stevenson 4ce ppt - ch12

Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter

Inventory Management

12

Slides prepared byLaurel DonaldsonDouglas College


Learning Objectives

Define the term inventory, list major reasons for holding inventory, and discuss the objectives of inventory management.

List the main requirements for effective inventory management, and describe A-B-C classification and perform it.

Describe the basic EOQ model, the economic production quantity model, the quantity discount model, and the planned shortage model and solve typical problems.

Describe how to determine the reorder point and solve typical problems.

Describe the fixed order interval model and solve typical problems.

Describe the single period model and solve typical problems.

LO 1

LO 3

LO 2

LO 4

LO 5

LO 6

2


Chapter Outline

IntroductionRequirements for Effective Inventory

ManagementFixed Order Quantity/Reorder Point Model

(FOQRP) FOQRP: Determining the Reorder PointFixed Order Interval ModelThe Single Period Model

3


LO 1

What Is Inventory?

Stock of items kept to meet future demand

Decisions of inventory managementhow many units to orderwhen to order

4


LO 1

Inventory

• Retail items,• finished goods, • supplies and parts, • some raw materials

A

B(4) C(2)

D(2) E(1) D(3) F(2)

Dependent Demand• Manufactured parts

Independent demand is uncertain. Dependent demand is certain.

Independent Demand

5


LO 1

Types of Inventories

Raw materials & purchased parts

Partially completed items called work in process (WIP)

Finished-goods (or merchandise)

Spare parts, tools, & supplies

6


LO 1

Functions of Inventory

To wait while in transit

To protect against stock-

outs

To take advantage of

quantity discounts

To smooth production

requirements

To decouple operations

To hedge against price

increases

7


LO 1

Objective of Inventory Control

Level of customer service (not understock)Fill rate

Costs of ordering and carrying inventory (not overstock) Inventory turnover

8

To achieve satisfactory levels of customer

service while keeping inventory costs within

reasonable bounds


LO 2

Effective Inventory Management

A reliable forecast of demandKnowledge of lead timesReasonable estimates of

Holding costsOrdering costsShortage costs

A classification systemA system to keep track of inventory

Quantity

Costs

Control

9


LO 2

Safely Storing Inventory Warehouse Management System (WMS)

computer software that controls the movement and storage of materials within a

warehouse, and processes the associated transactions

10

Warehouse/storeroom concernsSecurity Safety Obsolescenc

e


LO 2

Inventory Counting Systems

Periodic counting Physical count of items made at periodic intervals

Periodic counting Physical count of items made at periodic intervals

11

Perpetual (or continual) tracking keeps track of removals from and additions to inventory continuously, thus providing current levels of each item

Perpetual (or continual) tracking keeps track of removals from and additions to inventory continuously, thus providing current levels of each item


LO 2

Inventory Replenishment Fixed Order Quantity/Reorder Point Model

An order of a fixed size is placed when the amount on hand drops below a minimum quantity called the reorder point

Two-Bin System Two containers of inventory; reorder when the first is

empty Bar Code

A number assigned to an item or location, made of a group of vertical bars of different thickness that are readable by a scanner

Universal Product Code (UPC)Radio Frequency Identification (RFID)

technology that uses a RFID tag attached to the item that emits radio waves to identify items.

0

214800 232087768

12


LO 2

Forecasting Demand Lead time

time interval between ordering and receiving the order

Point of Sale (POS) systemSoftware for electronically recording

actual sales at the time and location of sale

13


LO 2

Inventory Costs

Inventory costs

Shortage costs

Ordering or Setup costs

Holding (carrying)

costs

14


LO 2

Inventory Costs Holding (carrying) costs

cost to carry an item in inventory Ordering costs

costs determining order quantity, preparing purchase orders, and fixed cost portion of receiving, inspection, and material handling

Setup costsTime spent preparing equipment for the job by

adjusting machine, changing tools, etc Shortage costs

costs when demand exceeds supply; often unrealized profit per unit

15


LO 2

ABC Classification System

Classifying inventory according to some measure of importance and allocating control efforts accordingly.

A - very important

B - mod. important

C - least important Annual $ value of items

A

B

C

High(70-80)

Low(5-10)

Low(15-20)

High(50-60)

Percentage of Items16

A items should receive more attention!


LO 2

Example: A-B-C Classification

Item Numbe

r

Annual Deman

dx Unit

Cost =

Annual Dollar

Volume (ADV)

% of Total ADV

8 1,000 $ 90.00

$ 90,000 38.8%

10 500 154.00 77,000 33.2%

2 1,550 17.00 26,350 11.3%

5 350 42.86 15,000 6.4%

3 1,000 12.50 12,500 5.4%

1 600 14.17 8,500 3.7%

7 2,000 .60 1,200 .5%

9 100 8.50 850 .4%

6 1,200 .42 504 .2%

4 250 .60 150 .1% 17

72%

23%

5%

A

B

C


LO 2

Cycle Counting

Cycle counting managementHow much accuracy is needed?

When kind of counting cycle should be used?

Who should do it?

18

Regular actual count of the items in inventory on a cyclic schedule


LO 3

Fixed Order Quantity/Reorder Point Model: Determining Economic Order Quantity

basic economic order quantity (EOQ)

EOQ with

quantity discount

EOQ with

planned shortage

economic production quantity

(EPQ)

19

economic order quantity (EOQ) The order size that

minimizes total inventory control cost


LO 3

Assumptions of EOQ Model

1. Only one product is involved

2. Annual demand requirements known

3. Demand is even throughout the year

4. Lead time does not vary

5. Each order is received in a single delivery

6. There are no quantity discounts

7. Shortage is not allowed

20


LO 3

R = Reorder pointQ = Economic order quantityLT = Lead time

LT LT

Q QQ

R

Time

Quantityon hand

1. You receive an order (size = Q)

2. Quantity decreases by demand rate (d) 3. When quantity reaches

reorder point quantity (R), place another order (size = Q).

4. Order received after lead time (LT) expires, when 0 on hand. The cycle then repeats.

21

Inventory Cycles with EOQ


LO 3

EOQ: Minimizing Total Costs

Ordering Costs

HoldingCosts

Order Quantity (Q)

ANNUAL

COST

Total Cost

QO

Total cost = Holding + Ordering Costs

Total cost is minimized at Q0 where holding = ordering cost

22


LO 3

Total Annual =Cost

AnnualOrdering

Cost

AnnualHolding

Cost+

TC = Total annual costQ = Order quantity (units)H = Annual holding cost

per unitD = Annual DemandS = Ordering (or setup) cost per order

Q0 = EOQ

23

TCQ

HD

QS

2

Basic Economic Order Quantity (EOQ)

Cost Holding Annual

Cost) Setupor (Order Demand) 2(Annual =

H

2DS = QO


LO 3

EOQ Example 1

H = $6 per unitS = $75D = 10,000 units

Qo =2(10,000) (75)

(6)

Qo = 500 units

TC = +

(10,000)(75)500

(500)(6)2

TC = $1500 + $1500= $3000

Orders per year = D/Qo

= 10,000/500= 20 orders/year

Length of order cycle = 250

days/(D/Qo)

= 250/20= 12.5 days 2

4

Qo =2DS

HTC = +

QH2

DSQ

A phone company has annual demand of 10,000. A component has annual holding cost of $6 per unit, and ordering cost of $75. Calculate EOQ, Total Cost, number of orders per year and the order cycle time.


LO 3

Qo =2(15,000) (75)

(6)

Qo = 612 units

TC = +

(15,000)(75)612

(612)(6)2

TCmin = $1836 + $1838 = $3674

Orders per year = D/Qopt

= 15,000/612= 25 orders/year

Total cost is 22% more than

$3000

EOQ is 22% more than

500

25

Length of order cycle = 250

days/(D/Qo)

= 250/25= 10 days

EOQ Example 2a


Qo =2DS

HTC = +

QH2

DSQ

A phone company has annual demand of 15,000. A component has annual holding cost of $6 per unit, and ordering cost of $75. Calculate EOQ, Total Cost, number of orders per year and the order cycle time.


LO 3

Qo =2(15,000) (75)

(6)

Qo = 612 units

TC = +

(15,000)(75)500

(500)(6)2

TC = $1500 + $2250 = $375026

What if we still use

EOQ of 500? What is total

cost?

Total cost is only an extra 2% more if still use EOQ of

500

EOQ Example 2b


Qo =2DS

HTC = +

QH2

DSQ

A phone company has annual demand of 15,000. A component has annual holding cost of $6 per unit, and ordering cost of $75.


LO 3

Robust Model

The EOQ model is robustIt works even if all parameters

and assumptions are not metThe total cost curve is relatively flat near

the EOQ (especially to the right)

27


LO 3

Economic Production Quantity (EPQ)

Production done in batches or lotsproduction capacity > usage or demand

ratefor a part for the part

28

Assumptions of EPQsimilar to EOQexcept orders are received

incrementally during production


LO 3


29


LO 3


dpp

QI

p

Q

d

Q

SQ

DH

I

max

max

;lengthRun ;length Cycle

2Cost

Setup

Annual

Cost

Holding

Annual

TC

30

dp

p

H

DSQ

20TC = Total annual cost

Q = Order quantity (units)H = Annual holding cost

per unitD = Annual DemandS = Ordering (or setup) cost per order

Q0 = Optimal run or order quantityp = Production rated = Usage or demand rateImax = Maximum inventory level


LO 3

EPQ ExampleHoldit Inc. produces reusable shopping bags. Demand is 20,000 bags per day, 5 days per week, 50 weeks per year. Production is 50,000 per day. The setup cost is $200 and the annual holding cost rate is $.55 per bag. Calculate the EPQ, the total cost, the cycle length and optimal production run length.

H = $0.55 per bag S = $200 D = 20,000 bags x 50 wks x 5 daysd = 20,000 bags per day p = 50,000 bags per day

31

dp

p

H

DSQ

20

850,772050

50

55.

)200)(000,000,5(20

GG

GQ


LO 3

EPQ Example

H = $0.55 per bag S = $200 D = 20,000 bags x 50 wks x 5 daysd = 20,000 bags per day p = 50,000 bags per day

32

dpp

QIS

Q

DH

I

max

max 2

TC

bags 46,710 30000000,50

850,77max I

$25,690 002850,77

5)55(.

2

710,46TC

million

Holdit Inc. produces reusable shopping bags. Demand is 20,000 bags per day, 5 days per wk, 50 wks per yr. Production is 50,000 per day. Setup cost is $200 and annual holding cost rate is $.55 per bag. Calculate total cost.


LO 3

EPQ ExampleHoldit Inc. produces reusable shopping bags. Demand is 20,000 bags per day, 5 days per week, 50 weeks per year. Production is 50,000 per day. The setup cost is $200 and the annual holding cost rate is $.55 per bag. Calculate cycle length and optimal production run length. H = $0.55 per bag S = $200 D = 20,000 bags x 50 wks x 5 daysd = 20,000 bags per day p = 50,000 bags per day

33

p

Q

d

Q lengthRun ;length Cycle

days 3.89every 000,20

850,77length Cycle

orderper days 56.1000,50

850,77lengthRun


LO 3

EOQ with Quantity Discounts Price reductions are often offered as incentive to

buy larger quantities Weigh benefits of reduced purchase price against

increased holding cost

R = per unit price of the itemD = annual demand

Annualholdingcost

PurchasingcostTC = +

Q2

H DQ

STC = +

+Annualorderingcost

RD +


LO 3

Total Cost with Purchase Cost

C

ost

EOQ

TC with PD

TC without PD

PD

0 Quantity

Adding Purchasing costdoesn’t change EOQ

35


LO 3

Total Cost with Quantity Discounts

36


LO 3

Best Purchase Quantity Procedure

begin with the lowest unit price

compute the EOQ for each price range

stop when find a feasible EOQ

Is EOQ for the lowest unit price

feasible?

Yes: it is the optimal order

quantity

No: compare total cost at all break quantities larger than feasible

EOQ

37

The quantity that yields the lowest total cost is optimum


LO 3

Example: Quantity DiscountsBelow is a quantity discount schedule for an item with

an annual demand of 10,000 units that a company orders regularly at an ordering cost of $4. The annual holding cost is 2% of the purchase price per year. Determine the optimal order quantity.

Order Quantity(units) Price/unit($)0 to 2,499 $1.202,500 to 3,999 1.004,000 or more .98

38


LO 3

units 1,826 = 0.02(1.20)

4)2(10,000)( =

H

2DS = QO

D = 10,000 units S = $4

units 2,000 = 0.02(1.00)

4)2(10,000)( =

H

2DS = QO

units 2,020 = 0.02(0.98)

4)2(10,000)( =

H

2DS = QO

H = .02R R = $1.20, 1.00, 0.98

Interval from 0 to 2499, the Qo value is feasible

Interval from 2500-3999, Qo value is NOT feasible

Interval from 4000 & up, Qo value is NOT feasible

39

Order Quantity Price/unit($)0 to 2,499 $1.202,500 to 3,999 1.004,000 or more .98

Example: Quantity Discounts


LO 3

Quantity Discount Models

2500 4000

An

nu

al cost

0 Quantity

EOQs (not feasible)

1st break quantity

2nd break quantity

1st range total cost

curve

40

2nd range total cost curve

3rd range total cost curve

EOQ


LO 3

TC(0-2499) = (1826/2)(0.02*1.20) + (10000/1826)*4+(10000*1.20) = $12,043.82

TC(2500-3999)= $10,041

TC(4000&more)= $9,949.20

Therefore the optimal order quantity is 4000 units

41

Example: Quantity Discounts

Q2H D

QSTC = + RD +


LO 3

EOQ with Planned Shortages Assumptions:

all shorted demand is back-orderedback-orders incur shortage costsshortage cost is proportional to waiting timeall other basic EOQ assumptions

42


LO 3

EOQ with Planned Shortages

orderper cost setup)(or ordering S

demand annual D

unitper cost holding annual H

cycleorder per ordered-backquantity

yearper unit per cost order back

2

22

Cost

OrderBack

Annual

Cost

Ordering

Annual

Cost

Holding

Annual

TC

22

b

bb

Q

B

B

BH

H

DSQ

BQ

QS

Q

DH

Q

QQTC

43


LO 3

Example: EOQ with Planned Shortage

Annual demand for a refrigerator is 50 units. Holding cost per unit per year is $200. Back-order cost per unit per year is estimated to be $500.Ordering cost from the manufacturer is $10 per order. Determine order quantity and back-order quantity per order cycle.

44

D = 50 H = $200 B = $500 S = $10

2 2(50)(10) 200 5002.65, round to 3 units.

200

2003 0.86, round to1.

200 500b

DS H BQ

H B B

HQ Q

H B

Allow inventory to drop to zero. When another unit is demanded, order 3 units.


LO 3

Concept Check

Which of the following is FALSE about EOQ?

A. It determines how many to order.B. The EOQ always results in the lowest total

cost.C. The model minimizes total cost by

balancing carrying and order costs.D. The model is robust and works even if all

assumptions are not exact.

45


LO 3

Concept Check

Which is NOT a difference between EOQ and EPQ?

A. A different formula is used.B. EPQ is used mainly for producing batches,

and EOQ is for receiving orders.C. Quantity is received gradually in EPQ.D. Demand can be variable for EPQ but not

for EOQ.

46


LO 3

Concept Check

Which is NOT an assumption of both EOQ and EPQ?

A. Demand is known with certainty and is constant over time

B. No shortages are allowedC. Order quantity is received all at onceD. Lead time for the receipt of orders is

constant

47


LO 4

What’s next?

EOQ models give HOW MANY to orderNow look at WHEN to order

Reorder Point (ROP)

48

d = Demand rate (units per day or week)LT = Lead time (in days or weeks)Note: Demand and lead time must have the same time units.

ROP = d LT


LO 3

Annual Demand = 1,000 units

Days per year = 365Lead time = 7 days

units/day 2.74 = days/year 365

units/year 1,000 = d

units 20or 19.18=(7days)units/day 2.74=L =ROP d

When inventory level reaches 20 units, place the next order.

49

Example: ROP


LO 4

Fixed Order Quantity/Reorder Point Model

Safety Stock

1. Variability of demand and lead time 2. Service Level

2a. Lead time service level

2b. Annual service level

50

Reorder Point = Expected demand + Safety Stock (ROP) during lead time


LO 4

When to Reorder with EOQ Ordering Reorder Point – When inventory level drops to this

amount, the item is reordered.

Safety Stock - Stock that is held in excess of expected demand due to variability of demand and/or lead time.

Service Level – Probability demand will not exceed supply. Lead time service level: probability that demand will not

exceed supply during lead time. Annual service level: percentage of annual demand filled.

51


LO 4

Determinants of the Reorder Point

Rate of demand Lead time

Demand and/or lead

time variability

Stockout risk (safety stock)

52

ROP Expected demandSafety stockduring lead time


LO 4

Safety Stock

LT Time

Expected demandduring lead time

Maximum probable demandduring lead time

ROP

Qu

an

tity

Safety stock

Safety stock reduces risk ofstockout during lead time

53


LO 4

Reorder Point

54

z = Safety factor; number of standard deviations above expected demanddLT = The standard deviation of demand during lead time

Safety Stock = z.dLT

The ROP based on a normalDistribution of lead time demand


LO 4

Demand During Lead Time

55


LO 5

ROP with Lead Time Service Level

variable demand during a lead time

ROP = expected demand during lead time + safety stock

56

z = Safety factor; number of standard deviations above expected demanddLT = The standard deviation of demand during lead time

ROP = + z.dLT


LO 5


variable demand and constant lead time

ROP = (average demand x lead time) + z x st. dev. of demand

during lead time(demand and lead time measures in same time units)

sd = standard deviation of demand per day

sdLT = sd LT

57


LO 5


both demand and lead time are variable

ROP = (avg. demand x avg. lead time) + z x st. dev. of demand

in lead time(demand and lead time measures in same time units)

sd= standard deviation of demand per day

sLT= standard deviation of lead time

sdLT = (average lead time x sd2)

+ (average daily demand) 2sLT2

58


LO 5

Example 1: ROP with Lead Time Service Level

Calculate the ROP required to achieve a 95% service level for a product with average demand of 350 units per week and a standard deviation of demand during lead time of 10. Lead time averages one week.

From Table 12-3 (p434), z for 95% = 1.65

ROP = 350 + ZsdLT

= 350 + 1.65 (10)

= 350 + 16.5 = 366.5 ≈ 367

A new order should be placed when inventory level reaches 367 units.

59


LO 5


Calculate the ROP and amount of safety stock required to achieve a 90% service level for a product with variable demand that averages 15 units per day with a standard deviation of 5. Lead time is consistently 2 days.

From Table 12-3 (p434), z for 90% = 1.28

ROP = (15 units x 2 days) + ZsdLT

= 30 + 1.28 ( 2) (5)

= 30 + 8.96 = 38.96 ≈ 39

Safety stock is about 9 units and a new order should be placed when inventory level reaches 39 units. 60


LO 5


Calculate the ROP for a product that has an average demand of 150 units per day and a standard deviation of 16. Lead time averages 5 days, with a standard deviation of 2. The company wants no more than 5% stockouts.

service level = 1 – 5% = 95%From Table 12-3 (p434), z for 95% =

1.65

Place a new order when inventory level reaches 1004 units

61

ROP = (150 units x 5 days) + 1.65sdlt

= (150 x 5) + 1.65 (5 days x 162) + (1502 x 12)

= 750 + 1.65 (154) = 1,004 units


LO 5

ROP Using Annual Service Level1. Calculate

2. Use a table to find the z value associated with E(z)

3. Use the z value in the appropriate ROP formula,

62

dLT

annualSLQzE

)1(

)(

dLTzROP timeleadduringdemandexpected

SLannual = annual service level E(z) = standardized expected number of units short during an order cycle.


LO 5

Min/Max model

similar to fixed order-quantity/reorder point (ROP) model

difference:if at order time, Q on hand < min (ROP),

then order quantity = max – Q on hand(max EOQ + ROP)

63


LO 5

Inventory Models

EOQ/ROP modelOrder size constant, time between orders

changes

Fixed Order Interval/Order up to Level Modelorders placed at fixed time intervalsdetermine how much to order to bring inventory

level up to a predetermined point (order up to level)

used widely for retailconsider expected demand during lead time,

safety stock, and amount on handdemand or lead time can be variable

64


LO 5

Comparing Inventory Models

65

EOQ/ROP

Fixed Interval/

Order up to


LO 5

Disadvantagesrequires a larger safety stockincreases carrying costcosts of periodic reviews

Fixed Order Interval: Benefits and Disadvantages

Benefitsgrouping items from same supplier

can reduce ordering/shipping costspractical when inventories

cannot be closely monitored

66


LO 5

Fixed Order Interval/Order up to Level Model

Determining the order interval

67

OI = order interval (in fraction of a year)S = fixed ordering cost per purchase orders = variable ordering cost per SKU included in the order (line item)

(assume s is the same for every SKU)n = n number of SKUs purchased from the supplierRj = unit cost of SKUj , j = 1, …, ni = annual holding cost rateDj = annual demand of SKUj , j = 1, …., n

Total Annual Inventory Cost:

TC =

Optimal Order Interval:

OInsSiR

OIDj

j 1)(.

2

.

jj RDi

nsSOI

)(2*


LO 5

Fixed Order Interval/Order up to Level Model

Determining the Order up to Level

LTOIzLTOId d

Stock

Safety

interval

protection during

demand Expected

I

handon Amount IQ

max

max

68

= Average daily or weekly or monthly demand OI = Order interval (length of time between ordersLT = Lead time in days or weeks or monthsz = Safety factor; # of standard deviations above expected demandd = Standard deviation of daily or weekly or monthly demand


LO 5

= 20 (30 + 10) + (2.32) (4) 30 + 10 = 800 + 2.32 (25.298) = 858.7 or 859 units stock up to level

Average daily demand for a product is 20 units, with a standard deviation of 4 units. The order interval is 30 days, and lead time is 10 days. Desired service level is 99%. If there are currently 200 units on hand, how many should be ordered?

69

LTOIzLTOId d maxI

maxI

Amount to order = 859 – 200 = 659 units

Example: Fixed Order Interval Model


LO 5

Coordinated Periodic Review Modeldetermines an order interval (OI) and order up to

level for reviewing every stock keeping unit (SKU)calculate a multiple (mi ) of OI for each SKUi

use this to determine the optimal OI for each SKUi

70

To use:Compare on hand inventory of each SKU to its ROP

(forecast demand for next OI + lead time + safety stock)

if on hand is less: order a quantity that brings the on hand level to SKU’s order up-to levelthe order up-to level is enough for the next OI + LT.


LO 6

Single Period Model Single period model

model for ordering of perishables and other items with limited useful lives

Shortage cost Cs

generally the unrealized profits per unitRevenue per unit – Cost per unit

Excess cost Ce cost per unit - salvage per unit

for items left over at the end of a period

71

GOAL = find order quantity (stock level) that minimizes total excess and shortage costs.


LO 6

Single Period Model

Continuous stocking levelsIdentifies optimal stocking levelsOptimal stocking level balances unit

shortage and excess cost

Discrete stocking levelsDesired service level is equaled or

exceededCompare service level to cumulative probability of

demand

72


LO 6

Optimal Stocking Level

Service Level

So

Quantity

Ce

Cs

Balance point

Service level (SL) =Cs

Cs + CeCs = Shortage cost per unitCe = Excess cost per unit

73So = Optimum stocking level (i.e., order quantity


LO 6

Example 1: Single Period ModelCe = $0.20 per unitCs = $0.60 per unitService level = Cs/(Cs+Ce) =

.6/(.6+.2)Service level = .75

Service Level = 75%

Quantity

Ce

Cs

Stockout risk = 1.00 – 0.75 = 0.2574


LO 6

Example 2: Single Period Model

The Poisson table (App. B, Table C) Cs is unknown Ce = $500

provides these values for a mean of 2.0: Number of FailuresCumulative Probability0 .1351 .4062 .6773 .8574 .9475 .983

75

s.406, so .406($500 )$500s

ss

CC C

C

Optimum stock level = 2, then

SL between

Cs = $343.17

The range of shortage cost is $343.17 to $1,047.99.

.677, so .677($500 )$500s

s ss

CC C

C

Cs = $1,047.99.

A company usually carries 2 units of a spare part that costs $500 and has no salvage value. Part failures can be modeled by a Poisson distribution with a mean of 2 failures during the useful life of the equipment. Estimate the range of shortage cost for which stocking 2 units of this spare part is optimal.


Review: Inventory Models

EOQ models used to determine order sizeSimple model for many types of inventoryTrade-off between carrying and ordering costsQuantity discount model adds purchasing costs

and compares total cost for various order sizes (that is still a feasible EOQ)

EPQ models used to determine production lot sizeUsed when producing and depleting items at

same timeTrade-off between carrying and setup costsConsider production and usage rate

76


Review: Inventory Models ROP (reorder point)

Determines at what quantity (when) to re-order Consider expected demand during lead time and

safety stock Trade-off cost of carrying safety stock & risk of

stockout Fixed Order Interval Model

Used when orders placed at fixed time intervals – determine how much to order

Used widely for retailConsider expected demand during lead time, safety

stock, and amount on handDemand or lead time can be variable Need more safety stock, but not continuous

monitoring Single-Period Model

Determines at what quantity (when) to re-order Used when can’t carry goods to next period (e.g..

perishables)Trade-off cost of shortages & of excess (wasted)

inventory

77


Learning Checklist

Define the term inventory and list the major reasons for holding inventories.

Discuss the objectives of inventory management.

List the main requirements for effective inventory management.

Describe the A-B-C approach and perform it.Describe Basic Inventory Control SystemsBe able to describe and solve problems

using: EOQ, EPQ, ROP, Fixed Order Interval Model, Single Period Model.

78

stevenson 4ce ppt - ch12

Documents

mcgrawhill companies

inventory ordering costs

shortage costs costs

term inventory

inventory costsordering

inventory costsholding

inventory management

fixed order interval