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Inventory Objective:
Why Inventory?
Created by uncertainty
Variations in delivery times Uncertain production schedules Large number of defects Large fluctuations in customer demand Poor forecasts of customer demand
What is Inventory?
Raw materials Purchased parts & supplies Labor In-process products Component parts Working capital Tools, machinery, and equipment
Demand
Independent demand
Final or finished products
A car
Dependent demand
Component parts or materials used in the process of producing a final product
Tires for a car
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Inventory Costs
Carrying/Holding costs Ordering/Setup costs Shortage costs
Carrying/Holding Costs
Setup/Ordering costs
Shortage costs
EOQ model
Annual ordering cost = CoD/Q Annual carrying cost = CcQ/2 Total annual inv. Cost
TC = CoD/Q + CcQ/2
Reorder Point
R = dL
Safety Stocks
Remaining inventory between the time an order is placed and when new stock is received
If not enough inventory, a stockout can occur Safety stock is a hedge against running out of inventory