University of Business & Technology

Engineering College

IE 451
Production Planning and
Control

Dr. Ashraf Hassan

Industrial Engineering Department

INVENTORY CONTROL
An Introduction
 INVENTORY CONTROL
An Introduction
 INVENTORY: a stock or store of goods

Examples:
 Manufacturing firm: carries supplies of raw material,
purchased parts, semi-finished goods, finished goods, spare
parts for machines, tools,

 Department stores: carry clothing, furniture, carpeting,

stationary, appliances, gifts, cards, and toys.

 Hospitals stock drugs, surgical supplies, life-monitoring

equipment

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 Functions of inventory
 To meet anticipated demand
 To smooth production requirements
 To protect against stockout (running out of stock)
 To permit operations

Requirements for effective inventory management:

 A system to keep track of inventory in hand

 A reliable forecast of demand
 Knowledge of lead times
 Knowledge of inventory costs
 A classification system for inventory items
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Bar code: a universal product code (UPS) has information about the
item. (0): a grocery item, (14800): manufacturer, (23208) specific item
Advan.: increase in speed & accuracy, information on inventory

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INVENTORY CONTROL
MODELS I
 Definitions
 Lead time: time interval between ordering and receiving
the order

 Holding (carrying) cost: cost to carry an item in

inventory for a year: interest, insurance, deterioration,
warehousing costs

 Ordering cost: costs of ordering and receiving inventory:

preparation of invoices, shipping cost, inspection.
 Shortage cost: when demand exceeds supply in
inventory; unrealized profit

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 How much to order:
economic order quantity
models
(1) Basic economic order
quantity (EOQ) model
 Assumptions:

 Only one product is involved

 Annual demand is known
 Demand is spread evenly
 Lead time does not vary
 No quantity discounts

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Orders are timed to avoid excess stock and stockouts ( running out of stock)

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Optimal order quantity is a trade-off between holding costs and
ordering costs

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 the total annual carrying cost is

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 Annual ordering cost is a function of the number of orders
per year and the ordering cost per order:

The total annual cost (TC) associated with carrying and

ordering inventory when Q units are ordered each time
is

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 Figure 13.4 C reveals that the total-cost curve is U-shaped (i.e., convex,
with one minimum) and that it reaches its
minimum at the quantity where carrying and ordering costs are equal. An
expression for the
optimal order quantity, Q 0 , can be obtained

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Example 1
 A local distributor for a national tire company expects to sell
approximately 9,600 steel-belted radial tires of a certain size
and tread design next year. Annual carrying cost is $16 per tire,
and ordering cost is $75. The distributor operates 288 days a
year.
a. What is the EOQ?
b. How many times per year does the store reorder?
c. What is the length of an order cycle?
d. What is the total annual cost if the EOQ quantity is ordered?

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Example 2
 toy manufacturer uses approximately 32,000
silicon chips annually. The chips are used at a
steady rate during the 240 days a year that the
plant operates. Annual holding cost is $3 per
chip, and ordering cost is $120. Determine
a. The optimal order quantity.
b. The number of workdays in an order cycle.

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 Carrying cost is sometimes stated as a percentage of the price
of an item rather than as a
dollar amount per unit. However, as long as the percentage is
converted into a dollar amount,
the EOQ formula is still appropriate.

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Example 3
 Piddling Manufacturing assembles security
monitors. It purchases 3,600 black-and-white
cathode ray tubes a year at $65 each. Ordering
costs are $31, and annual carrying costs are
20 percent of the purchase price. Compute the
optimal quantity and the total annual cost of
ordering and carrying the inventory.

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(2) EOQ with incremental
replenishment
 When the firm is a producer and user, inventories are
replenished over time instead of instantaneously as in EOQ
Here production rate exceeds usage rate
Ex: daily production rate=20 units, daily usage rate =15 units
then inventory will build up at a rate of 20-15=5 units a day

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 • Because the company makes the product itself, there are
no ordering costs but set up cost—the costs required to
prepare the equipment for the job, such as cleaning,
adjusting, and changing tools and fixtures.

• Setup costs are analogous to ordering costs because they

are independent of the lot (run) size.

• They are treated in the formula in exactly the same way.

•
• The larger the run size, the fewer the number of runs
needed and, hence, the lower the annual setup cost.

• The number of runs or batches per year is D/Q, and the

annual setup cost is equal to the number of runs per year
times the setup cost, S, per run: ( D/Q ) S.

The total cost is

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Example 4
 A toy manufacturer uses 48,000 rubber wheels per
year for its popular dump truck series. The firm
makes its own wheels, which it can produce at a
rate of 800 per day. The toy trucks are assembled
uniformly over the entire year. Carrying cost is $1
per wheel a year. Setup cost for a production run of
wheels is $45. The firm operates 240 days per
year. Determine the
a. Optimal run size.
b. Minimum total annual cost for carrying and
setup.
c. Cycle time for the optimal run size.
d. Run time.
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 Note again the equality of cost (in this example,
setup and carrying costs) at the EOQ.

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Example 5
 The Dine Corporation is both a producer and a user of brass
couplings. The firm operates 220 days a year and uses the
couplings at a steady rate of 50 per day. Couplings can be
produced at a rate of 200 per day. Annual storage cost is $2 per
coupling, and machine setup cost is $70 per run.
a. Determine the economic run quantity.
b. Approximately how many runs per year will there be?
c. Compute the maximum inventory level.
d. Determine the length of the pure consumption portion of the
cycle.

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SHEET # 6
 SHEET # 6
Inventory Control: EOQ
/ Problems No.: 1, 2

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THANK YOU VERY MUCH