Professional Documents
Culture Documents
Inventory Control Models: To Accompany
Inventory Control Models: To Accompany
To accompany
Quantitative Analysis for Management, Tenth Edition,
by Render, Stair, and Hanna © 2008 Prentice-Hall, Inc.
Power Point slides created by Jeff Heyl © 2009 Prentice-Hall, Inc.
Learning Objectives
After completing this chapter, students will be able to:
Labor Costs
Inventory
Costs
Planning on What
Forecasting Controlling
Inventory to Stock
Parts/Product Inventory
and How to Acquire
Demand Levels
It
Feedback Measurements
to Revise Plans and
Forecasts
Figure 6.1
Storing resources
Seasonal products may be stored to satisfy
off-season demand
Materials can be stored as raw materials,
work-in-process, or finished goods
Labor can be stored as a component of
partially completed subassemblies
Irregular supply and demand
Demand and supply may not be constant
over time
Inventory can be used to buffer the variability
Quantity discounts
Lower prices may be available for larger
orders
Extra costs associated with holding more
inventory must be balanced against lower
purchase price
Avoiding stockouts and shortages
Stockouts may result in lost sales
Dissatisfied customers may choose to buy
from another supplier
Table 6.1
© 2009 Prentice-Hall, Inc. 6 – 14
Inventory Cost Factors
Ordering costs are generally independent
of order quantity
Many involve personnel time
The amount of work is the same no matter the
size of the order
Carrying costs generally varies with the
amount of inventory, or the order size
The labor, space, and other costs increase as
the order size increases
Of course, the actual cost of items
purchased varies with the quantity
purchased
© 2009 Prentice-Hall, Inc. 6 – 15
Economic Order Quantity
Inventory
Level
Order Quantity = Q =
Maximum Inventory Level
Minimum
Inventory
0
Time
Figure 6.2
© 2009 Prentice-Hall, Inc. 6 – 18
Inventory Costs in the EOQ Situation
Number of Ordering
Annual ordering cost orders placed cost per
per year order
D
Co
Q
Average Carrying
Annual holding cost inventory cost per unit
per year
Q
Ch
2
Cost
Curve of Total Cost
of Carrying
and Ordering
Minimum
Total
Cost
Summary of equations
D
Annual ordering cost C o
Q
Q
Annual holding cost C h
2
2 DC o
EOQ Q *
Ch
2 DC o 2(1,000)(10)
Q
*
40,000 200 units
Ch 0.50
Program 6.1A
© 2009 Prentice-Hall, Inc. 6 – 27
Sumco Pump Company Example
Program 6.1B
© 2009 Prentice-Hall, Inc. 6 – 28
Purchase Cost of Inventory Items
Total inventory cost can be written to include the
cost of purchased items
Given the EOQ assumptions, the annual purchase
cost is constant at D C no matter the order
policy
C is the purchase cost per unit
D is the annual demand in units
It may be useful to know the average dollar level
of inventory
(CQ )
Average dollar level
2
© 2009 Prentice-Hall, Inc. 6 – 29
Purchase Cost of Inventory Items
Inventory carrying cost is often expressed as an
annual percentage of the unit cost or price of the
inventory
This requires a new variable
C h IC
2 DC o
thus, Q
*
IC
© 2009 Prentice-Hall, Inc. 6 – 30
Sensitivity Analysis with the
EOQ Model
The EOQ model assumes all values are know and
fixed over time
Generally, however, the values are estimated or
may change
Determining the effects of these changes is
called sensitivity analysis
Because of the square root in the formula,
changes in the inputs result in relatively small
changes in the order quantity
2 DC o
EOQ
Ch
2(1,000)(10)
EOQ 200 units
0.50
2(1,000)(40)
EOQ 400 units
0.50
dL
© 2009 Prentice-Hall, Inc. 6 – 33
Procomp’s Computer Chip Example
Inventory
Level Part of Inventory Cycle There is No Production
During Which Production is During This Part of the
Taking Place Inventory Cycle
Maximum
Inventory
t Time
Figure 6.5
© 2009 Prentice-Hall, Inc. 6 – 35
Annual Carrying Cost for
Production Run Model
In production runs, setup cost replaces ordering
cost
The model uses the following variables
Q d
Average inventory 1
2 p
and
Q d
Annual holding cost 1 C h
2 p
D
Annual setup cost C s
Q
and
D
Annual ordering cost C o
Q
Q d D
1 h
C Cs
2 p Q
2 DC s
Q*
d
C h 1
p
© 2009 Prentice-Hall, Inc. 6 – 40
Production Run Model
Summary of equations
Q d
Annual holding cost 1 C h
2 p
D
Annual setup cost C s
Q
2 DC s
Optimal production quantity Q *
d
C h 1
p
2 DC s Q
1. Q
*
Production cycle
d p
C h 1
p 4,000
50 days
80
2 10,000 100
2. Q
*
60
0.5 1
80
2,000,000
16,000,000
0.5 1
4
4,000 units
© 2009 Prentice-Hall, Inc. 6 – 43
Brown Manufacturing Example
Program 6.2A
© 2009 Prentice-Hall, Inc. 6 – 44
Brown Manufacturing Example
Program 6.2B
© 2009 Prentice-Hall, Inc. 6 – 45
Quantity Discount Models
Quantity discounts are commonly available
The basic EOQ model is adjusted by adding in the
purchase or materials cost
Table 6.3
0 1,000 2,000
Figure 6.6 Order Quantity
© 2009 Prentice-Hall, Inc. 6 – 49
Brass Department Store Example
Brass Department Store stocks toy race cars
Their supplier has given them the quantity
discount schedule shown in Table 6.3
Annual demand is 5,000 cars, ordering cost is $49, and
holding cost is 20% of the cost of the car
The first step is to compute EOQ values for each
discount
(2)(5,000)(49)
EOQ1 700 cars per order
(0.2)(5.00)
(2)(5,000)(49)
EOQ 2 714 cars per order
(0.2)(4.80)
(2)(5,000)(49)
EOQ 3 718 cars per order
(0.2)(4.75 )
© 2009 Prentice-Hall, Inc. 6 – 50
Brass Department Store Example
Q1 700
Q2 1,000
Q3 2,000
Table 6.4
Program 6.3A
© 2009 Prentice-Hall, Inc. 6 – 53
Brass Department Store Example
Program 6.3B
Time
Figure 6.7(a) Stockout
© 2009 Prentice-Hall, Inc. 6 – 57
Use of Safety Stock
Inventory
on Hand
Safety
Stock, SS
Stockout is Avoided
Time
Figure 6.7(b)
© 2009 Prentice-Hall, Inc. 6 – 58
ROP with Known Stockout Costs
Table 6.6
$5,000 –
$4,320
$4,000 –
$3,000 –
Cost
$2,410
$2,000 –
$990
$1,000 –
$305 $110
$0 –
30 Units 40 Units 50 Units 60 Units 70 Units
ROP
Figure 6.8
© 2009 Prentice-Hall, Inc. 6 – 63
Safety Stock with Unknown
Stockout Costs
There are many situations when stockout costs
are unknown
An alternative approach to determining safety
stock levels is to use a service level
A service level is the percent of time you will not
be out of stock of a particular item
350 X?
Figure 6.9
350 X?
Figure 6.9
X
1. We know that Z
4. So we have
2. We also know that SS X – SS Z
Z(10)
SS
3. Thus Z
© 2009 Prentice-Hall, Inc. 6 – 67
Hinsdale Company Example
Cost of different service levels
SERVICE Z VALUE FROM SAFETY STOCK CARRYING
LEVEL (%) NORMAL CURVE TABLE (UNITS) COST ($)
90 1.28 12.8 12.80
91 1.34 13.4 13.40
92 1.41 14.1 14.10
93 1.48 14.8 14.80
94 1.55 15.5 15.50
95 1.65 16.5 16.50
96 1.75 17.5 17.50
97 1.88 18.8 18.80
98 2.05 20.5 20.50
99 2.33 23.3 23.20
99.99 3.72 37.2 37.20
Table 6.7
© 2009 Prentice-Hall, Inc. 6 – 68
Hinsdale Company Example
Service level ($)
40 –
–
versus annual –
–
–
carrying cost 35 –
–
–
P(MP) ≥ ML – P(ML) or
ML
P(MP) + P(ML) ≥ ML P
ML MP
P(MP + ML) ≥ ML
MP Marginal profit $6 – $4 $2
Table 6.8
ML $4 4
P 0.67
ML MP $4 $2 6
P 0.67
Let P = 0.40
© 2009 Prentice-Hall, Inc. 6 – 81
Newspaper Example
Step 2. Using the normal distribution in Figure
6.11, we find the appropriate Z value
Z = 0.25 standard deviations from the mean
Area under the Curve is 1 – 0.40 = 0.60
(Z = 0.25) Mean Daily Sales
50 X* X Demand
X * 60
0.25
10
or
From Appendix A
A 70 10 Yes
B 20 20 In some cases
C 10 70 No
Table 6.10
1 B(2) C(3)
Figure 6.13
© 2009 Prentice-Hall, Inc. 6 – 91
Material Structure Tree
Table 6.11
© 2009 Prentice-Hall, Inc. 6 – 96
Net Material Requirements Plan
Week Lead
Item 1 2 3 4 5 6 Time
A Gross 50 1
On-Hand 10 10
Net 40
Order Receipt 40
Order Release 40
B Gross 80A 2
On-Hand 15 15
Net 65
Order Receipt 65
Order Release 65
Figure 6.15(a)
Week Lead
Item 1 2 3 4 5 6 Time
C Gross 120A 1
On-Hand 20 10
Net 100
Order Receipt 100
Order Release 100
D Gross 130B 1
On-Hand 10 10
Net 120
Order Receipt 120
Order Release 120
Figure 6.15(b)
Week Lead
Item 1 2 3 4 5 6 Time
Figure 6.15(c)
D(3) F(2)
Week Lead
Item 1 2 3 4 5 6 Time
AA Gross 10 1
On-Hand 0 0
Net 10
Order Receipt 10
Order Release 10
Figure 6.16(a)
Week Lead
Item 1 2 3 4 5 6 Time
Figure 6.16(b)
P-kanban C-kanban
and and
Container Container
4 1
3 2
Figure 6.17