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Chapter 13Role of Inventory Management
Copyright 2011 John Wiley & Sons, Inc.
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Lecture OutlineElements of Inventory ManagementInventory Control SystemsEconomic Order Quantity ModelsQuantity DiscountsReorder PointOrder Quantity for a Periodic Inventory SystemCopyright 2011 John Wiley & Sons, Inc.13-*
Copyright 2011 John Wiley & Sons, Inc.
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What Is Inventory?Stock of items kept to meet future demand13-*
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Purpose of inventory management
To determine the amount of inventory to keep
How many units to order
When to order
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Supply Chain Management (1)Bullwhip effect
demand information is distorted as it moves away from the end-use customer
higher safety stock inventories are stored to compensate
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Supply Chain Management (2)
Seasonal or cyclical demand
Inventory provides independence from vendors
Take advantage of price discounts
Inventory provides independence between stages and avoids work stoppagesCopyright 2011 John Wiley & Sons, Inc.13-*
Copyright 2011 John Wiley & Sons, Inc.
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Quality Management in the Supply ChainCustomers usually perceive quality service as availability of goods they want when they want them
Inventory must be sufficient to provide high-quality customer service in QMCopyright 2011 John Wiley & Sons, Inc.13-*
Copyright 2011 John Wiley & Sons, Inc.
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Types of InventoryRaw materials13-*
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Types of InventoryPurchased parts and supplies13-*
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Types of InventoryWork-in-process (partially completed) products (WIP)13-*
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Types of InventoryItems being transportedTools and equipment13-*
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Two Forms of DemandCopyright 2011 John Wiley & Sons, Inc.13-*DependentDemand for items used to produce final products Tires for autos are a dependent demand item
IndependentDemand for items used by external customersCars, appliances, computers, and houses are examples of independent demand inventory
Copyright 2011 John Wiley & Sons, Inc.
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ABC ClassificationClass A5 15 % of units70 80 % of value Class B30 % of units15 % of valueClass C50 60 % of units 5 10 % of valueCopyright 2011 John Wiley & Sons, Inc.13-*
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ABC ClassificationCopyright 2011 John Wiley & Sons, Inc.13-*
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ABC ClassificationCopyright 2011 John Wiley & Sons, Inc.13-*Example 10.1
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ABC ClassificationCopyright 2011 John Wiley & Sons, Inc.13-*Example 10.1
Copyright 2011 John Wiley & Sons, Inc.
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Inventory CostsCarrying costcost of holding an item in inventory
Ordering costcost of replenishing inventory
Shortage costtemporary or permanent loss of sales when demand cannot be met
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Inventory Control SystemsCopyright 2011 John Wiley & Sons, Inc.13-*Continuous system (fixed-order-quantity)constant amount ordered when inventory declines to predetermined level
Periodic system (fixed-time-period)order placed for variable amount after fixed passage of time
Copyright 2011 John Wiley & Sons, Inc.
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Economic Order Quantity (EOQ) ModelsEOQoptimal order quantity that will minimize total inventory costs
Basic EOQ model
Production quantity model
Copyright 2011 John Wiley & Sons, Inc.13-*
Copyright 2011 John Wiley & Sons, Inc.
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Assumptions of Basic EOQ ModelDemand is known with certainty and is constant over time
No shortages are allowed
Lead time for the receipt of orders is constant
Order quantity is received all at once
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Inventory Order CycleCopyright 2011 John Wiley & Sons, Inc.13-*
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EOQ Cost ModelCopyright 2011 John Wiley & Sons, Inc.13-*
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EOQ Cost ModelCopyright 2011 John Wiley & Sons, Inc.13-*
Copyright 2011 John Wiley & Sons, Inc.
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EOQ Cost ModelCopyright 2011 John Wiley & Sons, Inc.13-*
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EOQ ExampleCopyright 2011 John Wiley & Sons, Inc.13-*
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Production Quantity ModelOrder is received gradually, as inventory is simultaneously being depletednon-instantaneous receipt modelassumption that Q is received all at once is relaxed
p - daily rate at which an order is received over time, production rate
d - daily rate at which inventory is demandedCopyright 2011 John Wiley & Sons, Inc.13-*
Copyright 2011 John Wiley & Sons, Inc.
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Production Quantity ModelCopyright 2011 John Wiley & Sons, Inc.13-*
Copyright 2011 John Wiley & Sons, Inc.
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Production Quantity ModelCopyright 2011 John Wiley & Sons, Inc.13-*
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Production Quantity ModelCopyright 2011 John Wiley & Sons, Inc.13-*Cc = $0.75 per gallonCo = $150D = 10,000 gallonsd = 10,000/311 = 32.2 gallons per dayp = 150 gallons per day
Copyright 2011 John Wiley & Sons, Inc.
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Production Quantity ModelCopyright 2011 John Wiley & Sons, Inc.13-*
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Solution of EOQ Models With ExcelCopyright 2011 John Wiley & Sons, Inc.13-*
Copyright 2011 John Wiley & Sons, Inc.
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Solution of EOQ Models With ExcelCopyright 2011 John Wiley & Sons, Inc.13-*
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Solution of EOQ Models With OM ToolsCopyright 2011 John Wiley & Sons, Inc.13-*
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Quantity DiscountsCopyright 2011 John Wiley & Sons, Inc.13-*
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Quantity Discount ModelCopyright 2011 John Wiley & Sons, Inc.13-*
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Quantity DiscountCopyright 2011 John Wiley & Sons, Inc.13-*
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Quantity Discount Model With ExcelCopyright 2011 John Wiley & Sons, Inc.13-*
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Reorder PointCopyright 2011 John Wiley & Sons, Inc.13-*Inventory level at which a new order is placed
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Reorder PointCopyright 2011 John Wiley & Sons, Inc.13-*
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- Safety Stock Safety stockbuffer added to on hand inventory during lead timeStockout an inventory shortageService level probability that the inventory available during lead time will meet demandP(Demand during lead time
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Variable Demand With Reorder PointCopyright 2011 John Wiley & Sons, Inc.13-*
Copyright 2011 John Wiley & Sons, Inc.
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Reorder Point With Safety StockCopyright 2011 John Wiley & Sons, Inc.13-*
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Reorder Point With Variable DemandCopyright 2011 John Wiley & Sons, Inc.13-*
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Reorder Point For a Service LevelCopyright 2011 John Wiley & Sons, Inc.13-*Probability of meeting demand during lead time = service levelProbability of a stockoutRSafety stockdLDemandzd L
Copyright 2011 John Wiley & Sons, Inc.
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Reorder Point For Variable DemandCopyright 2011 John Wiley & Sons, Inc.13-*
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Determining Reorder Point with ExcelCopyright 2011 John Wiley & Sons, Inc.13-*
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Order Quantity for a Periodic Inventory SystemCopyright 2011 John Wiley & Sons, Inc.13-*
Copyright 2011 John Wiley & Sons, Inc.
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Periodic Inventory SystemCopyright 2011 John Wiley & Sons, Inc.13-*
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Fixed-Period Model With Variable DemandCopyright 2011 John Wiley & Sons, Inc.13-*
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Fixed-Period Model with ExcelCopyright 2011 John Wiley & Sons, Inc.13-*
Copyright 2011 John Wiley & Sons, Inc.
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Copyright 2011 John Wiley & Sons, Inc.13-*Copyright 2011 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in section 117 of the 1976 United States Copyright Act without express permission of the copyright owner is unlawful. Request for further information should be addressed to the Permission Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages caused by the use of these programs or from the use of the information herein.
Copyright 2011 John Wiley & Sons, Inc.
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