inventory need, types,eoq model

8/3/2019 Inventory Need, Types,EOQ Model

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Inventory Management-Need, Types,EOQ Model


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What Is Inventory?

Stock of items kept to meet future demand.

or Inventory is an idle resource of any kind,

which has some economic valueor

Inventory is the material held in an idle orincomplete state awaiting future sale, use, or

transformation


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Storagearea

Empty containers

Full containers

Manufacturing System

Receiving post

Fabricationcell

O1

O2

O3

O2

Assembly line 1

Assembly line 2

Raw Materials forproduct 1



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Storagearea

Empty containers

Full containers


Receiving post

Fabricationcell

O1

O2

O3

O2

Assembly line 1

Assembly line 2




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Storagearea

Empty containers

Full containers


Receiving post

Fabricationcell

O1

O2

O3

O2

Assembly line 1

Assembly line 2




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Storagearea

Empty containers

Full containers


Receiving post

Fabricationcell

O1

O2

O3

O2

Assembly line 1

Assembly line 2




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Storagearea

Empty containers

Full containers


Receiving post

Fabricationcell

O1

O2

O3

O2

Assembly line 1

Assembly line 2




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Storagearea

Empty containers

Full containers


Receiving post

Fabricationcell

O1

O2

O3

O2

Assembly line 1

Assembly line 2




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Storagearea

Empty containers

Full containers


Receiving postRaw Materials forproduct 1

Fabricationcell

O1

O2

O3

O2

Assembly line 1

Assembly line 2



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Inventory Types - 1

Raw Material (RM) purchasedo true raw materialo Component parts

Work-in-process (WIP) manufactured in-houseo Sub-assemblieso Fabricated parts


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Inventory Types - 2

Finished Goods (FGI)o Completed products

Operating supplies


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Objective of Inventory Management

Never have a stockout.o Customer dissatisfactiono Production disruption

Never carry excess inventoryo Inventory is an asset but it is not free


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Importance of Inventory Management

By effectively managing inventory:o Wal-Mart became the largest retail company

utilizing efficient inventory managemento

GM has reduced parts inventory andtransportation costs by 26% annually- Growth forced AMAZON.com to excel ininventory management!


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By not managing inventory successfullyo In 1994, IBM continues to struggle with

shortages in their ThinkPad line (WSJ, Oct 7,1994)

o Shares of Intel Corp. fell to an 11-month lowon Wednesday, leading a decline insemiconductor-industry stocks a day after the

worlds largest chipmaker warned that itsinventories had risen sharply, this despite96% growth in quarterly profit.Reuters, July14, 2004


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Cisco Systems Inc. on Tuesday reported thatquarterly profit surges 41%, but its shares fellsharply in after-hours trade on a rise in

inventories. - Reuters, August 10, 2004

General Motors was down 3.1%, or $1.37, at $42.75,after analysts with Goldman Sachs and LehmanBrothers downgraded their ratings of the stock, amidworries of inventory buildup. AP, July 30, 2004


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Inventory Control


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Answer 2 questionso When to ordero How much to order

Historical Evolution of I/C - 1


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When to order (Reorder Point)

B i Fi d O d Q tit M d l d R d

17-19


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Basic Fixed-Order Quantity Model and ReorderPoint Behavior

R = Reorder pointQ = Economic order quantityL = Lead time

L L

Q QQ

R

Time

Numberof unitson hand

1. You receive an order quantityQ.

2. Your start usingthem up overtime.

3. When you reach downto a level of inventory ofR, you place your next Qsized order.

4. The cycle thenrepeats.


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Inventory Related Costs

Cost of ordering Cost of carrying, or holding, inventory Stock out cost


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Cost of ordering Developing and sending purchase order Processing and inspecting incoming inventory Bill Paying

inquiries Utilities, phone bills, and so on , for purchasing

department Salaries and wages of purchasing departmentemployees Supplies such as forms and paper of the purchasing

dept


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Cost of carrying, or holding,inventory

Personnel Equipment Occupancy (rent and utilities) Interest Insurance Taxes Security Shrinkage and damage



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Cost of carrying, or holding, inventoryCategory

Housing costs

Material handling costsLabor cost from extra handlingInvestment costsPilferage, scrap, and obsolescence

Cost as a % of Inventory Value6%3%3%11%

3%26%


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Shortage Costs/Stock out CostTemporary or Permanent loss of sales,when demand cannot be met. Loss of goodwill


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Inventory Control Decisions

Major objective in controlling inventory is tominimize total inventory costs:

Cost of ordering Cost of carrying, or holding, inventory


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Historical Evolution of I/C - 2

How much to order Introduced in 1913 by Ford W. Harris,

How Many Parts to order at OnceThe Economic Order Quantity (EOQ)

model


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Cost Minimization Goal

OrderingCosts

HoldingCosts

QOPTIMAL Order Quantity (Q)

COST

Total Cost

EOQ M d li A ti


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EOQ Modeling Assumptions

1.Production is instantaneous there is no capacityconstraint and the entire lot is produced simultaneously.2.Delivery is immediate there is no time lag betweenproduction and availability to satisfy demand.3.Demand is deterministic there is no uncertainty

about the quantity or timing of demand.4.Demand is constant over time in fact, it can berepresented as a straight line, so that if annual demandis 365 units this translates into a daily demand of oneunit.5.A production run incurs a fixed setup costregardless of the size of the lot or the status of thefactory, the setup cost is constant.6.Products can be analyzed singly either there is

only a single product or conditions exist that ensure


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Derivation of EOQ formula

Q = lot size D = average annual demand H = unit annual carrying cost (=i*c) S = cost per order Total Cost = Total annual setup cost +

Total annual inventory carrying cost


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Derivation of EOQ formula

Total setup/order cost = S(D/Q) Maximum inventory = Q Minimum inventory = 0 Average inventory = Q/2 Total carrying cost = H(Q/2) TC = SD/Q + HQ/2 Goal: Find the Order Quantity that

Minimizes TC


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Some Important Formulae

Reorder Point (R) = daily demand x lead time (days)

Total Inventory Cost (TC) = Total annual setup/orderingcost

+ Total annual inventory carrying cost= (D/EOQ) * S + (EOQ/2) * H

EOQ


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EOQExample

SaveMart needs 1000 coffee makers peryear. The cost of each coffee maker is $78.Ordering cost is $100 per order. Carrying

cost is 40% of per unit cost. Lead time is 5days. SaveMart is open 365 days/yr. What isthe optimal order quantity & ROP?

D = 1000S = $100H = i*c = .4*$78H = $31.20


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SaveMart ROP

EOQ = 80coffeemakers

SaveMart ROP


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SaveMart ROP

D = annual demand = 1000Days / year = 365Daily demand = 1000 / 365 = 2.74Lead time = 5 daysROP = daily demand x lead time (days)= d x L

ROP = 2.74 x 5 = 13.7 => 14

Example


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Example

Megallite has annual demand of 500,000CFLs. They want to determine EOQ for glassblank which have an annual holding cost (H)of Rs.75 per unit, and an ordering cost (S) of

Rs6000. They want to calculate TC and thereorder point (R) if the purchasing lead timeis 1 day. (The Company works for 250 days ina year)

Ans :D = 500,000H = Rs. 75S = Rs.6000


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Thank You

inventory need, types,eoq model

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