inventory and materials management a. a. elimam
DESCRIPTION
Inventory and Materials Management A. A. Elimam. Acquisition of raw materials. Distribution. Storage. Storage. Conversion. The Materials Management Cycle. Cost of Goods Sold - 1990. Materials 66%. Cost of Goods Sold - 1990. Energy 18%. Materials 66%. Cost of Goods Sold - 1990. - PowerPoint PPT PresentationTRANSCRIPT
To accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Fourth Edition 1996 Addison-Wesley Publishing Company, Inc. All rights reserved.
Inventory and Inventory and Materials Materials ManagementManagement
A. A. ElimamA. A. Elimam
To accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Fourth Edition 1996 Addison-Wesley Publishing Company, Inc. All rights reserved.
The Materials Management Cycle
Storage Conversion
Acquisition of raw materials
StorageDistribution
Flour
Eggs
Acquisition of raw materials
Distribution
Storage Conversion
Storage
To accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Fourth Edition 1996 Addison-Wesley Publishing Company, Inc. All rights reserved.
Cost of Goods Sold - 1990Cost of Goods Sold - 1990
To accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Fourth Edition 1996 Addison-Wesley Publishing Company, Inc. All rights reserved.
Cost of Goods Sold - 1990Cost of Goods Sold - 1990
MaterialsMaterials66%66%
To accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Fourth Edition 1996 Addison-Wesley Publishing Company, Inc. All rights reserved.
Cost of Goods Sold - 1990Cost of Goods Sold - 1990
EnergyEnergy18%18%
MaterialsMaterials66%66%
To accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Fourth Edition 1996 Addison-Wesley Publishing Company, Inc. All rights reserved.
Cost of Goods Sold - 1990Cost of Goods Sold - 1990
LaborLabor12%12%
EnergyEnergy18%18%
MaterialsMaterials66%66%
To accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Fourth Edition 1996 Addison-Wesley Publishing Company, Inc. All rights reserved.
Cost of Goods Sold - 1990Cost of Goods Sold - 1990
LaborLabor12%12%
CapitalCapital4%4% EnergyEnergy
18%18%
MaterialsMaterials66%66%
To accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Fourth Edition 1996 Addison-Wesley Publishing Company, Inc. All rights reserved.
Profit Potential of MaterialsProfit Potential of Materials
Alternative Percentage Change
To accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Fourth Edition 1996 Addison-Wesley Publishing Company, Inc. All rights reserved.
Profit Potential of MaterialsProfit Potential of Materials
Alternative Percentage Change
1. Increase sales by $10 million ( )$10 million
$100 million(100%) = 10%
To accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Fourth Edition 1996 Addison-Wesley Publishing Company, Inc. All rights reserved.
Profit Potential of MaterialsProfit Potential of Materials
Alternative Percentage Change
1. Increase sales by $10 million
2. Reduce labor costs by $1 million
( )$10 million
$100 million(100%) = 10%
( )$1 million
$15 million(100%) = 7%
To accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Fourth Edition 1996 Addison-Wesley Publishing Company, Inc. All rights reserved.
Profit Potential of MaterialsProfit Potential of Materials
Alternative Percentage Change
1. Increase sales by $10 million
2. Reduce labor costs by $1 million
3. Reduce materials costs by $1 million
( )$10 million
$100 million(100%) = 10%
( )$1 million
$15 million(100%) = 7%
( )$1 million
$60 million(100%) = 2%
To accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Fourth Edition 1996 Addison-Wesley Publishing Company, Inc. All rights reserved.
Where Where Inventories Inventories Are HeldAre Held
To accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Fourth Edition 1996 Addison-Wesley Publishing Company, Inc. All rights reserved.
ManufacturingManufacturing(36%)(36%)
Where Where Inventories Inventories Are HeldAre Held
To accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Fourth Edition 1996 Addison-Wesley Publishing Company, Inc. All rights reserved.
ManufacturingManufacturing(36%)(36%)
Retail tradeRetail trade(25%)(25%)
Where Where Inventories Inventories Are HeldAre Held
To accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Fourth Edition 1996 Addison-Wesley Publishing Company, Inc. All rights reserved.
ManufacturingManufacturing(36%)(36%)
Retail tradeRetail trade(25%)(25%)
Wholesale tradeWholesale trade(23%)(23%)
Where Where Inventories Inventories Are HeldAre Held
To accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Fourth Edition 1996 Addison-Wesley Publishing Company, Inc. All rights reserved.
ManufacturingManufacturing(36%)(36%)
FarmFarm(8%)(8%)
Retail tradeRetail trade(25%)(25%)
Wholesale tradeWholesale trade(23%)(23%)
Where Where Inventories Inventories Are HeldAre Held
To accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Fourth Edition 1996 Addison-Wesley Publishing Company, Inc. All rights reserved.
ManufacturingManufacturing(36%)(36%)
OtherOther(8%)(8%)
FarmFarm(8%)(8%)
Retail tradeRetail trade(25%)(25%)
Wholesale tradeWholesale trade(23%)(23%)
Where Where Inventories Inventories Are HeldAre Held
To accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Fourth Edition 1996 Addison-Wesley Publishing Company, Inc. All rights reserved.
The Acquisition ProcessThe Acquisition Process
Recognize a needRecognize a need Select suppliersSelect suppliers Place the orderPlace the order Track the orderTrack the order Receive the orderReceive the order
To accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Fourth Edition 1996 Addison-Wesley Publishing Company, Inc. All rights reserved.
Inventory at Successive Inventory at Successive Stocking PointsStocking Points
To accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Fourth Edition 1996 Addison-Wesley Publishing Company, Inc. All rights reserved.
Types of InventoryTypes of Inventory
To accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Fourth Edition 1996 Addison-Wesley Publishing Company, Inc. All rights reserved.
Types of InventoryTypes of InventoryCycle InventoryCycle Inventory
Average cycle inventory = Q + 0
2
To accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Fourth Edition 1996 Addison-Wesley Publishing Company, Inc. All rights reserved.
Types of InventoryTypes of InventoryCycle InventoryCycle Inventory
Safety StockSafety Stock
Average cycle inventory = Q + 0
2
To accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Fourth Edition 1996 Addison-Wesley Publishing Company, Inc. All rights reserved.
Types of InventoryTypes of InventoryCycle InventoryCycle Inventory
Safety StockSafety StockAnticipation InventoryAnticipation Inventory
Average cycle inventory = Q + 0
2
To accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Fourth Edition 1996 Addison-Wesley Publishing Company, Inc. All rights reserved.
Types of InventoryTypes of InventoryCycle InventoryCycle Inventory
Safety StockSafety StockAnticipation InventoryAnticipation InventoryPipeline InventoryPipeline Inventory
Average cycle inventory =
Pipeline inventory = DL = dl
Q + 02
To accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Fourth Edition 1996 Addison-Wesley Publishing Company, Inc. All rights reserved.
Inventory MeasuresInventory Measures
To accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Fourth Edition 1996 Addison-Wesley Publishing Company, Inc. All rights reserved.
Inventory MeasuresInventory Measures
Average inventory = $2 millionCost of goods sold = $10 million
To accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Fourth Edition 1996 Addison-Wesley Publishing Company, Inc. All rights reserved.
Inventory MeasuresInventory Measures
Weeks supply = = 10.4 weeks($2 million)(52 weeks)
$10 million
Average inventory = $2 millionCost of goods sold = $10 million
To accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Fourth Edition 1996 Addison-Wesley Publishing Company, Inc. All rights reserved.
Inventory MeasuresInventory Measures
Inventory turnover = = 5 turns/year$10 million
$2 million
Weeks supply = = 10.4 weeks($2 million)(52 weeks)
$10 million
Average inventory = $2 millionCost of goods sold = $10 million
To accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Fourth Edition 1996 Addison-Wesley Publishing Company, Inc. All rights reserved.
ABC AnalysisABC Analysis
To accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Fourth Edition 1996 Addison-Wesley Publishing Company, Inc. All rights reserved.
ABC AnalysisABC Analysis
10 20 30 40 50 60 70 80 90 100
Percentage of items
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To accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Fourth Edition 1996 Addison-Wesley Publishing Company, Inc. All rights reserved.
ABC AnalysisABC Analysis
10 20 30 40 50 60 70 80 90 100
Percentage of items
Per
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To accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Fourth Edition 1996 Addison-Wesley Publishing Company, Inc. All rights reserved.
ABC AnalysisABC Analysis
10 20 30 40 50 60 70 80 90 100
Percentage of items
Per
cen
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Class C
Class A
Class B
To accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Fourth Edition 1996 Addison-Wesley Publishing Company, Inc. All rights reserved.
ABC AnalysisABC Analysis
10 20 30 40 50 60 70 80 90 100
Percentage of items
Per
cen
tag
e o
f d
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ar v
alu
e
100 —
90 —
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10 —
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Class C
Class A
Class B
To accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Fourth Edition 1996 Addison-Wesley Publishing Company, Inc. All rights reserved.
ABC AnalysisABC Analysis
10 20 30 40 50 60 70 80 90 100
Percentage of items
Per
cen
tag
e o
f d
oll
ar v
alu
e
100 —
90 —
80 —
70 —
60 —
50 —
40 —
30 —
20 —
10 —
0 —
Class C
Class A
Class B
To accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Fourth Edition 1996 Addison-Wesley Publishing Company, Inc. All rights reserved.
ABC AnalysisABC Analysis
10 20 30 40 50 60 70 80 90 100
Percentage of items
Per
cen
tag
e o
f d
oll
ar v
alu
e
100 —
90 —
80 —
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50 —
40 —
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20 —
10 —
0 —
Class C
Class A
Class B
To accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Fourth Edition 1996 Addison-Wesley Publishing Company, Inc. All rights reserved.
Independent Demand Independent Demand InventoryInventory
Time
Ag
gre
gat
e d
eman
d
To accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Fourth Edition 1996 Addison-Wesley Publishing Company, Inc. All rights reserved.
Independent Demand Independent Demand InventoryInventory
Time
Ag
gre
gat
e d
eman
d
To accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Fourth Edition 1996 Addison-Wesley Publishing Company, Inc. All rights reserved.
Independent Demand Independent Demand InventoryInventory
Average Average demanddemand
Time
Ag
gre
gat
e d
eman
d
To accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Fourth Edition 1996 Addison-Wesley Publishing Company, Inc. All rights reserved.
Independent Demand Independent Demand InventoryInventory
Average Average demanddemand
Time
Demand averaged over all customers is relatively smooth
Ag
gre
gat
e d
eman
d
To accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Fourth Edition 1996 Addison-Wesley Publishing Company, Inc. All rights reserved.
How How Much?Much? When!When!
To accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Fourth Edition 1996 Addison-Wesley Publishing Company, Inc. All rights reserved.
Economic Economic Order Order QuantityQuantity
To accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Fourth Edition 1996 Addison-Wesley Publishing Company, Inc. All rights reserved.
Economic Order QuantityEconomic Order QuantityO
n-h
and
in
ven
tory
(u
nit
s)
Time
To accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Fourth Edition 1996 Addison-Wesley Publishing Company, Inc. All rights reserved.
Economic Order QuantityEconomic Order QuantityO
n-h
and
in
ven
tory
(u
nit
s)
Time
To accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Fourth Edition 1996 Addison-Wesley Publishing Company, Inc. All rights reserved.
Economic Order QuantityEconomic Order QuantityO
n-h
and
in
ven
tory
(u
nit
s)
Time
Receive order
Q
To accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Fourth Edition 1996 Addison-Wesley Publishing Company, Inc. All rights reserved.
Economic Order QuantityEconomic Order QuantityO
n-h
and
in
ven
tory
(u
nit
s)
Time
Receive order
Q
1 cycle
To accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Fourth Edition 1996 Addison-Wesley Publishing Company, Inc. All rights reserved.
Economic Order QuantityEconomic Order QuantityO
n-h
and
in
ven
tory
(u
nit
s)
Time
Receive order
Q
1 cycle
To accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Fourth Edition 1996 Addison-Wesley Publishing Company, Inc. All rights reserved.
Economic Order QuantityEconomic Order QuantityO
n-h
and
in
ven
tory
(u
nit
s)
Time
Receive order
Inventory depletion (demand rate)
Q
1 cycle
To accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Fourth Edition 1996 Addison-Wesley Publishing Company, Inc. All rights reserved.
Economic Order QuantityEconomic Order QuantityO
n-h
and
in
ven
tory
(u
nit
s)
Time
Receive order
Inventory depletion (demand rate)
Q
1 cycle
To accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Fourth Edition 1996 Addison-Wesley Publishing Company, Inc. All rights reserved.
Economic Order QuantityEconomic Order QuantityO
n-h
and
in
ven
tory
(u
nit
s)
Time
Averagecycleinventory
Q
Q—2
1 cycle
Receive order
Inventory depletion (demand rate)
To accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Fourth Edition 1996 Addison-Wesley Publishing Company, Inc. All rights reserved.
Economic Order QuantityEconomic Order QuantityA
nn
ual
co
st
(do
llars
)
Lot Size (Q)
To accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Fourth Edition 1996 Addison-Wesley Publishing Company, Inc. All rights reserved.
Economic Order QuantityEconomic Order QuantityA
nn
ual
co
st
(do
llars
)
Lot Size (Q)
Holding cost (HC)
To accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Fourth Edition 1996 Addison-Wesley Publishing Company, Inc. All rights reserved.
Economic Order QuantityEconomic Order QuantityA
nn
ual
co
st
(do
llars
)
Lot Size (Q)
Holding cost (HC)
Ordering cost (OC)
To accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Fourth Edition 1996 Addison-Wesley Publishing Company, Inc. All rights reserved.
Economic Order QuantityEconomic Order QuantityA
nn
ual
co
st
(do
llars
)
Lot Size (Q)
Ordering cost (OC)
Holding cost (HC)
Total cost = HC + OC
To accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Fourth Edition 1996 Addison-Wesley Publishing Company, Inc. All rights reserved.
Economic Order QuantityEconomic Order Quantity
| | | | | | | |50 100 150 200 250 300 350 400
An
nu
al c
ost
(d
oll
ars)
Lot Size (Q)
3000 —
2000 —
1000 —
0 —
To accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Fourth Edition 1996 Addison-Wesley Publishing Company, Inc. All rights reserved.
Economic Order QuantityEconomic Order Quantity
| | | | | | | |50 100 150 200 250 300 350 400
An
nu
al c
ost
(d
oll
ars)
Lot Size (Q)
3000 —
2000 —
1000 —
0 —
Total cost = (H) + (S)DQ
Q2
Holding cost = (H)Q2
Ordering cost = (S)DQ
To accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Fourth Edition 1996 Addison-Wesley Publishing Company, Inc. All rights reserved.
Economic Order QuantityEconomic Order QuantityA
nn
ual
co
st (
do
llar
s)
| | | | | | | |50 100 150 200 250 300 350 400
3000 —
2000 —
1000 —
0 —
Total cost = (H) + (S)DQ
Q2
Holding cost = (H)Q2
Ordering cost = (S)DQ
Lot Size (Q)
Birdfeeder costs
C = (H) + (S)Q2
DQ
D = (18 /week)(52 weeks) = 936 unitsH = 0.25 ($60/unit) = $15S = $45 Q = 390 units
To accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Fourth Edition 1996 Addison-Wesley Publishing Company, Inc. All rights reserved.
Economic Order QuantityEconomic Order QuantityA
nn
ual
co
st (
do
llar
s)
| | | | | | | |50 100 150 200 250 300 350 400
Lot Size (Q)
3000 —
2000 —
1000 —
0 —
Total cost = (H) + (S)DQ
Q2
Holding cost = (H)Q2
Ordering cost = (S)DQ
Birdfeeder costs
C = (H) + (S)Q2
DQ
D = (18 /week)(52 weeks) = 936 unitsH = 0.25 ($60/unit) = $15S = $45 Q = 390 units
C = $2925 + $108 = $3033
To accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Fourth Edition 1996 Addison-Wesley Publishing Company, Inc. All rights reserved.
Economic Order QuantityEconomic Order Quantity
| | | | | | | |50 100 150 200 250 300 350 400
An
nu
al c
ost
(d
oll
ars)
Lot Size (Q)
3000 —
2000 —
1000 —
0 —
Currentcost
CurrentQ
Total cost = (H) + (S)DQ
Q2
Holding cost = (H)Q2
Ordering cost = (S)DQ
Birdfeeder costs
C = (H) + (S)Q2
DQ
D = (18 /week)(52 weeks) = 936 unitsH = 0.25 ($60/unit) = $15S = $45 Q = 390 units
C = $2925 + $108 = $3033
To accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Fourth Edition 1996 Addison-Wesley Publishing Company, Inc. All rights reserved.
Economic Order QuantityEconomic Order Quantity
| | | | | | | |50 100 150 200 250 300 350 400
An
nu
al c
ost
(d
oll
ars)
Lot Size (Q)
3000 —
2000 —
1000 —
0 —
Currentcost
CurrentQ
Total cost = (H) + (S)DQ
Q2
Holding cost = (H)Q2
Ordering cost = (S)DQ
Birdfeeder costs
C = (H) + (S)Q2
DQ
D = (18 /week)(52 weeks) = 936 unitsH = 0.25 ($60/unit) = $15S = $45 Q = 390 units
C = $2925 + $108 = $3033
To accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Fourth Edition 1996 Addison-Wesley Publishing Company, Inc. All rights reserved.
Economic Order QuantityEconomic Order Quantity
| | | | | | | |50 100 150 200 250 300 350 400
An
nu
al c
ost
(d
oll
ars)
Lot Size (Q)
3000 —
2000 —
1000 —
0 —
Currentcost
CurrentQ
Total cost = (H) + (S)DQ
Q2
Holding cost = (H)Q2
Ordering cost = (S)DQ
To accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Fourth Edition 1996 Addison-Wesley Publishing Company, Inc. All rights reserved.
Economic Order QuantityEconomic Order Quantity
| | | | | | | |50 100 150 200 250 300 350 400
An
nu
al c
ost
(d
oll
ars)
Lot Size (Q)
3000 —
2000 —
1000 —
0 —
Currentcost
CurrentQ
Total cost = (H) + (S)DQ
Q2
Holding cost = (H)Q2
Ordering cost = (S)DQ
Birdfeeder costs
D = (18 /week)(52 weeks) = 936 unitsH = 0.25 ($60/unit) = $15S = $45 Q = EOQ
C = (H) + (S)Q2
DQEOQ =
2DSH
To accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Fourth Edition 1996 Addison-Wesley Publishing Company, Inc. All rights reserved.
Economic Order QuantityEconomic Order Quantity
| | | | | | | |50 100 150 200 250 300 350 400
An
nu
al c
ost
(d
oll
ars)
Lot Size (Q)
3000 —
2000 —
1000 —
0 —
Currentcost
CurrentQ
Total cost = (H) + (S)DQ
Q2
Holding cost = (H)Q2
Ordering cost = (S)DQ
Birdfeeder costs
D = (18 /week)(52 weeks) = 936 unitsH = 0.25 ($60/unit) = $15S = $45 Q = 75 units
C = (H) + (S)Q2
DQEOQ =
2DSH
To accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Fourth Edition 1996 Addison-Wesley Publishing Company, Inc. All rights reserved.
Economic Order QuantityEconomic Order Quantity
| | | | | | | |50 100 150 200 250 300 350 400
An
nu
al c
ost
(d
oll
ars)
Lot Size (Q)
3000 —
2000 —
1000 —
0 —
Currentcost
CurrentQ
Total cost = (H) + (S)DQ
Q2
Holding cost = (H)Q2
Ordering cost = (S)DQ
Birdfeeder costs
D = (18 /week)(52 weeks) = 936 unitsH = 0.25 ($60/unit) = $15S = $45 Q = 75 units
C = $562 + $562 = $1124
C = (H) + (S)Q2
DQEOQ =
2DSH
To accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Fourth Edition 1996 Addison-Wesley Publishing Company, Inc. All rights reserved.
Economic Order QuantityEconomic Order Quantity
| | | | | | | |50 100 150 200 250 300 350 400
An
nu
al c
ost
(d
oll
ars)
Lot Size (Q)
3000 —
2000 —
1000 —
0 —
Currentcost
CurrentQ
Total cost = (H) + (S)DQ
Q2
Holding cost = (H)Q2
Ordering cost = (S)DQ
Birdfeeder costs
D = (18 /week)(52 weeks) = 936 unitsH = 0.25 ($60/unit) = $15S = $45 Q = 75 units
C = $562 + $562 = $1124
C = (H) + (S)Q2
DQEOQ =
2DSH
To accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Fourth Edition 1996 Addison-Wesley Publishing Company, Inc. All rights reserved.
Economic Order QuantityEconomic Order Quantity
| | | | | | | |50 100 150 200 250 300 350 400
An
nu
al c
ost
(d
oll
ars)
Lot Size (Q)
3000 —
2000 —
1000 —
0 —
Currentcost
CurrentQ
Total cost = (H) + (S)DQ
Q2
Holding cost = (H)Q2
Ordering cost = (S)DQ
Birdfeeder costs
D = (18 /week)(52 weeks) = 936 unitsH = 0.25 ($60/unit) = $15S = $45 Q = 75 units
C = $562 + $562 = $1124
C = (H) + (S)Q2
DQEOQ =
2DSH
Lowestcost
Best Q(EOQ)
To accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Fourth Edition 1996 Addison-Wesley Publishing Company, Inc. All rights reserved.
Economic Order QuantityEconomic Order Quantity
| | | | | | | |50 100 150 200 250 300 350 400
An
nu
al c
ost
(d
oll
ars)
Lot Size (Q)
3000 —
2000 —
1000 —
0 —
Currentcost
CurrentQ
Total cost = (H) + (S)DQ
Q2
Holding cost = (H)Q2
Ordering cost = (S)DQ
Birdfeeder costs
D = (18 /week)(52 weeks) = 936 unitsH = 0.25 ($60/unit) = $15S = $45 Q = 75 units
C = $562 + $562 = $1124
C = (H) + (S)DQ
Q2EOQ =
2DSH
Lowestcost
Best Q(EOQ)
Time between orders
TBOEOQ = (12 months/year)EOQ
D
TBOEOQ = (52 weeks/year)EOQ
D
To accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Fourth Edition 1996 Addison-Wesley Publishing Company, Inc. All rights reserved.
Economic Order QuantityEconomic Order Quantity
| | | | | | | |50 100 150 200 250 300 350 400
An
nu
al c
ost
(d
oll
ars)
Lot Size (Q)
3000 —
2000 —
1000 —
0 —
Currentcost
CurrentQ
Total cost = (H) + (S)DQ
Q2
Holding cost = (H)Q2
Ordering cost = (S)DQ
Birdfeeder costs
D = (18 /week)(52 weeks) = 936 unitsH = 0.25 ($60/unit) = $15S = $45 Q = 75 units
C = $562 + $562 = $1124
C = (H) + (S)DQ
Q2EOQ =
2DSH
Lowestcost
Best Q(EOQ)
Time between orders
TBOEOQ = (12 months/year)EOQ
D
TBOEOQ = (52 weeks/year)EOQ
D
TBOEOQ = (75/936)(12) = 0.96 months
TBOEOQ = (75/936)(52) = 4.17 weeks
To accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Fourth Edition 1996 Addison-Wesley Publishing Company, Inc. All rights reserved.
Economic Order QuantityEconomic Order Quantity
| | | | | | | |50 100 150 200 250 300 350 400
An
nu
al c
ost
(d
oll
ars)
Lot Size (Q)
3000 —
2000 —
1000 —
0 —
Currentcost
Lowestcost
Best Q(EOQ)
CurrentQ
Total cost = (H) + (S)DQ
Q2
Holding cost = (H)Q2
Ordering cost = (S)DQ
To accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Fourth Edition 1996 Addison-Wesley Publishing Company, Inc. All rights reserved.
How How Much?Much? When!When!
To accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Fourth Edition 1996 Addison-Wesley Publishing Company, Inc. All rights reserved.
Reorder PointReorder PointO
n-h
and
in
ven
tory
Time
R
Orderreceived
Q
OH
To accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Fourth Edition 1996 Addison-Wesley Publishing Company, Inc. All rights reserved.
Reorder PointReorder PointO
n-h
and
in
ven
tory
Orderreceived
Q
OH
Orderplaced
IP
TBO
L
R
To accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Fourth Edition 1996 Addison-Wesley Publishing Company, Inc. All rights reserved.
Reorder PointReorder PointO
n-h
and
in
ven
tory
Time
Orderreceived
Orderreceived
Q Q
OH OH
Orderplaced
Orderplaced
IP IP
TBO
L
TBO
L
TBO
L
R
To accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Fourth Edition 1996 Addison-Wesley Publishing Company, Inc. All rights reserved.
Reorder PointReorder Point
Time
On
-han
d i
nve
nto
ry
Orderreceived
Orderreceived
Q
OH
Orderplaced
Orderplaced
IPIP
R
TBO1 TBO2 TBO3
L1 L2 L3
To accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Fourth Edition 1996 Addison-Wesley Publishing Company, Inc. All rights reserved.
Reorder Point / Safety StockReorder Point / Safety Stock
Probability of stockout(1.0 - 0.85 = 0.15)
Cycle-service level = 85%
Average demand
during lead time
zL
R
To accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Fourth Edition 1996 Addison-Wesley Publishing Company, Inc. All rights reserved.
Reorder Point / Safety StockReorder Point / Safety Stock
Demand during lead time = 36 units
L = 15 Cycle/service level = 90%
Time
On
-ha
nd
in
ven
toryR
To accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Fourth Edition 1996 Addison-Wesley Publishing Company, Inc. All rights reserved.
Reorder Point / Safety StockReorder Point / Safety Stock
Demand during lead time = 36 units
L = 15 Cycle/service level = 90%
Time
On
-ha
nd
in
ven
toryR
z = 1.28
Safety stock = zL = 19.2 19
Reorder point = 36 + 19 = 55
To accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Fourth Edition 1996 Addison-Wesley Publishing Company, Inc. All rights reserved.
Reorder Point / Safety StockReorder Point / Safety Stock
Demand during lead time = 36 units
L = 15 Cycle/service level = 90%
Time
On
-ha
nd
in
ven
tory55
z = 1.28
Safety stock = zL = 19.2 19
Reorder point = 36 + 19 = 55
To accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Fourth Edition 1996 Addison-Wesley Publishing Company, Inc. All rights reserved.
Reorder Point / Safety StockReorder Point / Safety Stock
Demand during lead time = 36 units
L = 15 Cycle/service level = 90%
Time
On
-ha
nd
in
ven
tory55
z = 1.28
Safety stock = zL = 19.2 19
Reorder point = 36 + 19 = 55
To accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Fourth Edition 1996 Addison-Wesley Publishing Company, Inc. All rights reserved.
Reorder Point / Safety StockReorder Point / Safety Stock
Demand during lead time = 36 units
L = 15 Cycle/service level = 90%
Time
On
-ha
nd
in
ven
tory55
z = 1.28
Safety stock = zL = 19.2 19
Reorder point = 36 + 19 = 55
When L is unknown:
L = t L
To accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Fourth Edition 1996 Addison-Wesley Publishing Company, Inc. All rights reserved.
Reorder Point / Safety StockReorder Point / Safety Stock
Lower Florida Keys Health SystemBasic Surgery Cart
Demand DuringLead Time (units) 100 200 300 400 500 600
Probability 0.10 0.15 0.20 0.25 0.25 0.05
CumulativeProbability 0.10 0.25 .045 0.70 0.95 1.00
Desired Cycle-Service Level = 95%
Reorder Point = 500 units
Safety stock = Reorder point - DDLT
DDLT = 100(0.10) + 200(0.15) ... 600(0.05)= 355 units
Safety stock = 500 - 355 = 145 units
To accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Fourth Edition 1996 Addison-Wesley Publishing Company, Inc. All rights reserved.
Periodic Review SystemsPeriodic Review Systems
Time
On
-han
d i
nve
nto
ry
P P
T
To accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Fourth Edition 1996 Addison-Wesley Publishing Company, Inc. All rights reserved.
Periodic Review SystemsPeriodic Review Systems
Time
On
-han
d i
nve
nto
ry
P P
T
Q1
Orderplaced
To accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Fourth Edition 1996 Addison-Wesley Publishing Company, Inc. All rights reserved.
Periodic Review SystemsPeriodic Review Systems
Time
On
-han
d i
nve
nto
ry
P P
T
Q1
L
Orderplaced
To accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Fourth Edition 1996 Addison-Wesley Publishing Company, Inc. All rights reserved.
Periodic Review SystemsPeriodic Review Systems
Time
On
-han
d i
nve
nto
ry
P P
T
Q1
L
Orderplaced
Orderreceived
To accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Fourth Edition 1996 Addison-Wesley Publishing Company, Inc. All rights reserved.
Periodic Review SystemsPeriodic Review Systems
Time
On
-han
d i
nve
nto
ry
Orderreceived
Orderreceived
Orderplaced
Orderplaced
Q1Q2
Q3
L L LP P
T
To accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Fourth Edition 1996 Addison-Wesley Publishing Company, Inc. All rights reserved.
Periodic Review SystemsPeriodic Review Systems
Time
On
-han
d i
nve
nto
ry
IP1
IP3
IP2
Orderreceived
Orderreceived
IP IP
OH OH
Orderplaced
Orderplaced
Q1Q2
Q3
L L LP P
Protection interval
T
To accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Fourth Edition 1996 Addison-Wesley Publishing Company, Inc. All rights reserved.
Periodic Review SystemsPeriodic Review Systems
Time
On
-han
d i
nve
nto
ry
IP1
IP3
IP2
Orderreceived
Orderreceived
IP IP
OH OH
Orderplaced
Orderplaced
Q1Q2
Q3
L L LP P
Protection interval
T
Qt = T - IPt
IP = OH + SR - BO
T = 400 BO = 5OH = 0 SR = 0
Q = 400 - (-5) = 405
To accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Fourth Edition 1996 Addison-Wesley Publishing Company, Inc. All rights reserved.
Periodic Review SystemsPeriodic Review Systems
Time
On
-han
d i
nve
nto
ry
IP1
IP3
IP2
Orderreceived
Orderreceived
IP IP
OH OH
Orderplaced
Orderplaced
Q1Q2
Q3
L L LP P
Protection interval
T
Qt = T - IPt
IP = OH + SR - BO
T = 400 BO = 5OH = 0 SR = 0
Q = 400 - (-5) = 405
T = Average demand during protection interval + zP+L
t = 15 units L = 3 weeks cycle/service level = 80%
To accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Fourth Edition 1996 Addison-Wesley Publishing Company, Inc. All rights reserved.
Periodic Review SystemsPeriodic Review Systems
Time
On
-han
d i
nve
nto
ry
IP1
IP3
IP2
Orderreceived
Orderreceived
IP IP
OH OH
Orderplaced
Orderplaced
Q1Q2
Q3
L L LP P
Protection interval
T
Qt = T - IPt
IP = OH + SR - BO
T = 400 BO = 5OH = 0 SR = 0
Q = 400 - (-5) = 405
T = Average demand during protection interval + zP+L
D = (40 units/week)(52 weeks) = 2080 units
t = 15 units L = 3 weeks cycle/service level = 80%
P = = 10 weeksEOQ
DP+L = 15 13 = 54 units
To accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Fourth Edition 1996 Addison-Wesley Publishing Company, Inc. All rights reserved.
Periodic Review SystemsPeriodic Review Systems
Time
On
-han
d i
nve
nto
ry
IP1
IP3
IP2
Orderreceived
Orderreceived
IP IP
OH OH
Orderplaced
Orderplaced
Q1Q2
Q3
L L LP P
Protection interval
T
Qt = T - IPt
IP = OH + SR - BO
T = 400 BO = 5OH = 0 SR = 0
Q = 400 - (-5) = 405
T = Average demand during protection interval + zP+L
D = (40 units/week)(52 weeks) = 2080 units
t = 15 units L = 3 weeks cycle/service level = 80%
P = = 10 weeksEOQ
DP+L = 15 13 = 54 units
T = (40 units/week)(13 weeks) + 0.84(54 units) = 565 units
To accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Fourth Edition 1996 Addison-Wesley Publishing Company, Inc. All rights reserved.
Periodic Review SystemsPeriodic Review Systems
Time
On
-han
d i
nve
nto
ry
IP1
IP3
IP2
Orderreceived
Orderreceived
IP IP
OH OH
Orderplaced
Orderplaced
Q1Q2
Q3
L L LP P
Protection interval
T