project71-managinginventories

8/18/2019 Project71-ManagingInventories

1/3

Case Study 71 Managing Inventories

Managing Inventories

Problem Description

Managing inventories is a major concern for managers of all types of businesses. For

companies that operate on relatively low profit margins poor inventory management canseriously undermine the business. !he objective of this project is to build a decision support

system that would allow companies to manage their inventories. "e provide a summary of

mathematical models that can be used to identify the optimal amount of cycle pipeline and

safety stoc# inventory to be carried in the system under different scenarios $for e%ample

when demand is constant or not constant&. !o learn more about managing inventories we

refer the students to 'ahmias $()))&.

Mathematical Models

In the mathematical models presented below we use the following notation*

Q lot si+e

TC total annual costs $inventory and ordering costs&

D annual demand

DL demand during lead,time

S order-setup cost

h unit inventory holding cost

z service level

P σ standard deviation during protection interval.

!he total cost function is calculated as follows* ( ) ( ) S Q DhQTC **2 += .

!he following are some of the inventory control systems used by companies*

1. In the case that the demand rate is constant and #nown with certainty inventories are

managed as follows* when the reorder point is reached the economic order uantity

$EOQ& is ordered. !he EOQ is calculated using the following formula*

h DS EOQ 2= . !he reorder point is set eual to demand during lead,time. !hese

systems do not carry safety stoc#.

(. In the case that demand rate is not constant the following two inventory control systems

could be used*

a. Continuous review system. In this case the inventories are continuously monitored/

when the reorder point is reached EOQ is ordered. !he reorder point is eual todemand during lead,time plus safety stoc#.

b. Periodic review system. In this case the inventories are reviewed periodically

rather than continuously/ at the review time an order is placed to bring the

inventory position up to the target level T . !he target level is set eual to demand

during protection interval plus safety stoc#. !he inventory position is eual to on,

hand inventory plus scheduled receipts minus bac#orders.

71


2/3


Note the following * cycle inventory 0 Q-(/ pipeline inventory 0 DL/ safety stoc# 0 P z σ .

User Interface

1. uild a welcome form.

(. uild a form titled 23roblem 4ata.5 !he following are suggestions to help you design the

form. !he form has three te%t bo%es a combo bo% and a command button. !he user

types in the te%t bo%es the following data* order-setup cost length of the lead,time and

unit inventory holding costs. !he combo bo% allows the user to select whether demand

is constant or not. 6pon selection in the case that demand is constant a te%t bo%

appears where the user types in the annual demand/ otherwise three te%t bo%es appear

where the user types in the average demand corresponding standard deviation and

service level reuired. !he user clic#s on the command button to submit the data.

. uild a form titled 2Inventory 8nalyses.5 !he form has three option buttons that allow the

user to choose the type of system being analy+ed* the constant demand system the

periodic review system or the continuous review system.

a. In the case that the user chose the constant demand model a frame appears that

includes a number of option buttons and a command button. !he option buttonsallow the user to calculate the following* 9:; reorder point annual inventory

holding costs annual ordering costs total costs cycle inventory pipeline inventory

time between orders and number of orders in a year. "hen the user clic#s on the

command button the calculations are performed and the corresponding results are

presented to the user

b. In case that the user chose the continuous review system a frame appears that

includes a number of option buttons and a command button. !he option buttons

allow the user to calculate the following* 9:; reorder point annual inventory

holding costs annual ordering costs total costs safety stoc# cycle inventory

pipeline inventory average time between orders and average number of orders in

a year. "hen the user clic#s on the command button the calculations are

performed and the corresponding results are presented to the user.

c. In the case that the user chose the periodic review system a frame appears that

includes a number of option buttons and a command button. !he option buttons

allow the user to calculate the following* annual inventory holding costs annual

ordering costs total costs safety stoc# cycle inventory pipeline inventory target

inventory level length of the order period and number of orders in a year. "hen

the user clic#s on the command button the calculations are performed and the

corresponding results are presented to the user.


3/3


a. !he annual inventory holding costs annual ordering costs and annual total costs.

b. !he 9:; and reorder point.

c. !he total number of orders placed in a year.

d. !he average time between orders.

e. !he amount of safety stoc# cycle inventory and pipeline inventory.

. >raph the relationship between the following*

a. 8nnual inventory holding costs and order uantity.

b. 8nnual order costs and order uantity.

c. 8nnual total costs and order uantity.

Reference

'ahmias S. 23roduction and :perations 8nalysis with Student C4,=om.5 < th 9d. Mcr!w"

#ill$%rwin ())).

project71-managinginventories

Documents