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Inventory Management
Inventory Management
Inventory Management
Inventory Management
Introduction
Economic Order Quantity (EOQ) Model
Economic Production Quantity Model
Quantity Discounts Model
Reorder Point (Q System)
Shortages and Service Levels
Single Period Model
1
Definition of Independent Demand Inventory
2
Types of Inventory
• Cycle inventory
• Safety stock
• Anticipation inventory
• Pipeline inventory
3
Managing Independent Demand Inventory
• When to order?
4
Five Assumptions of EOQ
• Whole lots
• Item independence
5
Total Annual Relevant Cost
6
dC H D
Take the first derivative of cost with respect to quality: dQ
= − 2 (S )
2 Q
dC 2 DS
Setting dQ
=0 and solving for Q: EOQ =
H
EOQ
Time between orders: TBO EOQ =
D
7
Overland Motors Example
9
Economic Production Quantity Example
10
Quantity Discounts
Total cost = Annual holding cost + Annual ordering cost + Annual cost of
materials
Q D
C= ( H ) + ( S ) + PD
2 Q
11
Quantity Discounts
Two-Step Procedure
12
Quantity Discounts Example
EOQ50.00 =
Step 2. C76 =
C100 =
13
Reorder Point (Q System)
A continuous review (Q) system tracks the remaining inventory of an item each
time a withdrawal is made, to determine if it is time to reorder.
Decision rule: Whenever a withdrawal brings the inventory down to the reorder
point (R), place an order for Q (fixed) units.
14
Reorder Point
Demand pattern Lead time for ROP
ordering
Known and None ROP = 0
constant
Known and Known and constant ROP = d × LT
constant
Variable, normally Known and constant ROP = d × LT + zσdLT
distributed, σ
dLT
known
Variable, normally Known and constant ROP = d × LT + z LT σd
distributed, σ
d
known
Known and Variable, normally ROP = d × LT + zd σLT
constant distributed, σ
LT
known
Uncertain, discrete unknown Determine ROP for a given service level
probability based on the cumulative probabilities of
distribution demand during lead time.
15
Shortage and Service Levels
16
Q System Example
17
Cycle-Service Level with Discrete Distribution
Application:
Demand Cycle-Service
Level Probability R Level (%)
0 0.30 0
50 0.20 50
100 0.20 100
150 0.15 150
200 0.10 200
250 0.05 250
18
Single Period (Newsvendor) Model
Used to handle ordering of perishables and items that
have a limited useful life.
19
Example of the Newsvendor Model
20