12. Inventory Management. Learning Objectives. Define the term inventory and list the major reasons for holding inventories; and list the main requirements for effective inventory management. Discuss the nature and importance of service inventories
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Independent demand is uncertain. Dependent demand is certain.
Inventory: a stock or store of goods
Inventory turnover is the ratio ofaverage cost of goods sold toaverage inventory investment.
Physical count of items made at periodic intervals (Manager periodically check the shelves)
System that keeps track of removals from inventory continuously, thus monitoringcurrent levels of each item
Percentage of Items
Classifying inventory according to some measure of importance and allocating control efforts accordingly.
B- mod. important
C- least important
Profile of Inventory Level Over Time
Total cost =
The Total-Cost Curve is U-Shaped
Order Quantity (Q)
(optimal order quantity)
The total cost curve reaches its minimum where the carrying and ordering costs are equal.
Using calculus, we take the derivative of the total cost function and set the derivative (slope) equal to zero and solve for Q.
a) Optimal run size (optimal quantity produced)
b) Minimum total annual cost for carrying cost and setup.
c) Cycle time for the optimal run size?
d) Run time
Maximum probable demand
during lead time
during lead time
Safety stock reduces risk of
stockout during lead time