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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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Presentation Transcript
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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