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    Inventory: Importance Inventory Decisions EOQ Model ROP

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    Joris Yap
    The document discusses inventory management concepts like economic order quantity (EOQ), reorder point (ROP), and provides an example of how to calculate these using a spreadsheet for a business called Bart's Barometer Business. It shows partial spreadsheet outputs for Bart's that calculate EOQ, total annual cost, inventory levels, order quantities, and more based on input data like annual demand, ordering costs, holding costs. It summarizes that a 16% reduction from the optimal EOQ quantity only increased total costs by 1.55%. The document also provides an example ROP problem, showing how to calculate costs of being out of stock and costs of safety stock to determine the optimal ROP that minimizes total annual

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    Inventory: Importance Inventory Decisions EOQ Model ROP

    Uploaded by

    Joris Yap
    10 views9 pages
    The document discusses inventory management concepts like economic order quantity (EOQ), reorder point (ROP), and provides an example of how to calculate these using a spreadsheet for a business called Bart's Barometer Business. It shows partial spreadsheet outputs for Bart's that calculate EOQ, total annual cost, inventory levels, order quantities, and more based on input data like annual demand, ordering costs, holding costs. It summarizes that a 16% reduction from the optimal EOQ quantity only increased total costs by 1.55%. The document also provides an example ROP problem, showing how to calculate costs of being out of stock and costs of safety stock to determine the optimal ROP that minimizes total annual

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    SMATH311LC_Module7_excel

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    The document discusses inventory management concepts like economic order quantity (EOQ), reorder point (ROP), and provides an example of how to calculate these using a spreadsheet for a business called Bart's Barometer Business. It shows partial spreadsheet outputs for Bart's that calculate EOQ, total annual cost, inventory levels, order quantities, and more based on input data like annual demand, ordering costs, holding costs. It summarizes that a 16% reduction from the optimal EOQ quantity only increased total costs by 1.55%. The document also provides an example ROP problem, showing how to calculate costs of being out of stock and costs of safety stock to determine the optimal ROP that minimizes total annual

    Copyright:

    © All Rights Reserved
    Flag for inappropriate content
    10 views9 pages

    Inventory: Importance Inventory Decisions EOQ Model ROP

    Uploaded by

    Joris Yap
    The document discusses inventory management concepts like economic order quantity (EOQ), reorder point (ROP), and provides an example of how to calculate these using a spreadsheet for a business called Bart's Barometer Business. It shows partial spreadsheet outputs for Bart's that calculate EOQ, total annual cost, inventory levels, order quantities, and more based on input data like annual demand, ordering costs, holding costs. It summarizes that a 16% reduction from the optimal EOQ quantity only increased total costs by 1.55%. The document also provides an example ROP problem, showing how to calculate costs of being out of stock and costs of safety stock to determine the optimal ROP that minimizes total annual

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    INVENTORY

    Definition
    Importance
    Inventory Decisions
    EOQ Model
    ROP
    HOW TO DO IT IN EXCEL
    Example: Bart’s Barometer Business

     Partial Spreadsheet with Input Data


    A B
    1 BART'S ECONOMIC ORDER QUANTITY
    2
    3 Annual Demand 500
    4 Ordering Cost $80.00
    5 Annual Holding Rate % 20
    6 Cost Per Unit $50.00
    7 Working Days Per Year 300
    8 Lead Time (Days) 60
     Partial Spreadsheet Showing Formulas for Output
    A B C
    10 Econ. Order Qnty. =SQRT(2*B3*B4/(B5*B6/100))
    11 Request. Order Qnty
    12 % Change from EOQ =(C11/B10-1)*100
    13
    14 Annual Holding Cost =B5/100*B6*B10/2 =B5/100*B6*C11/2
    15 Annual Order. Cost =B4*B3/B10 =B4*B3/C11
    16 Tot. Ann. Cost (TAC) =B14+B15 =C14+C15
    17 % Over Minimum TAC =(C16/B16-1)*100
    18
    19 Max. Inventory Level =B10 =C11
    20 Avg. Inventory Level =B10/2 =C11/2
    21 Reorder Point =B3/B7*B8 =B3/B7*B8
    22
    23 No. of Orders/Year =B3/B10 =B3/C11
    24 Cycle Time (Days) =B10/B3*B7 =C11/B3*B7
     Partial Spreadsheet Showing Output

    A B C
    10 Econ. Order Qnty. 89.44
    11 Request. Order Qnty. 75.00
    12 % Change from EOQ -16.15
    13
    14 Annual Holding Cost $447.21 $375.00
    15 Annual Order. Cost $447.21 $533.33
    16 Tot. Ann. Cost (TAC) $894.43 $908.33
    17 % Over Minimum TAC 1.55
    18
    19 Max. Inventory Level 89.44 75
    20 Avg. Inventory Level 44.72 37.5
    21 Reorder Point 100 100
    22
    23 No. of Orders/Year 5.59 6.67
    24 Cycle Time (Days) 53.67 45.00
    Example: Bart’s Barometer Business

     Summary of Spreadsheet Results


    – A 16.15% negative deviation from the EOQ resulted in
    only a 1.55% increase in the Total Annual Cost.
    – Annual Holding Cost and Annual Ordering Cost are
    no longer equal.
    – The Reorder Point is not affected, in this model, by a
    change in the Order Quantity.
    ROP Sample Problem
    There will be two costs that must be computed these are:
    COST OF BEING OUT OF STOCK and COST OF SAFETY STOCK
    For the COST OF BEING OUT OF STOCK

    Start with the first reorder period that is at least the Lead
    time demand value as initial ROP
    Safety Stock = reorder period used – lead time demand
    # short = reorder period used – ROP column value
    EAC = (# short)(SS)(stockout cost)(# of orders/year)
    Cost of being out of stock = sum of EAC in the same ROP
    ROP Sample Problem
    COST OF SAFETY STOCK

    Entries on ROP column and SS, for Cost of Safety Stock Table is just the same as the previous table
    Cost of being out of stock = values on the last column of the previous table
    ACC = (SS)(annual carrying cost)
    Total cost per year = cost of being out of stock + annual carrying cost
    Decision: ROP that will minimize the total cost per year
    ROP Sample Problem

     Summary of Spreadsheet Results


    – The lead time demand is 300 electric motor (for
    computer printer) per day
    – Additional 100 units of electric motor as safety stock
    will minimize the total cost per year.
    – The reorder point for electric motor for computer
    printer should be 400 units.
    – The minimum inventory cost is $1375

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