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Chapter 13

Inventory Systems for Independent Demand

This section explores:

The definition and purpose ofinventory

Inventory costs

Independent vs. dependent demand

Types ofinventory systems

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What is Inventory?

Inventory is the stock of any item or resource used

in an organization, such as:

Raw materials

Finished products

Component parts

Supplies

Workin process (or progress)

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Why Carry Inventory? (Pros)

1. To maintain independence of operations

2. To meet variation in product demand

3. To allow flexibility in production scheduling

4. To provide a safeguard for variation in raw

material delivery time

5. To take advantage of large purchase discounts

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Inventory Carrying and

Changing Costs (Cons)

Carrying costs (most significant)

Interest (capital opportunity cost)

Setup (or production c

hange) costs

Tooling

Ordering costs

Shortage costs

Difficult to evaluate e.g. loss of goodwill.

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E(1)

Independent vs. Dependent Demand

Independent Demand

(Demand not related to otheritems)

Dependent Demand(Derived from other

higher level items)

....

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Inventory Systems and Models

Inventory systems provide the organizational

structure and the operating policies for controlling

materials to be stocked

Two general types of system models:

Fixed-Order Quantity (or Economic Order Quantity,

EOQ orQ) Models: Event triggered

Fixed-Time Period (or periodic system fixed-order

interval orP) Models: Time triggered

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Comparison of Q and P Inventory Systems

Feature

Order quantity

When to order

Recordkeeping

Inventory size

Labor to maintain

Types ofitems

Fixed-Order Quantity (Q)

Constant: same amount order-

ed each time.When quantity on hand drops to

reorder level

Each time items removed or

added

Less than fixed-time period

Higher due to continuous record-

keeping

High-priced and critical items

Fixed-Time Period (P)

Variable: different each time

orderis madeWhen the review period

arrives

Inventory counted only at

review period

Larger than fixed-order

quantity

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Fixed-Order Quantity (Q) System

Idle state

Waiting for demand

Demand

occursUnit withdrawn from

inventory orback ordered

Compute inventory status

Status = On hand + On order- Back order

Is status