Planning and Managing Inventories in A Supply Chain

Inventory Management: Cycle Inventory
Inventory Management:
Cycle Inventory
1
Role of Inventory in the Supply Chain
Understocking: Demand exceeds amount available

–Lost margin and future sales
Overstocking: Amount available exceeds demand

– Liquidation, Obsolescence, Holding
2
Why hold inventory?
► Economies of scale
》 Batch size and cycle time

► Stochastic variability
》 Quantity discountsof supply and demand
》 Short term
》Service leveldiscounts / Trade
given safety promotions
inventory
》Evaluating Service level given safety inventory
3
Role of Inventory in the Supply Chain
Improve
ImproveMatching of Supply
Matching of Supply
and
and Demand
Improved Forecasting
Cost Reduce Material Flow Time Availability

Efficiency Responsiveness
Reduce Waiting Time
Reduce Buffer Inventory
Supply / Demand
Economies of Scale Variability Seasonal Variability
Cycle Inventory Safety Inventory Seasonal Inventory
4
Cycle Inventory
Cycle inventory
Improve is the average
Matching inventory that built up in the supply
of Supply
chain because anda stage of the supply chain either produces or
Demand
purchases in lots that are larger than those demanded by the customer.
Improved Forecasting
Inventory
Cost Reduce Material Flow Time Availability
Efficiency Responsiveness
QReduce Waiting Time
Reduce Buffer Inventory
Time t
Supply
Cycle / Demand= lot size/2 = Q/2
inventory
Economies of Scale Variability Seasonal Variability
Cycle Inventory Safety Inventory Seasonal Inventory
5
Little’s Law
► Average flow time = Average inventory / Average
flow rate
► For any supply chain, average flow rate equals the
demand,
Average flow time resulting from cycle inventory
= Cycle inventory / Demand
= Q / 2D
Q: Lot size
D: Demand per unit time
6
Holding Cycle Inventory for
Economies of Scale
► Fixed costs associated with lots
► Quantity discounts
► Trade Promotions
7
Economics of Scale to Exploit Fixed Costs
— Economic Order Quantity—
» D= Annual demand of the product
» S= Fixed cost incurred per order
» C= Cost per unit
» h=Holding cost per year as a fraction of product cost
» H=Holding cost per unit per year =hC
» Q=Lot size
» n=Order frequency
8
Lot Sizing for a Single Product (EOQ)
► Annual order cost =(D/Q)S=ns
Annual holding cost = (Q/2)H =(Q/2)hC
Annual material cost = CD
TC =CD + (D/Q)S + (Q/2)hC

Cost
Total Cost
Holding Cost
Order Cost
Material Cost
Lot Size
9
Lot Sizing for
Total a cost,
annual Single Product
TC =CD (EOQ)
+ (D/Q)S + (Q/2)hc
Optimal lot size, Q is obtained by taking the first derivative
► Annual order
d (cost
TC) ==(D/Q)S
-DS hC
+ = 0 *
= 2DS
Annual holdingdQcost =Q(Q/2)H
2 =(Q/2)hc Q
2 hC
Annual material cost = CD‧
*
= D = DhC Average flow time = Q*/2D
n
Q* 2S
TC =CD + (D/Q)S + (Q/2)hc
Cost
Total Cost
Holding Cost
Order Cost
Material Cost
Lot Size
10
Example
 Demand， D =1,000 units/month
= 12,000 units/year
 Fixed cost, S = $4,000/order
 Unit cost, C = $500
 Holding cost, h = 20% = 0.2
2X12000X4000
》Optimal order size Q= = 980
0.2X500
》Cycle inventory Q/2 =490
》Numbers of orders per year D / Q = 12000 / 980 =12.24

》Average flow time Q / 2D = 490 / 12000 =0.041 (year)
=0.49(mounth)
11
Example - Continued
 Demand， D =1,000 units/month
► If we want to reduce the optimal lot size from 980 to 200,
= 12,000 units/year
 Fixed cost, Sthen how much the order cost per lot should be.
= $4,000/order
 Unit cost, C = $500 h C ( Q * ) 2
0.2X500X2002
S = = 0.2
 Holding cost, h = 20% = = $166.7
2D 2X12000
2X12000X4000
》Optimal
 order
If we size
increase theQlot=size by 10% (from 980 to
= 1100),
980 what
the 0.2X500
total cost would be.
Annual
》Cycle cost = $ 98,636
inventory (from $ 97,980)(an increase by only 0.6%)
Q/2 =490
(Note: material cost is not included)
》Numbers of orders per year D / Q = 12000 / 980 =12.24
》Average flow time Microsoft。
Q / 2D = 490 / 12000 =0.041
Microsoft。 (year)
CoolCLIPS
=0.49(mounth)Microsoft。
Microsoft。
Microsoft。
12
Key Points from EOQ
 Total order and holding costs are relatively stable around the
economic order quantity. A firm is often better served by ordering a
convenient lot size close to the EOQ rather than the precise EOQ.
 If demand increases by a factor of k, the optimal lot size increases

by a factor of k . The number of orders placed per year should
also increase by a factor of k . Flow time attributed to cycle
inventory should decrease by a factor of k .
 To reduce the optimal lot size by a factor of k, the fixed order cost
S must be reduced by a factor of k2 .
13
Aggregating Multiple Products in a Single
Order
► One of major fixed costs is transportation
► Ways to lower the fixed ordering and transportation costs:
► Ways to lower receiving
》Aggregating or products
across the loading costs:
from the same supplier
》Single delivery from multiple suppliers
》ASN (Advanced Shipping Notice) with EDI
》Single delivery to multiple retailers
Microsoft。
Microsoft。
Microsoft。
14
Example: Lot Sizing with Multiple Products
 Three computer models (L, M, H) are sold and the demand per year:
–DL = 12,000; DM = 1,200; DH = 120
L M
► Common fixed (transportation) cost, S = $4,000 H
► Additional product specific order cost
》sL = $1,000; sM = $1,000; sH = $1,000
Microsoft。 Microsoft。 Microsoft。
► Holding cost, h = 0.2
► Unit cost
》CL = $500; CM = $500; CH = $500
15
Delivery Options
► No aggregation
► Complete aggregation
》Each product is ordered separately
► Tailored aggregation
》All products are delivered on each truck
》Selected subsets of products on each truck
16
Option 1: No Aggregation Result
► No aggregation
Litepro Medpro Heavypro
Demand per year 12000 1200 120
Fixed cost / order $5,000 $5,000 $5,000
Optimal order size 1,095 346 110
Order frequency 11.0/year 3.5/year 1.1/year
Annual holding cost $109,544 $34,642 $10,954
Annual total cost = $155,140 (no material cost)
17
Option 2: Complete Aggregation
► No aggregation
► Tailored
》Combinedaggregation
fixed cost per order is given by
=*2DS
S = S + sL + sM + sH
* Q
hC
》Let n be the number of orders placed per year. We have
Total annual cost = Annual order cost + Annual holding cost
=
(S n ) + [(DL hCL / 2n ) + (DM hCM / 2n ) + (DH hCH / 2n )]
*
DL hCL +DM hCM +DH hCH DhC

n* = n =
*
2S* 2S
18
Option 2: Complete Aggregation
► No aggregation
► Tailored
》Combinedaggregation
fixed cost per order is given by
S = S + sL + sM + sH
*
》Let n be the number of orders placed per year. We have

Total annual cost = Annual order cost + Annual holding cost
=
(S n ) + [(DL hCL / 2n ) + (DM hCM / 2n ) + (DH hCH / 2n )]
*
DL hCL +DM hCM +DH hCH DhC

n* = n =
*
2S* 2S
19
Option 2: Complete Aggregation Result
► No aggregation

Optimal order size 1,230 123 12.3
Annual holding cost $61,512 $6,151 $615
Annual order cost = 9.75×$7,000 = $68,250
Annual total cost = $68,250+$61,512+$6,151+$615=$136,528
20
Option 3: Tailored aggregation
► No aggregation
A heuristic that yields an ordering policy whose cost is close to optimal.
► Step 1: Identify most frequently ordered product.

► Step 2: Identify frequency of other products as a multiple of the order
frequency of the most frequently ordered product.
► Step 3: Recalculate order frequency of most frequently ordered product.
► Step 4: Identify ordering frequency of all products.
21
Option 3: Tailored aggregation hCiDi
n = Max { ni = }
i 2(S+si)
► No aggregation
hC L D L
nL = = 11 . 0, n = 3.5, n H = 1.1 \ n = 11 . 0
2( S + s L )
► Complete aggregation M
►A heuristic that yields an ordering policy whose cost is close to optimal.

22
► No aggregation
hC L D L
nL = = 11 . 0, n = 3.5, n H = 1.1 \ n = 11 . 0
2( S + s L )
► Complete aggregation M
►►Tailored
Step 2: aggregation
Identify frequency of other products as a multiple of the order
= optimal.
A heuristic that yields an ordering policy whose cost is close to hC D i i
hCM DM
n=
nM = = 7 .7 nH = 2.4 2si
2sM
 Step 2: Identify frequency of other products as a multiple of the order
mM =of the
frequency 11 . 0 / 7ordered
nM  =frequently
n / most . 7  = 1product.
. 4  = 2 mH = 4 . 5  = 5
23
Option 3: TailoredDerivation
aggregation
of n
►
► No
Stepaggregation
TC= order
1: Identify cost + holding
most frequently ordered cost
product.
hC L D L
nL = = 11 . 0, n = 3.5, n H = 1.1 \ n = 11 . 0
2( S + s L )
M
 Step 2: Identify
A heuristic frequency
that yields of other
an ordering products
policy whoseas a multiple
cost is close of
to the order
optimal.
hCM DM
n = = 7 .7 nH =products
2.4
► StepM 2: Identify
2sM frequency of other as a multiple of the order
mM =  n / nM  =11 . 0 / 7 . 7  = 1 . 4  = 2 mH = 4 . 5  = 5
 Step 4: Identify ordering frequency of all products.
hCi Di mi
n=
2 [ S + (si / mi )]
24
aggregation
of n
►
► No
Stepaggregation
TC= order
most frequently ordered cost
product.
hC nSD 
n L = TC=( L L i = 11
+ n i s i  (hC
)+. 0, n i ) Di
= 3.5, n H = 1.1 \ n = 11 . 0
i 2n
2( S + s L )
M i
 hCiDiMi
A heuristic that =
yields
nS + ordering
an
n
frequency sof
i
other
+ i products
cost is close of
to the order
optimal.
frequency of the most i m
frequently
i ordered
2n product.
mM =hCMnD/MnM  =11 . 0 / 7 . 7  = 1 . 4  = 2 mH = 4 . 5  = 5
n =
► StepM 2: Identify
= 7 .7
frequency of
nH =products
other
2.4 as a multiple of the order
2sM
mM =  n / nM  =11 . 0 / 7 . 7 
 Step 3: Recalculate order frequency of most frequently ordered product.
hCi Di mi
n=
2 [ S + (si / mi )]
25
aggregation
of n

► No
Stepaggregation
TC= order
most frequently orderedcost
product.
 Complete aggregation
hC nSD 
n L = TC=( L L i = 11
+ n i s i  (hC
)+. 0, n i ) Di
= 3.5, n H = 1.1 \ n = 11 . 0
i 2n
2( S + s L )
 Tailored aggregation
M i
 hCiDiMi
A heuristic that =
yields
nS + ordering
an
n
frequency sof
i
other
+ i products
cost is close of
to the order
optimal.
frequency of the most i m
frequently
i ordered
2n product.
  hCiDiMi
hCM DM = 0  S+ 
TC s i
- i
n =  = 7 . 7 n m= 2.4 2n 2 =0
M n i
H
2s frequency of other products as a multiple of the order
i
M
mM =  n / nM\ = 11 . 0 /7hC
. iD
7  i mi
n
 Step 3: Recalculate order = frequency of most frequently ordered product.
2 [ S + of
► Step 3: Recalculate order frequency
(si most
/ mi )]frequently ordered product.
hCi Di mi
n=
2 [ S + (si / mi )]
26
aggregation
of n
►
► No
Stepaggregation
TC= order
most frequently cost
ordered product.
hC D
nS  n s  (hC
n L = TC=( L L i = 11)+. 0,i n M 2n
+ i i i ) Di
= 3.5, n H = 1.1 \ n = 11 . 0
2( S + s L )
► Tailored aggregation i
 hCiDiMi
► Step 2: Identify
A heuristic that yields
=nS + ordering
an
n
frequency of
si other
+ i products as a multiple of the order
policy whose cost is close to optimal.
mi
frequency of the mosti frequently ordered
2n product.
  hCiDiMi
hCM DM = 0  S+ 
TC s i
- i
n =  = 7 . 7 n =
m 2.4 2n 2 =0
M n Hi
2s frequency of other products as a multiple of the order
i
M
mM =  n / nM\  =n11
= .0 / . 7iD=i m1i . 4  = 2 mH = 4 . 5  = 5
7 hC
2 [ S +of(smost
► Step 3: Recalculate order frequency i / mi )]
frequently ordered product.
hCi Di mi L
n= =11.47
2 [ S + (si / mi )]
Microsoft。
27

► No aggregation
Step 1: Identify most frequently ordered product.
 Complete aggregation
hC L D L
nL = = 11 . 0, n = 3.5, n H = 1.1 \ n = 11 . 0
2( S + s L )
 Tailored aggregation
M
A heuristic frequency
that yields of other
an ordering products
cost is close of
to the order
optimal.
hCM DM
n = = 7 .7 nH =products
2.4
 StepM 2: Identify
2sM frequency of other as a multiple of the order
mM =  n / nM  =11 . 0 / 7 . 7  = 1 . 4  = 2 mH = 4 . 5  = 5
hCi Di mi
n= =11.47
2 [ S + (si / mi )]
► Step 4: nL=11.47/year, nM=11.47/2=5.74/year,

nH=11.47/5=2.29/year .
28
Option 3: Tailored Aggregation Result
► No aggregation

Optimal order size 1,046 209 52
Annual holding cost $52,310 $10,453 $2620
Annual order cost = nS + nLsL+ sMsM + nHsH =$65,380
Annual total cost = $130,763
Complete aggregation (Annual total cost) =$136,528
29
► No aggregation
► Step 2: ─Identify
A fixedfrequency
cost of (S+si) is allocated
of other productstoas
each productofi,the
a multiple andorder
frequency of the most frequently ordered product. hCi Di 
The most frequently order frequency = n = Max  ni = 
i

► Step 3: Recalculate order frequency of most frequently ordered +
2(S si ) 
product.
30
► No aggregation

► Step =
= 3: Recalculate order frequency of most frequently ordered product.
ni = hCi Di mi = n / ni mi = mi
2si ordering frequency of all products.
31
► No aggregation

hCordering
► Step =4: Identify i Di mi frequency of all products.
n
2 [ S + (si / mi )]
32
► No aggregation

ni=n/mi
33
Impact of Product Specific Order Cost
Product specific Product specific

order cost =$1,000 order cost =$3,000
No aggregation $155,140 $183,564
Complete aggregation $136,528 $186,097
Tailored aggregation $130,763 $165,233
?
34
Lessons From Aggregation
 Aggregation allows firm to lower lot size without increasing cost
 Complete aggregation is effective if product specific fixed cost is a

small fraction of joint fixed cost
 Tailored aggregation is effective if product specific fixed cost is large

fraction of joint fixed cost
35
Why hold inventory?
► Economies of scale
》 Batch size and cycle time

► Stochastic variability
》 Quantity discountsof supply and demand
》 Short term discounts / Trade promotions
36
Quantity Discounts
► Lot size based

》Based on the quantity ordered in a single lot
> All units
► Volume based
> Marginal unit
》Based on total quantity purchased over a given period
 How should buyer react? How does this decision affect the supply chain
in terms of lot sizes, cycle inventory, and flow time?
 What are appropriate discounting schemes that suppliers should offer?
37
All Unit Quantity Discounts
Average Cost per Unit Total Material Cost
C0
C1
C2
Quantity Purchased Order Quantity

q1 q2 q3 q1 q2 q3
If an order that is at least as large as qi but smaller than qi+1 is placed,

then each unit is obtained at the cost of Ci.
38
Evaluate EOQ for All Unit Quantity
Total Cost
Discounts
Lowest cost in the range
► Evaluate EOQ for price in range qi to qi+1 , Qi = 2DS

hCi
Total Cost
Lowest cost in the range
》 Case 1:If qi  Qi < qi+1 , evaluate cost of ordering Qi EOQi
Q
TCi = D S + i hCi + DCi
Qi 2 qi qi+1 Order Quantity
Total Cost Lowest cost in the range
》 Case 2:If Qi < qi, evaluate cost of ordering qi EOQi
q
qi 2 qi qi+1
》 Case 3:If Qi  qi+1 , evaluate cost of ordering qi+1 EOQi

D qi+1
TCi = S+ hCi + DCi+1 Order Quantity
qi+1 2 qi qi+1
► Choose the lot size that minimizes the total cost over all price ranges.
39
Example
 Assume the all unit quantity discountsAverage Cost per Unit
Order Quantity Unit Price D = 120,000/ year
CS0 = $100/lot
0-5,000 $ 3.00
h = 0.2
C 1
5,000-10,000 $ 2.96
C2
10,000 or more $ 2.92
 Based on the all unit quantity discounts, we have Quantity
q0=0, q1=5,000, q2=10,000 Purchased
C0=$3.00, C1=$2,96, C2=$2.92 q1 q2 q3
 If i = 0, evaluate Q0 as Q0= 2DS = 6,324

hC0
Since Q0 > q1, we set the lost size at q1=5,000 and the total cost
40
Evaluate EOQ for All Unit Quantity Discounts
 Evaluate EOQ for price in range qi to qi+1 , Qi = 2DS

hCi
》 Case 1:If qi  Qi < qi+1 , evaluate cost of ordering Qi
Q
Qi 2
》 Case 2:If Qi < qi, evaluate cost of ordering qi

q
qi 2
》 Case 3:If Qi  qi+1 , evaluate cost of ordering qi+1
D qi+1
TCi = S+ hCi + DCi+1
qi+1 2
 Choose the lot size that minimizes the total cost over all price ranges.
41
Example
 Assume the all unit quantity discounts
S = $100/lot
0-5,000 $ 3.00
h = 0.2
5,000-10,000 $ 2.96
10,000 or more $ 2.92
 Based on the all unit quantity discounts, we have
q0=0, q1=5,000, q2=10,000
C0=$3.00, C1=$2,96, C2=$2.92

hC0
q
TC0= D S + 1 hC1+ DC1 = $359,080
q1 2
42
Example
S = $100/lot
0-5,000 $ 3.00
h = 0.2
5,000-10,000 $ 2.96
10,000 or more $ 2.92
q0=0, q1=5,000, q2=10,000
C0=$3.00, C1=$2,96, C2=$2.92

hC0
q
TC0= D S + 1 hC1+ DC1 = $359,080
q1 2
43
All Unit Quantity Discounts
Average Cost per Unit Total Material Cost
C0
C1
C2
Quantity Purchased Order Quantity

q1 q2 q3 q1 q2 q3
If an order is placed that is at least as large as qi but smaller than qi+1,

then each unit is obtained at a cost of Ci.
44
Example
S = $100/lot
0-5,000 $ 3.00
h = 0.2
5,000-10,000 $ 2.96
10,000 or more $ 2.92
q0=0, q1=5,000, q2=10,000
C0=$3.00, C1=$2,96, C2=$2.92

hC0
q
TC0= D S + 1 hC1+ DC1 = $359,080
q1 2
45
Example - Continued
 For i = 1, we obtain Q1 = 6,367
Since 5,000 < Q1 <10,000 , we set the lot size at Q1 = 6,367.
Q1
TC1= D S + hC1+ DC1 = $358,969
Q1 2
 For i = 2, we obtain Q2 = 6,410

Since Q2 < q2 , we set the lot size at q2=10,000.
 Observe that the lowest total cost is for i = 2.

The optimal lot size = 10,000 (at the discount price of $2.92)
46
Example - Continued
 For i = 1, we obtain Q1 = 6,367
Q1
TC1= D S + hC1+ DC1 = $358,969
Q1 2
 For i = 2, we obtain Q2 = 6,410

q
TC2= D S + 2 hC2+ DC2 = $354,520
q2 2
► Observe that the lowest total cost is for i = 2.

47
Example - Continued
 For i = 1, we obtain Q1 = 6,367
Q1
TC1= D S + hC1+ DC1 = $358,969
Q1 2
 For i = 2, we obtain Q2 = 6,410

q
TC2= D S + 2 hC2+ DC2 = $354,520
q2 2

48
Example - Continued
 For i = 1, we obtain Q1 = 6,367
Q1
TC1= D S + hC1+ DC1 = $358,969
Q1 2
 For i = 2, we obtain Q2 = 6,410

q
TC2= D S + 2 hC2+ DC2 = $354,520
q2 2

49
The Impact of All Unit Discounts on Supply Chain
► In the above example
》The optimal order size = 6,324 when there is no discount.

》The quantity discounts result in a higher order size = 10,000.
► If the fixed ordering cost S = $4,
》The optimal order size without discount = 1,265

》The optimal order size with all unit discounts = 10,000
► All unit quantity discounts encourage retailers to increase the size of

their lots.
► This also increases cycle inventory and average flow time.
50
Marginal Unit Quantity Discounts
Marginal Cost per Unit Total Material Cost
C0
C1
C2
Quantity
Purchased Order Quantity
q1 q2 q3 q1 q2 q3
If an order of size q is placed, the first q1-q0 units are priced at C0, the
next q2-q1 are priced at C1, and so on.
51
Evaluate EOQ for Marginal Unit Discounts
► Evaluate EOQ for each marginal price Ci (or lot size between qi and qi+1)
》 Let Vi be the cost of order qi units. Define V0 = 0 and
Vi=C0(q1-q0)+C1(q2-q1)+‧‧‧+Ci-1(qi-qi-1)
》 Consider an order size Q in the range qi to qi+1

Total annual cost = ( D/Q )S (Annual order cost)
+ (Q/2)‧h‧[ Vi+(Q-qi)Ci ] / Q (Annual holding cost)
+ D‧[ Vi+(Q-qi)Ci ] / Q(Annual material cost)
Optimal lot size
2D(S+Vi-qiCi)
Qi =
hCi
52
Evaluate EOQ for Marginal Unit Discounts
► Evaluate EOQ for each marginal price Ci (or lot size between qi and qi+1)
》 Let Vi be the cost of order qi units. Define V0 = 0 and
Vi=C0(q1-q0)+C1(q2-q1)+‧‧‧+Ci-1(qi-qi-1)
》 Consider an order size Q in the range qi to qi+1

Total annual cost = ( D/Q )S (Annual order cost)
+ (Q/2)‧h‧[ Vi+(Q-qi)Ci ] / Q (Annual holding cost)
+ D‧[ Vi+(Q-qi)Ci ] / Q(Annual material cost)
Optimal lot size
2D(S+Vi-qiCi)
Qi=
hCi
53
Example
S = $100/lot
0-5,000 $ 3.00
h = 0.2
5,000-10,000 $ 2.96
10,000 or more $ 2.92
 q0=0, q1=5,000, q2=10,000
C0=$3.00, C1=$2,96, C2=$2.92
V0=0 ; V1=3(5,000-0)=$15,000
V2=3(5,000-0)+2.96(10,000-5,000)=$29,800
2D(S+V0-q0C0)
 If i = 0, evaluate Q0 as Q0 = = 6,324
hC0
h D
TC0 = D S +[ V1+(q 1 1 1 2 + q [ V1+(q1-q1)C1]= $363,900
-q )C ]
q1 1
54
Example - Continued
 For i = 1, evaluate Q1= 2D(S+V1-q1C1) = 11,028
hC1
Since Q1 > q2, we evaluate the cost of ordering q2=10,000
D h D
TC1 = S +[ V2 +(q 2 2 2 2 + q [ V2+(q2-q2)C2]=$361,780
-q )C ]
q2 2
2D(S+V2-q2C2)
 For i = 2, evaluate Q2= = 16,961
hC2
TC2= D S +[ V2+(Q2-q2)C2] h + D [ V2+(Q2-q2)C2 ]= $360,365

Q2 2 Q2
 Optimal order size = 16,961
55
版權聲明
頁碼作品授權條件作者/來源
本作品轉載自Microsoft Office 2007多媒體藝廊，依據Microsoft 服務合約及著

12 作權法第46、52、65條合理使用。

12, 14 作權法第46、52、65條合理使用。

12, 14 作權法第46、52、65條合理使用。

CoolCLIPS。本作品轉載自CoolCLIPS網站
（http://dir.coolclips.com/Popular/World_of_Industry/Food/Shopping_cart_full_of_
12 groceries_vc012266.html），瀏覽日期2011/12/28。依據著作權法第46、52、65
條合理使用。


56
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15, 27 作權法第46、52、65條合理使用。


57

Planning and Managing Inventories in A Supply Chain

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Inventory Management: Cycle Inventory

Understocking: Demand exceeds amount available

Overstocking: Amount available exceeds demand

》 Batch size and cycle time

Cost Reduce Material Flow Time Availability

Reduce Buffer Inventory

Cycle Inventory Safety Inventory Seasonal Inventory

Reduce Buffer Inventory

Cycle Inventory Safety Inventory Seasonal Inventory

» D= Annual demand of the product

» S= Fixed cost incurred per order

» C= Cost per unit

» h=Holding cost per year as a fraction of product cost

» H=Holding cost per unit per year =hC

TC =CD + (D/Q)S + (Q/2)hC

》Cycle inventory Q/2 =490

》Numbers of orders per year D / Q = 12000 / 980 =12.24

 If demand increases by a factor of k, the optimal lot size increases

》Selected subsets of products on each truck

DL hCL +DM hCM +DH hCH DhC

》Let n be the number of orders placed per year. We have

DL hCL +DM hCM +DH hCH DhC

Litepro Medpro Heavypro

A heuristic that yields an ordering policy whose cost is close to optimal.

► Step 1: Identify most frequently ordered product.

► Step 3: Recalculate order frequency of most frequently ordered product.

► Step 4: Identify ordering frequency of all products.

►A heuristic that yields an ordering policy whose cost is close to optimal.

► Step 1: Identify most frequently ordered product.

► Step 2: Identify frequency of other products as a multiple of the order

► Step 3: Recalculate order frequency of most frequently ordered product.

► Step 4: Identify ordering frequency of all products.

► Step 4: Identify ordering frequency of all products.

► Step 4: nL=11.47/year, nM=11.47/2=5.74/year,

Litepro Medpro Heavypro

A heuristic that yields an ordering policy whose cost is close to optimal.

► Step 1: Identify most frequently ordered product.

► Step 4: Identify ordering frequency of all products.

A heuristic that yields an ordering policy whose cost is close to optimal.

► Step 1: Identify most frequently ordered product.

A heuristic that yields an ordering policy whose cost is close to optimal.

► Step 1: Identify most frequently ordered product.

► Step 3: Recalculate order frequency of most frequently ordered product.

A heuristic that yields an ordering policy whose cost is close to optimal.

► Step 1: Identify most frequently ordered product.

► Step 3: Recalculate order frequency of most frequently ordered product.

► Step 4: Identify ordering frequency of all products.

Product specific Product specific

No aggregation $155,140 $183,564

Complete aggregation $136,528 $186,097

Tailored aggregation $130,763 $165,233

 Aggregation allows firm to lower lot size without increasing cost

 Complete aggregation is effective if product specific fixed cost is a

 Tailored aggregation is effective if product specific fixed cost is large

》 Batch size and cycle time

► Lot size based

Average Cost per Unit Total Material Cost

Quantity Purchased Order Quantity

If an order that is at least as large as qi but smaller than qi+1 is placed,

► Evaluate EOQ for price in range qi to qi+1 , Qi = 2DS

》 Case 3:If Qi  qi+1 , evaluate cost of ordering qi+1 EOQi

C0=$3.00, C1=$2,96, C2=$2.92 q1 q2 q3

 If i = 0, evaluate Q0 as Q0= 2DS = 6,324