CHAPTERCHAPTER88

Inventory Inventory ManagementManagement

Independent DemandIndependent Demand

AA

B(4)B(4) C(2)C(2)

H(2)H(2) E(1)E(1) D(3)D(3) F(2)F(2)

Dependent DemandDependent Demand

Independent demand is uncertain. Independent demand is uncertain. Dependent demand is certain.Dependent demand is certain.

InventoryInventory: a stock or store of goods: a stock or store of goods

AA

B(4)B(4) C(2)C(2)

H(2)H(2) E(1)E(1) D(3)D(3) F(2)F(2)

How many items of C, D, and E should be requested if How many items of C, D, and E should be requested if Quantity of A = 100 unitsQuantity of A = 100 units

Answer Answer

Q of C = 100 x 2 = 200 unitsQ of C = 100 x 2 = 200 units

Q of D = 100 x 2 x 3 = 600 unitsQ of D = 100 x 2 x 3 = 600 units

Q of E = 100x 4 x 1 = 400 units Q of E = 100x 4 x 1 = 400 units

Types of Inventories

Raw materials Partially completed goods called

work in progress

Finished-goods inventories

Replacement supplies such as spare parts

Goods-in-transit to warehouses or customers

Functions of Inventory

To meet demand

To smooth production

To protect against stock-outs

To help hedge against price increases

To take advantage of quantity discounts

Economic Order Quantity

Cost Holding Annual

Cost)der Demand)(Or 2(Annual =

H

2DS = EOQ

EOQ Example 1When When Order cost = $ 2000 per orderOrder cost = $ 2000 per orderSemi-annual quantity = 8000 units Semi-annual quantity = 8000 units Holding cost = $ 400 per unitHolding cost = $ 400 per unitFind EOQFind EOQ

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EOQEOQ = =22DSDS

HH

EOQEOQ = =2(16000)(2000)2(16000)(2000)

400400 = 400 units= 400 units

EOQ Example 2Based on the previous problemBased on the previous problemFind Find a)a) No. of orders No. of orders No. of orders = D/EOQ = 16000/400 = 40 orders No. of orders = D/EOQ = 16000/400 = 40 orders

b) Order costb) Order costOrder cost = No. of Orders x Order Cost Order cost = No. of Orders x Order Cost = 40 x $ 2000 = $ 80000= 40 x $ 2000 = $ 80000c) Holding costc) Holding costHolding cost = EOQ/2 x Holding costHolding cost = EOQ/2 x Holding cost 400/2 x $ 400 = $ 80000400/2 x $ 400 = $ 80000d)Total costd)Total costTotal cost = Order cost + Holding cost Total cost = Order cost + Holding cost = $ 80000 + $ 80000 = $160000 = $ 80000 + $ 80000 = $160000

Assumptions of Basic EOQ Model

Demand 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

Inventory Order Cycle

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Demand Demand raterate

TimeTimeLead Lead timetime

Lead Lead timetime

Order Order placedplaced

Order Order placedplaced

Order Order receiptreceipt

Order Order receiptreceipt

Inve

nto

ry L

evel

Inve

nto

ry L

evel

Reorder point, Reorder point, RR

Order quantity, Order quantity, QQ

00

Average Average inventoryinventory

QQ

22