inventory
DESCRIPTION
Stock of items held to meet future demand Tangible goods Intangible goods Inventory management answers two questions How much to order? When to order?. Inventory. Raw materials Purchased parts and supplies Labor In-process (partially completed) products Component parts Working capital - PowerPoint PPT PresentationTRANSCRIPT
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Inventory
• Stock of items held to meet future demand– Tangible goods– Intangible goods
• Inventory management answers two questions
– How much to order?– When to order?
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Types of Inventory
• Raw materials
• Purchased parts and supplies
• Labor
• In-process (partially completed) products
• Component parts
• Working capital
• Tools, machinery, and equipment
• Finished goods
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Reasons To Hold Inventory
• Meet unexpected demand
• Smooth seasonal or cyclical demand
• Meet variations in customer demand
• Take advantage of price discounts
• Hedge against price increases
• Quantity discounts
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Two Forms Of Demand
• Dependent– items used to produce final products
• Independent– items demanded by external customers
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Inventory Costs
• Carrying Cost– cost of holding an item in inventory
• Ordering Cost– cost of replenishing inventory
• Shortage Cost– temporary or permanent loss of sales when
demand cannot be met
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Inventory Control Systems
• Fixed-order-quantity system (Continuous)– constant amount ordered when inventory
declines to predetermined level
• Fixed-time-period system (Periodic)– order placed for variable amount after fixed
passage of time
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Assumptions Of Basic EOQ Model
• Demand is known with certainty
• Demand is relatively constant over time
• No shortages are allowed
• Lead time for the receipt of orders is constant
• The order quantity is received all at once
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The Inventory Order CycleDemand rate
0 TimeLead time
Lead time
Order Placed
Order Placed
Order Received
Order Received
Inve
ntor
y L
evel
Reorder point, R
Order qty, Q
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EOQ Cost Model
CO - cost of placing order D - annual demand
CC - annual per-unit carrying costQ - order quantity
Annual ordering cost =
Annual carrying cost =
Total cost = +
CoD
QCcQ
2CoD
Q
CcQ
2
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EOQ Model
TC=CoD
Q+CcQ
2
CoD
Q=CcQ
2
∂TC
∂Q=−
CoD
Q2 +Cc
2 Q2 =
2CoD
Cc
0=−CoD
Q2 +Cc
2 Qopt=
2CoD
Cc
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Total Cost at Q*
Qopt=2CoD
Cc
TCmin =CoD
Qopt
+CcQopt
2
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EOQ Model Cost CurvesSlope = 0
Total Cost
Ordering Cost = CoD/Q
Order Quantity, Q
Annualcost ($)
Minimumtotal cost
Optimal order Qopt
Carrying Cost = CcQ/2
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EOQ Example
CC = $0.75 per yard
CO = $150
D = 10,000 yards
Find EOQ, TC at Q*, # of order/year, and cycle time
NOTE: store days = 311
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EOQ Example
Qopt=2CoD
Cc
=2(150)(10,000)
(0.75)=2,000yards
TCmin =CoD
Qopt
+CcQopt
2
=(150)(10,000)
2,000+
(0.75)(2,000)
2=$750+750=$1,500
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Number of orders per year =D
Qopt
=10,000
2,000= 5
Order cycle time =311
D/Qopt
=311
5= 62.2 store days
Orders per/yr and Cycle Time
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EOQ With Noninstantaneous Receipt
Q(1-d/p)
Inventorylevel
(1-d/p)Q2
Time0
Orderreceipt period
BeginOrderreceipt
EndOrderreceipt
Maximuminventory level
Averageinventory level
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EOQ With Noninstantaneous Receipt
p = production rate d = demand rate
€
Max inv level = Q -Q
pd = Q 1 -
d
p
⎛
⎝ ⎜
⎞
⎠ ⎟
Avg inv level =1
2Q 1 -
d
p
⎛
⎝ ⎜
⎞
⎠ ⎟
⎡
⎣ ⎢
⎤
⎦ ⎥=Q
21 -
d
p
⎛
⎝ ⎜
⎞
⎠ ⎟
Total carrying cost =CcQ
21 -
d
p
⎛
⎝ ⎜
⎞
⎠ ⎟
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EOQ With Noninstantaneous Receipt
€
TC=CoD
Q+CcQ
21-
d
p
⎛
⎝ ⎜ ⎞
⎠ ⎟
Qopt=2CoD
Cc 1-d
p
⎛
⎝ ⎜ ⎞
⎠ ⎟
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Production Quantity Example
CC = $0.75 per yard
CO = $150
D = 10,000 yards
d = 10,000/311 = 32.2 yards per day
p = 150 yards per day
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Optimum Q - Q*
Qopt=2CoD
Cc 1-d
p
⎛
⎝ ⎜ ⎞
⎠ ⎟
=2(150)(10,000)
0.751-32.2
150
⎛
⎝ ⎜ ⎞
⎠ ⎟
=2,256.8 yards
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Total Cost
€
TCmin=CoD
Q+CcQ
21-
d
p
⎛
⎝ ⎜ ⎞
⎠ ⎟
=(150)(10,000)
2,256.8+
(0.75)2,256.8
21-
32.2
150
⎛
⎝ ⎜ ⎞
⎠ ⎟
=$1,329
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Production Run and Max Inv. Levels
Production run = Q/p
= 2,256.8/150
= 15.05 yards
Number of production runs = D/Q
= 10,000/2,256.8
= 4.43
Max inv level=Q 1-d
p
⎛
⎝ ⎜ ⎞
⎠ ⎟ =2,256.8 1-
32.2
150
⎛
⎝ ⎜ ⎞
⎠ ⎟ =1,722yards
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Safety Stocks
• Safety stock– buffer added to on hand inventory during lead
time
• Stockout – an inventory shortage
• Service level – probability that the inventory available
during lead time will meet demand
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Inputs and Outputs to Aggregate Production Planning
AggregateProductionPlanning
CompanyPolicies
FinancialConstraints
StrategicObjectives
Units or dollarssubcontracted,backordered, or
lost
CapacityConstraints
Size ofWorkforce
Productionper month
(in units or $)
InventoryLevels
DemandForecasts
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Hierarchical Planning ProcessItems
Product lines or families
Individual products
Components
Manufacturing operations
Resource level
Plants
Individual machines
Critical work centers
Production Planning Capacity Planning
Resource Requirements Plan
Rough-Cut Capacity Plan
Capacity Requirements Plan
Input/Output Control
Aggregate Production Plan
Master Production Schedule
Material Requirements Plan
Shop Floor Schedule
All work centers