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Inventory Management

Inventory Management. Learning Objectives. Be Able To Apply Concepts Listed In Learning Goals Be Able To Use Formulas Listed In The Equation Summary of Chapter. Interest or Opportunity Costs Storage and Handling Costs Taxes, Insurance, and Shrinkage Costs Ordering and Setup Costs

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Inventory Management

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  1. Inventory Management Chapter 10—Inventory Management

  2. Learning Objectives • Be Able To Apply Concepts Listed In Learning Goals • Be Able To Use Formulas Listed In The Equation Summary of Chapter 1

  3. Interest or Opportunity Costs • Storage and Handling Costs • Taxes, Insurance, and Shrinkage Costs • Ordering and Setup Costs • Transportation Costs Inventory Costs Chapter 10—Inventory Management

  4. Cycle Inventory Q + 0 2 Average cycle inventory = Types of Inventory Chapter 10—Inventory Management

  5. Cycle Inventory Safety Stock Inventory Q 2 Average cycle inventory = Types of Inventory Chapter 10—Inventory Management

  6. Q 2 Cycle Inventory Safety Stock Inventory Anticipation Inventory Types of Inventory Average cycle inventory = Chapter 10—Inventory Management

  7. Cycle Inventory Safety Stock Inventory Anticipation Inventory Pipeline Inventory Q 2 Average cycle inventory = Pipeline inventory = DL = dL Types of Inventory Chapter 10—Inventory Management

  8. ABC Classification • Start With Inventoried Items Ranked by Dollar Value in Inventory in Descending Order • Plot Cumulative Dollar Value in Inventory Versus Cumulative Items in Inventory • . . . more 7

  9. ABC Classification • Typical Observations • A Small Percentage of Items (Class A) Make up a Large Percentage of Inventory Value • A Large Percentage of Items (Class C) Make up a Small Percentage of Inventory Value • These Classifications Determine How Much Attention Should Be Given to Controlling Inventory of Different Items 8

  10. 100 — 90 — 80 — 70 — 60 — 50 — 40 — 30 — 20 — 10 — 0 — Percentage of dollar value 10 20 30 40 50 60 70 80 90 100 Percentage of items ABC Analysis Chapter 10—Inventory Management

  11. Class C 100 — 90 — 80 — 70 — 60 — 50 — 40 — 30 — 20 — 10 — 0 — Class B Class A Percentage of dollar value 10 20 30 40 50 60 70 80 90 100 Percentage of items ABC Analysis Chapter 10—Inventory Management

  12. Class C 100 — 90 — 80 — 70 — 60 — 50 — 40 — 30 — 20 — 10 — 0 — Class B Class A Percentage of dollar value 10 20 30 40 50 60 70 80 90 100 Percentage of items ABC Analysis Chapter 10—Inventory Management

  13. How Much? When! Chapter 10—Inventory Management

  14. Economic Order Quantity Chapter 10—Inventory Management

  15. Assumptions Economic Order Quantity Demand rate is constant No constraints on lot size Only relevant costs are holding and ordering/setup Decisions for items are independent from other items No uncertainty in lead time or supply Chapter 10—Inventory Management

  16. On-hand inventory (units) Time Economic Order Quantity Chapter 10—Inventory Management

  17. Receive order Q On-hand inventory (units) Time Economic Order Quantity Chapter 10—Inventory Management

  18. Receive order Q On-hand inventory (units) 1 cycle Time Economic Order Quantity Chapter 10—Inventory Management

  19. Receive order Q On-hand inventory (units) 1 cycle Time Economic Order Quantity Chapter 10—Inventory Management

  20. Receive order Inventory depletion (demand rate) Q On-hand inventory (units) 1 cycle Time Economic Order Quantity Chapter 10—Inventory Management

  21. Receive order Inventory depletion (demand rate) Q On-hand inventory (units) 1 cycle Time Economic Order Quantity Chapter 10—Inventory Management

  22. Receive order Inventory depletion (demand rate) Q Q — 2 On-hand inventory (units) Average cycle inventory 1 cycle Time Economic Order Quantity Chapter 10—Inventory Management

  23. Annual cost (dollars) Holding cost (HC) Lot Size (Q) Economic Order Quantity Chapter 10—Inventory Management

  24. Annual cost (dollars) Holding cost (HC) Ordering cost (OC) Lot Size (Q) Economic Order Quantity Chapter 10—Inventory Management

  25. Total cost = HC + OC Annual cost (dollars) Holding cost (HC) Ordering cost (OC) Lot Size (Q) Economic Order Quantity Chapter 10—Inventory Management

  26. Current cost 3000 — 2000 — 1000 — 0 — Q 2 D Q Total cost = (H) + (S) Annual cost (dollars) Q 2 Holding cost = (H) D Q Ordering cost = (S) | | | | | | | | 50 100 150 200 250 300 350 400 Current Q Lot Size (Q) Economic Order Quantity Chapter 10—Inventory Management

  27. Current cost 3000 — 2000 — 1000 — 0 — Bird feeder costs Q 2 D Q D = (18 /week)(52 weeks) = 936 units H = 0.25 ($60/unit) = $15 S = $45 Q = EOQ Total cost = (H) + (S) Annual cost (dollars) Q 2 Holding cost = (H) Q 2 D Q 2DS H C = (H) + (S) EOQ = D Q Ordering cost = (S) | | | | | | | | 50 100 150 200 250 300 350 400 Current Q Lot Size (Q) Economic Order Quantity Chapter 10—Inventory Management

  28. Current cost 3000 — 2000 — 1000 — 0 — Bird feeder costs Q 2 D Q D = (18 /week)(52 weeks) = 936 units H = 0.25 ($60/unit) = $15 S = $45 Q = 75 units Total cost = (H) + (S) Annual cost (dollars) Q 2 Holding cost = (H) Q 2 D Q 2DS H C = (H) + (S) EOQ = D Q Ordering cost = (S) | | | | | | | | 50 100 150 200 250 300 350 400 Current Q Lot Size (Q) Economic Order Quantity Chapter 10—Inventory Management

  29. Current cost 3000 — 2000 — 1000 — 0 — Bird feeder costs Q 2 D Q D = (18 /week)(52 weeks) = 936 units H = 0.25 ($60/unit) = $15 S = $45 Q = 75 units Total cost = (H) + (S) Annual cost (dollars) Q 2 Holding cost = (H) Q 2 D Q 2DS H C = (H) + (S) EOQ = C = $562 + $562 = $1124 D Q Ordering cost = (S) | | | | | | | | 50 100 150 200 250 300 350 400 Current Q Lot Size (Q) Economic Order Quantity Chapter 10—Inventory Management

  30. Current cost 3000 — 2000 — 1000 — 0 — Bird feeder costs Q 2 D Q D = (18 /week)(52 weeks) = 936 units H = 0.25 ($60/unit) = $15 S = $45 Q = 75 units Total cost = (H) + (S) Annual cost (dollars) Q 2 Holding cost = (H) Q 2 D Q 2DS H C = (H) + (S) EOQ = C = $562 + $562 = $1124 D Q Ordering cost = (S) | | | | | | | | 50 100 150 200 250 300 350 400 Current Q Lot Size (Q) Economic Order Quantity Chapter 10—Inventory Management

  31. Current cost 3000 — 2000 — 1000 — 0 — Bird feeder costs Q 2 D Q D = (18 /week)(52 weeks) = 936 units H = 0.25 ($60/unit) = $15 S = $45 Q = 75 units Total cost = (H) + (S) Annual cost (dollars) Q 2 Holding cost = (H) Q 2 D Q 2DS H C = (H) + (S) EOQ = C = $562 + $562 = $1124 D Q Ordering cost = (S) Lowest cost | | | | | | | | 50 100 150 200 250 300 350 400 Current Q Best Q (EOQ) Lot Size (Q) Economic Order Quantity Chapter 10—Inventory Management

  32. Current cost 3000 — 2000 — 1000 — 0 — Bird feeder costs Q 2 D Q D = (18 /week)(52 weeks) = 936 units H = 0.25 ($60/unit) = $15 S = $45 Q = 75 units Total cost = (H) + (S) Annual cost (dollars) D Q Q 2 2DS H C = (H) + (S) EOQ = C = $562 + $562 = $1124 Lowest cost | | | | | | | | 50 100 150 200 250 300 350 400 Current Q Best Q (EOQ) Lot Size (Q) Economic Order Quantity Chapter 10—Inventory Management

  33. Birdfeeder costs Q 2 D Q D Q D = (18 /week)(52 weeks) = 936 units H = 0.25 ($60/unit) = $15 S = $45 Q = 75 units Total cost = (H) + (S) EOQ D D Q Q 2 2DS H C = (H) + (S) EOQ = C = $562 + $562 = $1124 Current cost 3000 — 2000 — 1000 — 0 — Time between orders Economic Order Quantity TBOEOQ = = 75/936 = 0.080 year Annual cost (dollars) Lowest cost | | | | | | | | 50 100 150 200 250 300 350 400 Current Q Best Q (EOQ) Lot Size (Q) Chapter 10—Inventory Management

  34. Current cost 3000 — 2000 — 1000 — 0 — Birdfeeder costs Time between orders Q 2 D Q D = (18 /week)(52 weeks) = 936 units H = 0.25 ($60/unit) = $15 S = $45 Q = 75 units Total cost = (H) + (S) EOQ D TBOEOQ = = 75/936 = 0.080 year TBOEOQ = (75/936)(12) = 0.96 months TBOEOQ = (75/936)(52) = 4.17 weeks TBOEOQ = (75/936)(365) = 29.25 days Annual cost (dollars) Lowest cost | | | | | | | | 50 100 150 200 250 300 350 400 Current Q Best Q (EOQ) Lot Size (Q) Economic Order Quantity Chapter 10—Inventory Management

  35. Current cost 3000 — 2000 — 1000 — 0 — Q 2 D Q Total cost = (H) + (S) Annual cost (dollars) Q 2 Holding cost = (H) D Q Ordering cost = (S) Lowest cost | | | | | | | | 50 100 150 200 250 300 350 400 Current Q Best Q (EOQ) Lot Size (Q) Economic Order Quantity Chapter 10—Inventory Management

  36. How Much? When! Chapter 10—Inventory Management

  37. Soup Soup Soup Order received Q On-hand inventory OH R Time Continuous Review Chapter 10—Inventory Management

  38. Soup Soup Soup IP Order received Q On-hand inventory OH R Order placed L TBO Continuous Review Chapter 10—Inventory Management

  39. Soup Soup Soup IP IP IP Order received Order received Order received Order received Q Q Q On-hand inventory OH OH OH R Order placed Order placed Order placed Time L L L TBO TBO TBO Continuous Review Chapter 10—Inventory Management

  40. On-hand inventory R Time Uncertain Demand Chapter 10—Inventory Management

  41. IP IP Order received Order received Order received Order received Q Q Q OH On-hand inventory R Order placed Order placed Order placed Time L1 L2 L3 TBO1 TBO2 TBO3 Uncertain Demand Chapter 10—Inventory Management

  42. Reorder Point / Safety Stock Average demand during lead time Chapter 10—Inventory Management

  43. Cycle-service level = 99% Probability of stockout (1.0 – 0.99 = 0.01) Average demand during lead time R zL Reorder Point / Safety Stock Chapter 10—Inventory Management

  44. Cycle-service level = 99% Probability of stockout (1.0 – 0.99 = 0.015) Average demand during lead time R zL Safety Stock/R dL = 250 L = 22 SL = 99% z = 2.33 Reorder Point / Safety Stock Chapter 10—Inventory Management

  45. Cycle-service level = 99% Probability of stockout (1.0 – 0.99 = 0.01) Average demand during lead time R zL Safety Stock/R Safety stock = zsL = 2.33(22) = 51.3 = 51 boxes Reorder Point / Safety Stock Chapter 10—Inventory Management

  46. Cycle-service level = 99% Probability of stockout (1.0 – 0.99 = 0.01) Average demand during lead time R zL Safety Stock/R Safety stock = zsL = 2.33(22) = 51.3 = 51 boxes Reorder point = dL + SS = 250 + 51 = 301 boxes Reorder Point / Safety Stock Chapter 10—Inventory Management

  47. st = 15 + 75 Demand for week 1 Lead Time Distributions Chapter 10—Inventory Management

  48. st = 15 st = 15 + 75 Demand for week 1 + 75 Demand for week 2 Lead Time Distributions Chapter 10—Inventory Management

  49. st = 15 st = 15 st = 15 + 75 Demand for week 1 + 75 Demand for week 2 = 75 Demand for week 3 Lead Time Distributions Chapter 10—Inventory Management

  50. st = 15 st = 15 st = 15 sL = 26 + 75 Demand for week 1 + 225 Demand for three-week lead time 75 Demand for week 2 = 75 Demand for week 3 Lead Time Distributions Chapter 10—Inventory Management

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