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Inventory Management
Inventory Management
MANAGEMENT
This time
Let's talk about INVENT'RY
Everybody's got a clue already
This might be crazy
Let us help you now this can be easy
Terminologies, formulas, and process
Store of goods of the business
That's why managing of inventory
Distribution will be systemized
To produce what are required
Makes customer satisfied
Chorus(2x):
Raw materials and purchased parts
Then work-in-process now
Merch and finished-goods
Replacement parts and tools
Goods-in-transit to warehouse and
customer make it all
Yeah! 'Tis INVENTORY MANAGEMENT
Yeah! 'Tis INVENTORY MANAGEMENT
Music fans have a rotten time these days. Gigs by Beyonce and festivals such as
Glastonbury sell out in the time it takes to refresh a web browser. Ed Sheeran’s UK and
Ireland tour sold out in five minutes in February. One fan tweeted: “Devastated, been
on since 9.40 refreshing for tickets to get page after page error. Sold out.” Sheeran
released a statement saying he was “deeply concerned” and cautioned against
engaging with ticket touts. The problem is that the supply chain for tickets extends far
beyond his reach. Resellers, fan sites, auto-buying bots and bulk buyers all affect the
fan experience, whether he likes it or not.
Lesson: The end of your supply chain is not the end of the chain.
ED SHEEERAN TICKETS
INVENTOR
Y Stocks or Store of Goods
FUNCTIONS OF INVENTORY
INVENTORY MANAGEMENT HAS TWO MAIN
CONCERNS/OBJECTIVES:
Level of Customer Service
SIZE of Orders
MEASURES OF PERFORMANCE:
EFFECTIVE
INVENTORY MANAGEMENT
A. A system to keep track of the inventory on hand and on
order. (Inventory Counting System)
B. A reliable forecast of demand that includes an indication
of possible forecast error.
C. Knowledge of lead times and lead time variability.
D. Reasonable estimates of inventory holding costs, ordering
costs, and shortage costs.
E. A classification system for inventory items.
Periodic System
Perpetual Inventory System (Continual
System)
Two-bin System
Can be Batch or On-Line
• Universal Product Code (UPC)
A. INVENTORY COUNTING
SYSTEM
“The greater the potential variability,
the greater the need for additional
stock to reduce the risk of a shortage
between deliveries.”
Holding or Carrying
Costs
Ordering Costs
• Setup Costs
Shortage Costs
D. INVENTORY COSTS
A-B-C Approach Key questions :
Classifying inventory 1. How much
according to some accuracy is
needed?
measure of importance,
and allocating control 2. When should
efforts accordingly. cycle counting be
performed?
Cycle Counting 3. Who should do it?
E. CLASSIFICATION SYSTEM
A-B-C Approach
To solve an A-B-C problem, follow these steps:
1. For each item, multiply annual volume by unit price
to get the annual dollar value.
2. Arrange annual dollar values in descending order.
3. The few (10 to 15 percent) with the highest annual
dollar value are A items. The most
(about 50 percent) with the lowest annual dollar value
are C items. Those in between
(about 35 percent) are B items.
E. CLASSIFICATION SYSTEM
Ex. A manager has
obtained a list of unit
costs and estimated
annual demands for 10
inventory items and
now wants to
categorize the items
on an A-B-C basis.
Multiplying each item’s
annual demand by its
unit cost yields its
annual dollar value:
2𝐷𝑆 𝑄𝑂
𝑄𝑜 = 𝐷
𝐻
MINIMUM TOTAL COST NUMBER OF ORDERS PER YEAR
2𝐷𝑆 𝐷
𝐷 𝐻
𝑇𝐶 = + (H) 𝑄𝑂
2𝐷𝑆 2
𝐻
SAMPLE PROBLEM
Number
TC=
Length of
Carrying
EOQ
of Order
Orders
Cost per Year
+ Ordering
Cycle
Cost
2𝐷𝑆
$75 𝑄 = 300
9, 600 units 𝑄𝑂 𝑜
𝐷(𝐻) 9600
𝐷(𝑆)
𝐻
== +
𝐷𝑄𝑂2 9600
𝑄𝑂
300
2(9600)($75)
300(16) 9600(75)
𝑄𝑜 =
+orders
==932
workdays
$16
2 300
300
𝑄=𝑜 $=4, tires
800
2𝐷𝑆 𝑝
𝑄𝑜 (Economic Run Quantity) = x
𝐻 𝑝−𝑢
𝐼𝑚𝑎𝑥 - Maximum
𝑄𝑂 𝐼𝑚𝑎𝑥
Inventory
𝐼𝑚𝑎𝑥 = (p-u) 𝐼𝑎𝑣𝑒 =
𝐼𝑎𝑣𝑒 - Maximum Inventory 𝑝 2
p- Production or Delivery
Rate 𝑄𝑂 𝑄𝑂
u- Usage Rate Run Time= Cycle Time=
𝑝 𝑢
SAMPLE PROBLEM
EOQ Run size
a. Optimal
48, 000 units $45
2𝐷𝑆 𝑝
𝑄𝑂 𝐻 x
𝑄𝑜 (Economicc Run Quantity) =2𝐷𝑆
𝑄𝑜 == 𝑝−𝑢
𝐷 𝐻
9600
𝐷
=
𝑄𝑂 300
300
x=
2(48000)(45) 800
𝑄𝑜 =
1 800−200
$1 per wheel 240 days a year 9600
2𝐷𝑆
𝐼 𝑄 𝐷
𝑇𝐶𝑚𝑖𝑛 = Carrying Cost + Setup
= 9600
Cost = ( 𝑂 )H + ( )S
𝑚𝑎𝑥
𝑄𝑜 = 2 𝑄𝑂
𝐷 𝐻
𝐷
𝑄𝑂
=
2,400
𝑄𝑂 800 (800-200)
𝐼𝑚𝑎𝑥 = (p-u)= 300
300
=
𝑝
= 1, 800 wheels
$1 per wheel 240 days a year 9600
1800 48000
𝑇𝐶𝑚𝑖𝑛 = ( )$1 + ( )$45
2 2400
800 per day
c. RunEOQ
Time
48, 000 units $45
2𝐷𝑆
𝑄𝑂
Run =
𝑄𝑜 =
Time=
𝐷
𝑄 𝑂
𝐻
𝑝9600
𝐷
=
𝑄𝑂 300
300
$1 per wheel 240 days a year Run Time= =
2,400 𝑤ℎ𝑒𝑒𝑙𝑠
9600
800 𝑤ℎ𝑒𝑒𝑙𝑠 𝑝𝑒𝑟 𝑑𝑎𝑦
RT= 3 𝐷𝑎𝑦𝑠
800 per day
SAMPLE PROBLEM
d. Cycle
EOQTime for the optimal run
48, 000 units size
$45
𝑄2𝐷𝑆
𝑄𝑂𝑂
Cycle 𝐷
=
𝑄𝑜 =
Time= 𝐻
9600
𝑢𝐷
=
𝑄𝑂 300
300
$1 per wheel 240 days a year Cycle Time= =
2,400 𝑤ℎ𝑒𝑒𝑙𝑠
9600
200 𝑤ℎ𝑒𝑒𝑙𝑠 𝑝𝑒𝑟 𝑑𝑎𝑦
CT= 12 𝐷𝑎𝑦𝑠
800 per day
QUANTITY
DISCOUNTS
Price reductions for larger orders offered to customers
to induce them to buy in large quantities.
For carrying costs that are constant, the procedure is as follows:
1. Compute the common minimum point.
2. Only one of the unit prices will have the minimum point in its
feasible range since the ranges do not overlap. Identify that
range.
a. If the feasible minimum point is on the lowest price range,
that is the optimal order quantity.
b. If the feasible minimum point is in any other range, compute
the total cost for the minimum point and for the price breaks of
all lower unit costs. Compare the total costs; the quantity
(minimum point or price break) that yields the lowest total cost
is the optimal order quantity.
QUANTITY
DISCOUNTS
QUANTITY
DISCOUNTS
Price reductions for larger orders.
QUANTITY
DISCOUNTS
When carrying costs are expressed as a percentage of price,
determine the best purchase quantity with the following
procedure:
1. Beginning with the lowest unit price, compute the minimum
points for each price range until you find a feasible minimum
point (i.e., until a minimum point falls in the quantity range for its
price).
2. If the minimum point for the lowest unit price is feasible, it is
the optimal order quantity. If the minimum point is not feasible
in the lowest price range, compare the total cost at the price
break for all lower prices with the total cost of the feasible
minimum point. The quantity that yields the lowest total cost is
the optimum.
QUANTITY
DISCOUNTS
Ex. Surge Electric uses 4,000 toggle switches
a year. Switches are priced as follows: 1 to
499, 90 cents each; 500 to 999, 85 cents
each; and 1,000 or more, 80 cents each. It
costs approximately $30 to prepare an order
and receive it, and carrying costs are 40
percent of purchase price per unit on an
annual basis. Determine the optimal order
quantity and the total annual cost.
QUANTITY
DISCOUNTS
REORDER POINT ORDERING
Occurs when the quantity on hand drops to a
predetermined amount.
E(n)= E(z)σ𝒅𝑳𝑻
Normal distribution service levels
and unit normal loss function
SHORTAGES AND SERVICE
LEVELS
Table
13.3
Ex. Suppose the
SHORTAGES AND SERVICE
standard deviation of
lead time demand is
E(n)= E(z)σ𝒅𝑳𝑻 LEVELS
known to be 20 units. σdLT = 20 units
Lead time demand is a.) Lead time (cycle) service level = .90.
approximately normal. From Table 13.3, E(z) = .048.
a.) For a lead time E(n) = .048(20 units) = .96, or about 1 unit
service level of 90 b.) For the case where E(n) = 2, you must
percent, determine
the expected number solve for E(z) and then use Table 13.3 to
of units short for any determine the lead time service that
order cycle. implies. So E(z) = E(n)/σdLT = 2/20 = .100.
b.) What lead time From Table 13.3, this implies a service
service level would an
expected shortage of
level of approximately 81.7 percent
two units imply? (interpolating).
SHORTAGES AND SERVICE
LEVELS
Having determined the expected
number of units short for an order cycle,
you can determine the expected number
of units short per year. It is simply the
expected number of units short per cycle
multiplied by the number of cycles
(orders) per year. Thus,
𝑫
E(N)= E(n)
𝑸
SHORTAGES AND SERVICE
LEVELS
Fill Rate
The percentage of
demand filled by the stock on
hand.
E(z)σ𝒅𝑳𝑻
SLannual= 1-
𝑸
Fixed-order-interval
Orders are placed at fixed time intervals
Continuous Stocking
Levels
Discrete Stocking
Levels
Continuous Stocking
Levels
𝐶𝑠
Service Level=
𝐶𝑠 + 𝐶𝑒
P= Unit Price
Rop under:
Constant
demand & Lead
time
ROP = d(LT)
?
(z𝝈𝒅𝑳𝑻) OI
? + LT − 𝑨
This time
Let's talk about INVENT'RY
Everybody's got a clue already
This might be crazy
Let us help you now this can be easy
Terminologies, formulas, and process
Store of goods of the business
That's why managing of inventory
Distribution will be systemized
To produce what are required
Makes customer satisfied
Chorus(2x):
Raw materials and purchased parts
Then work-in-process now
Merch and finished-goods
Replacement parts and tools
Goods-in-transit to warehouse and
customer make it all
Yeah! 'Tis INVENTORY MANAGEMENT
Yeah! 'Tis INVENTORY MANAGEMENT