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Inventory Management
Inventory Management
Inventory Management
Inventory Management
Lecture Outline
• Elements of Inventory Management
• Inventory Control Systems
• Economic Order Quantity Models
• Quantity Discounts
• Reorder Point
• Order Quantity for a Periodic Inventory System
Example 10.1
Copyright 2011 John Wiley & Sons, Inc. 13-12
ABC Classification
% OF TOTAL % OF TOTAL
CLASS ITEMS VALUE QUANTITY
A 9, 8, 2 71.0 15.0
B 1, 4, 3 16.5 25.0
C 6, 5, 10, 7 12.5 60.0
Example 10.1
Copyright 2011 John Wiley & Sons, Inc. 13-13
Economic Order Quantity
(EOQ) Models
• EOQ
• optimal order quantity that will minimize
total inventory costs
• Basic EOQ model
• Production quantity model
Order quantity, Q
Demand Average
rate inventory
Inventory Level
Q
2
Reorder point, R
Co D
Annual ordering cost =
Q
CcQ
Annual carrying cost =
2
Co D CcQ
Total cost = +
Q 2
CcQ
Minimum Carrying Cost =
2
total cost
CoD
Ordering Cost =
Q
Inventory
level
Maximum
Q(1-d/p) inventory
level
Average
Q inventory
(1-d/p)
2 level
0
Begin End Time
order order
Order
receipt receipt
receipt period
CoD CcQ d
TC = + 1- p
Q 2
2CoD 2(150)(10,000)
Qopt = = = 2,256.8 gallons
32.2
Cc 1 - d 0.75 1 -
p 150
CoD CcQ d
TC = + 1- p = $1,329
Q 2
Q 2,256.8
Production run = = = 15.05 days per order
p 150
D 10,000
Number of production runs = = = 4.43 runs/year
Q 2,256.8
d 32.2
Maximum inventory level = Q 1 - = 2,256.8 1 -
p 150
= 1,772 gallons
=(D4*D5/D10)+(D3*D10/2)*(1-(D7/D8))
=D10*(1-(D7/D8))
CoD CcQ
TC = + + PD
Q 2
where
P = per unit price of the item
D = annual demand
TC (d2 = $6 )
Inventory cost ($)
Carrying cost
Ordering cost
QUANTITY PRICE
Co = $2,500
1 - 49 $1,400
Cc = $190 per TV
50 - 89 1,100
D = 200 TVs per year
90+ 900
2CoD 2(2500)(200)
Qopt = = = 72.5 TVs
Cc 190
For Q = 72.5
Co D CcQopt
TC = + + PD = $233,784
Qopt 2
For Q = 90
Co D CcQ
TC = + + PD = $194,105
Q 2
Copyright 2011 John Wiley & Sons, Inc. 13-31
Quantity Discount Model With Excel
=IF(D10>B10,D10,B10) =(D4*D5/E10)+(D3*E10/2)+C10*D5
R = dL
where
Q
Inventory level
Reorder
point, R
0
LT LT
Time
Q
Reorder
point, R
Safety Stock
0
LT LT
Time
R = dL + zd L
where
d = average daily demand
L = lead time
d = the standard deviation of daily demand
z = number of standard deviations
corresponding to the service level
probability
zd L = safety stock
Probability of
a stockout
Safety stock
zd L
dL R
Demand
R = dL + z d L Safety stock = z d L
= 30(10) + (1.65)(5)( 10) = (1.65)(5)( 10)
= 326.1 gallons = 26.1 gallons
Q = d(tb + L) + zd tb + L - I
where
d = average demand rate
tb = the fixed time between orders
L = lead time
sd = standard deviation of demand
Q = d(tb + L) + zd tb + L - I
= (6)(60 + 5) + (1.65)(1.2) 60 + 5 - 8
= 397.96 packages