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Inventory Management
Lecture Outline
13-2
What Is Inventory?
Stock of items kept to meet future demand
Purpose of inventory management
how many units to order
when to order
13-3
13-4
13-5
Types of Inventory
Raw materials
Purchased parts and supplies
Work-in-process (partially completed) products
(WIP)
Items being transported
Tools and equipment
13-6
Independent
Demand for items used by external customers
Cars, appliances, computers, and houses are
examples of independent demand inventory
13-7
Inventory Costs
Carrying cost
cost of holding an item in inventory
Ordering cost
cost of replenishing inventory
Shortage cost
temporary or permanent loss of sales when
demand cannot be met
13-8
13-9
ABC Classification
Class A
5 15 % of units
70 80 % of value
Class B
30 % of units
15 % of value
Class C
50 60 % of units
5 10 % of value
13-10
ABC Classification
PART
UNIT COST
ANNUAL USAGE
$ 60
350
30
80
30
20
10
320
510
20
90
40
130
60
100
180
170
50
60
120
1
2
3
4
5
6
7
8
9
10
13-11
ABC Classification
PART
9
8
2
1
4
3
6
5
10
7
TOTAL
VALUE
$30,600
16,000
14,000
5,400
4,800
3,900
3,600
3,000
2,400
1,700
$85,400
% OF TOTAL
VALUE
35.9
18.7
16.4
6.3
5.6
4.6
4.2
3.5
2.8
2.0
% OF TOTAL
QUANTITY
6.0
5.0
4.0
9.0
6.0
10.0
18.0
13.0
12.0
17.0
% CUMMULATIVE
A
B
C
6.0
11.0
15.0
24.0
30.0
40.0
58.0
71.0
83.0
100.0
Example 10.1
Copyright 2011 John Wiley & Sons, Inc.
13-12
ABC Classification
CLASS
A
B
C
ITEMS
9, 8, 2
1, 4, 3
6, 5, 10, 7
% OF TOTAL
VALUE
% OF TOTAL
QUANTITY
71.0
16.5
12.5
15.0
25.0
60.0
Example 10.1
Copyright 2011 John Wiley & Sons, Inc.
13-13
13-14
13-15
Inventory Level
Order quantity, Q
Demand
rate
Average
inventory
Q
2
Reorder point, R
Lead
time
Order Order
placed receipt
Lead
time
Order Order
placed receipt
Time
13-16
D - annual demand
Q - order quantity
Co D
Q
Co D
Q
CcQ
2
CcQ
2
13-17
CoD
Q
Co D
CcQ
2
Cc
TC
=
+
Q2
Q
2
0=
Qopt =
C0D
Q2
Cc
2CoD
Cc
Proving equality of
costs at optimal point
CoD
Q
Q =
2
2
Qopt =
CcQ
2
2CoD
Cc
2CoD
Cc
13-18
Total Cost
Slope = 0
Carrying Cost =
Minimum
total cost
Ordering Cost =
Optimal order
Qopt
CcQ
2
Co D
Q
Order Quantity, Q
13-19
EOQ Example
Cc = $0.75 per gallon
Qopt =
Qopt =
Co = $150
2CoD
Cc
2(150)(10,000)
(0.75)
TCmin =
TCmin =
D = 10,000 gallons
CoD
Q
CcQ
2
(150)(10,000) (0.75)(2,000)
+
2,000
2
13-21
Q(1-d/p)
Maximum
inventory
level
Q
(1-d/p)
2
Average
inventory
level
0
Order
receipt period
Begin
End
order order
receipt receipt
Time
13-22
d = demand rate
Q
12
d
p
Qopt =
2CoD
d
Cc 1 - p
CoD CcQ
d
TC =
+
1- p
Q
2
13-23
Co = $150
D = 10,000 gallons
d
Cc 1 p
2(150)(10,000)
=
CoD CcQ
d
TC =
+
1- p
Q
2
Q
Production run =
p
Copyright 2011 John Wiley & Sons, Inc.
32.2
0.75 1 150
= 2,256.8 gallons
= $1,329
2,256.8
= 150
13-24
10,000
D
=
= 4.43 runs/year
2,256.8
Q
d
Maximum inventory level = Q 1 p
= 2,256.8 1 -
32.2
150
= 1,772 gallons
13-25
13-26
=(D4*D5/D10)+(D3*D10/2)*(1-(D7/D8))
=D10*(1-(D7/D8))
13-27
13-28
Quantity Discounts
Price per unit decreases as order
quantity increases
TC =
CoD
Q
CcQ
2
+ PD
where
P = per unit price of the item
D = annual demand
13-29
PRICE
$10
8 (d1)
6 (d2)
TC = ($10 )
TC (d1 = $8 )
TC (d2 = $6 )
Carrying cost
Ordering cost
Q(d1 ) = 100 Qopt
Copyright 2011 John Wiley & Sons, Inc.
Q(d2 ) = 200
13-30
Quantity Discount
QUANTITY
PRICE
1 - 49
50 - 89
90+
$1,400
1,100
900
Qopt =
2CoD
For Q = 72.5
TC =
For Q = 90
TC =
Copyright 2011 John Wiley & Sons, Inc.
Cc
Co D
Qopt
Co D
Q
Co = $2,500
Cc = $190 per TV
D = 200 TVs per year
2(2500)(200)
= 72.5 TVs
190
CcQopt
2
CcQ
2
+ PD = $233,784
+ PD = $194,105
13-31
=IF(D10>B10,D10,B10)
=(D4*D5/E10)+(D3*E10/2)+C10*D5
13-32
Reorder Point
R = dL
where
d = demand rate per period
L = lead time
13-33
Reorder Point
Demand = 10,000 gallons/year
Store open 311 days/year
Daily demand = 10,000 / 311 = 32.154
gallons/day
Lead time = L = 10 days
R = dL = (32.154)(10) = 321.54 gallons
13-34
Safety Stock
Safety stock
buffer added to on hand inventory during lead time
Stockout
an inventory shortage
Service level
probability that the inventory available during lead
time will meet demand
P(Demand during lead time <= Reorder Point)
13-35
Inventory level
Reorder
point, R
LT
LT
Time
13-36
Inventory level
Reorder
point, R
Safety Stock
LT
Time
LT
13-37
13-38
Probability of
a stockout
Safety stock
zd L
dL
Demand
13-39
Safety stock = z d L
= (1.65)(5)( 10)
= 326.1 gallons
= 26.1 gallons
13-40
13-41
tb + L - I
where
d
tb
L
d
zd
tb + L = safety stock
I = inventory level
13-42
13-43
Q = d(tb + L) + zd
tb + L - I
= (6)(60 + 5) + (1.65)(1.2)
60 + 5 - 8
= 397.96 packages
Copyright 2011 John Wiley & Sons, Inc.
13-44
13-45
13-46