12

Inventory Management

Homework: 1, 3(assume 250

working days/year), 5, 7, 10, 13,
Milligan Workshop

Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall.

For Operations Management, 9e by

Krajewski/Ritzman/Malhotra
2010 Pearson Education

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Inventory Management

Concepts
Weeks of supply
Turns
ABC Analysis
Q System
Q Systems Total Costs
P System
Q System vs. P System

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Inventory Management

Inventory is a stock of anything held to meet some

future demand. It is created when the rate of receipts
exceeds the rate of disbursements.
A stock or store of goods.
Inventory Turns (Turnover)
COGS/Avg. Inventory Investment

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Inventory Management

Weeks of supply = Average aggregate Inventory Value / Weekly Sales (at cost)

IT = COGS / Average aggregate inventory value

The Eagle Machine Company averaged $2M in inventory last year, and the
COGS was $10M. If the company has 52 business weeks per year, how many
weeks of supply are held in inventory? What is the inventory turnover rate?

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ABC Analysis
100
90

Percentage of dollar value

Class C

Class B

80 Class A
70
60
50
40
30
20
10
0
10

20

30

40

50

60

70

80

90 100

Percentage of SKUs
Figure 12.1 Typical Chart Using ABC Analysis
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Solved Problem 1
Bookers Book Bindery divides SKUs into three classes,
according to their dollar usage. Calculate the usage values of
the following SKUs and determine which is most likely to be
classified as class A.
SKU Number

Description

Boxes

Quantity Used
per Year

Unit Value
($)

500

3.00

Cardboard
(square feet)

18,000

0.02

Cover stock

10,000

0.75

Glue (gallons)

75

40.00

Inside covers

20,000

0.05

Reinforcing tape
(meters)

3,000

0.15

Signatures

150,000

0.45

Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall.

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Solved Problem 1
SKU
Number

Description

Boxes

Quantity
Used per
Year

Unit Value
($)

Annual Dollar
Usage ($)

500

3.00

1,500

Cardboard
(square feet)

18,000

0.02

360

Cover stock

10,000

0.75

7,500

Glue (gallons)

75

40.00

3,000

Inside covers

20,000

0.05

1,000

Reinforcing tape
(meters)

3,000

0.15

450

Signatures

150,000

0.45

67,500

Total

81,310

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Solved Problem 1

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Solved Problem 1

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Outline, Two Major Models

Fixed Quantity Model, Q Continuous Review System
Order a fixed amount
Order cycle (time between orders) varies
EOQ, C (holding and ordering costs)
R
- Constant demand, constant lead time
- Variable demand~N, constant lead time
Fixed Interval Model, P Periodic Review System
Order various amounts
Order cycle is fixed or constant

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Inventory Control Systems

Continuous review (Q) system
Reorder

point system (ROP) and fixed order

quantity system

For

independent demand items

Tracks

inventory position (IP)

Includes

scheduled receipts (SR), on-hand

inventory (OH), and back orders (BO)

Inventory position = On-hand inventory + Scheduled receipts

Backorders
IP = OH + SR BO

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Some Terms
Constant demand, constant lead time.
EOQ=Economic Order Quantity
Q=Order Quantity
D=Annual demand
S=Order cost per order
H=Annual holding cost per unit
TC=Total annual costs
TBO=Time between orders, order cycle time
R=Reorder Point, used when LT>0
d=demand rate, dbar mean demand rate
L=Lead time

Constant means fixed or non-fluctuating.

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Continuous Review System

Constant demand, constant lead time.

On-hand inventory (units)

Receive
order

Inventory depletion
(demand rate)

Average
cycle
inventory

1 cycle

Time
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Selecting the Reorder Point

IP

On-hand inventory

Order
received

IP

Order
received

OH

OH

IP

Order
received

Order
received

OH

R
Order
placed

Order
placed
L

TBO

Order
placed
L

TBO

Time

TBO

Figure 12.6 Q System When Demand and Lead Time Are Constant and Certain

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Continuous Review Systems Total Costs

Constant demand, constant lead time.

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Ex: Find EOQ, TBO, and make cost comparisons

Constant demand, constant lead time, LT=0.

Suppose that you are reviewing the inventory policies on

an item stocked at a hardware store. The current
policy is to replenish inventory by ordering in lots of
360 units. Additional information given:
D = 60 units per week, or 3120 units per year
S = $30 per order
H = 25% of selling price, or $20 per unit per year

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Ex: Determine ROP

Constant demand, constant lead time, LT>0.

O n-hand inven tory (units)

Q=300 units, LT=8 days, TBO=30 days.

Time
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Continuous Review Systems

On-hand inventory

Order
received

IP
Order
received

IP

IP

Order
received

Order
received

R
Order
placed

Order
placed

Order
placed

0
L1
TBO1

L2
TBO2

L3

Time

TBO3

Figure 12.7 Q System When Demand Is Uncertain

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Demand During Lead Time

Cycle-service level = 85%

Probability of stockout
(1.0 0.85 = 0.15)
Average
demand
during
lead time

R
zdLT

Figure 12.9 Finding Safety Stock with a Normal Probability Distribution for an
85 Percent Cycle-Service Level

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Ex: Determine EOQ, ROP

Q System

Variable demand~N, constant lead time, LT>0.

The Discount Appliance Store uses a fixed order quantity model. One of
the companys items has the following characteristics:
Demand = 10 units/wk (assume 52 weeks per year, normally distributed)
Ordering and setup cost (S) = $45/order
Holding cost (H) = $12/unit/year
Lead time (L) = 3 weeks
Standard deviation of demand = 8 units per week
Service level = 70%

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Periodic Review System (P)

On-hand inventory

IP
Q1

IP

Order
received
OH

Order
received

Q2

IP
Q3

Order
received

OH

IP1
IP3

Order
placed

Order
placed

IP2

L
P

Time

Protection interval
Figure 12.10 P System When Demand Is Uncertain
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Application 12.6, P system

The on-hand inventory is 10 units, and T is 400. There are no
back orders, but one scheduled receipt of 200 units. Now is the
time to review. How much should be reordered?

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Calculating P and T
EXAMPLE 12.7
Again, let us return to the bird feeder example. Recall that
demand for the bird feeder is normally distributed with a mean of
18 units per week and a standard deviation in weekly demand of
5 units. The lead time is 2 weeks, and the business operates 52
weeks per year. The Q system developed in Example 12.4 called
for an EOQ of 75 units and a safety stock of 9 units for a cycleservice level of 90 percent. What is the equivalent P system?
Answers are to be rounded to the nearest integer.

Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall.

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Calculating P and T
SOLUTION
We first define D and then P. Here, P is the time between
reviews, expressed in weeks because the data are expressed
as demand per week:
D = (18 units/week)(52 weeks/year) = 936 units
EOQ
75
(52) = 4.2 or 4 weeks
P=
(52) =
D
936
With d = 18 units per week, an alternative approach is to
calculate P by dividing the EOQ by d to get 75/18 = 4.2 or 4
weeks. Either way, we would review the bird feeder inventory
every 4 weeks.

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Calculating P and T
We now find the standard deviation of demand over the
protection interval (P + L) = 6:

P L d P L 5 6 12.25units
Before calculating T, we also need a z value. For a 90 percent
cycle-service level z = 1.28. The safety stock becomes
Safety stock = zP + L = 1.28(12.25) = 15.68 or 16 units
We now solve for T:
T = Average demand during the protection interval + Safety stock
= d(P + L) + safety stock
= (18 units/week)(6 weeks) + 16 units = 124 units

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Ex: P System, Determine the Amount to Order

d=30 units per day

d=3 units per day
LT=2 days
Service level 99%
P=7 days
A=71 units

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Q Model vs. P Model

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IM in Action Video

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