Inventory management
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Inventory Management. Bus 480 Management Science. Inventory Management. Objective A system to indicate how much to order and when to order to minimize inventory costs Inventory A stock of items kept on hand to meet demand Cyclical, seasonal. Inventory Demands. Dependent Demand

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Inventory Management

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Inventory management

Inventory Management

Bus 480

Management Science


Inventory management1

Inventory Management

  • Objective

    • A system to indicate how much to order and when to order to minimize inventory costs

  • Inventory

    • A stock of items kept on hand to meet demand

    • Cyclical, seasonal


Inventory demands

Inventory Demands

  • Dependent Demand

    • Internally used items used to produce a final product

    • eg. Parts of a computer- memory, hard drive, etc.

    • eg. Building a car – wheels, engine, windows, etc.

  • Independent Demand

    • Final product demanded by an external customer

    • eg. - the computer itself, the final car


Inventory costs

Inventory Costs

  • Carrying Cost

    • Costs of storing an item

    • eg. – rent, heating, cooling, etc.

  • Ordering Cost

    • Costs associated with replenishing inventory

    • eg. – transportation, shipping, handling, etc.

  • Shortage Costs

    • Cost of lack of inventory (surplus demand)

    • Subjective, estimated

    • eg. - Loss of sales, price discounts, rebates, etc.


Inventory systems

Inventory Systems

  • Continuous

    • Fixed-order quantity system

    • Constant amount is ordered when inventory declines to a pretermined level

  • Periodic

    • Fixed-time period system

    • Inventory reviewed after a fixed time period and orders are made based on the amount in stock


Economic order quantity eoc

Economic Order Quantity (EOC)

  • Function – To determine optimal order size that minimizes total inventory costs

  • Assumptions

    • Demand is known with certainty and is constant over time

    • No shortages are allowed

    • Lead time for the receipt of orders is constant

    • Orders are received at once


Economic order quantity eoc1

Economic Order Quantity (EOC)

Order Quantity

Q

Reorder Point

R

Lead

Time

Time

Order

Placed

Order

Received


Eoc formulas

EOC Formulas

  • Average Inventory = Q/2

  • Annual Carrying Cost = Cc * Q/2

    • Cc = carrying cost per unit per time period

  • Annual Ordering Cost = Co * D/Q

    • Co = cost per order

    • D = demand

  • Total Cost (TC) = Annual carrying + annual ordering cost

    = Cc * Q/2 + Co * D/Q

    • How to determine Q?


Eoc formulas1

EOC Formulas

  • Optimal Quantity can be derived via calculus

  • TCmin = Cc * Qopt /2 + Co * D/Qopt

    • Minimized Total Cost

  • Number of orders per time period = D/Qopt

  • Order Cycle Time = Amount of time open / (D/Qopt)

    • Eg. Number of days open / number of orders per time period


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