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By : Kuldeep Uttam
Production and Industrial Engineer
Outline
Reorder Point
Purpose of
inventory
management
How many units to
order?
when to order?
discount
Types of Inventories
Raw materials
Finished Goods
Work-in-process (partially completed
products )
Items being transported
Dependent Independent
(not used by customer directly)
Demand for items
Demand for items used by external
used to produce final customers
products Cars, computers, and
Tires stored at a plant houses are examples
are an example of a of independent
dependent demand demand inventory
item
Inventory and Quality
Management
Carrying cost
Ordering cost
Shortage cost
No shortage is allowed
Inventory Order
Cycle
Order quantity, Q
Demand
rate
Inventory Level
Reorder point, R
Co D
Annual ordering cost =
Q
CcQ
Annual carrying cost =
2
Co D CcQ
Total cost = +
Q 2
EOQ Cost Model
Co D
Ordering Cost = Q
Assumption
=Q1- d 2CoD
p
Qopt = d
Q d
Average inventory level = 1- Cc 1 - p
2 p
CoD CcQ d
TC = + 1- p
Q 2
Quantity Discounts
CoD CcQ
TC = + + PD
Q 2
TC (d2 = $6 )
Inventory cost ($)
Carrying cost
Ordering cost
R = dL
re
d = demand rate per
Variable Demand with a
Reorder Point
Q
Inventory level
Reorder
point, R
0
LT LT
Time
Reorder Point with a Safety
Stock
Inventory level
Q
Reorder
point, R
Safety Stock
0
LT LT
Time
Classifying Inventory Items
ABC Classification (Pareto Principle)
Percent of Percent of
Item Number of Annual Annual Annual
Stock Items Volume Unit Consump consumpti
Number Stocked (units) x Cost = tion value on value Class
Percent of Percent of
Item Number of Annual Annual Annual
Stock Items Volume Unit cons. cons.
Number Stocked (units) x Cost = value value Class
80 A Items
% of Consumption Value
70
60
50
40
30
20 B Items
10 C Items
| | | | | | | | | |
10 20 30 40 50 60 70 80 90 100
% of inventory items
Inventory
Management Policy
A Items:
very tight control, complete and accurate records, frequent review via
EOQ model.
B Items:
less tightly controlled, good records, regular review
C Items:
simplest controls possible, minimal records, large inventories, periodic
review and reorder
V (Vital) is the inventory where neither Substitute nor Variation Gap is allowed
.
E (Essential) is the inventory which allows either of the one to be changed
D (Desirable ) is the one which can have variation in both of the parameters
References:
Cox, James F., III, and John H. Blackstone, Jr.APICS
Dictionary.9th ed. Falls Church VA: American
Production and Inventory Control Society, 1998.
Anupindi, Ravi, et al.Managing Business Process
Flows: Principles of Operations Management.2nd ed.
Upper Saddle River, NJ: Pearson Prentice Hall, 2004.
Meredith, Jack R., and Scott M. Shafer.Operations
Management for MBAs.2nd ed. New York: John Wiley
& Sons Inc., 2002.
Stevenson, William J.Production/Operations
Management.8th ed. Boston: Irwin/McGraw-Hill,
2005.
Thank You