Professional Documents
Culture Documents
Management
Inventory
Inventory is the stock of any item or
resource used in an organization.
Inventory include: raw materials, finished
products, component parts, supplies, and
work-in-process
Purposes of Inventory
1. To maintain independence of operations
2. To meet variation in product demand
3. To allow flexibility in production scheduling
4. To provide a safeguard for variation in raw
material delivery time
5. To take advantage of economic purchaseorder size/Quantity discounts
Types of Inventory
Raw materials
Purchased parts and supplies
Work-in-process (partially completed) products
(WIP)
Items being transported
Tools and equipment
Inventory Costs
Holding (or carrying) costs
Costs
for
storage,
handling,
insurance,
obsolescence, depreciation, opportunity cost of
capital,etc
Holding costs tend to favor low inventory levels
and frequent replenishment
Ordering costs
Shortage costs
E(1)
Component
parts
Dependent
Demand
(Derived
demand items
for
component
parts,
subassemblie
s,
Conti..
As the level of inventory increases to provide better
customer service, inventory costs increase, whereas
quality-related customer service costs, such as lost sales
and loss of customers decrease
The conventional approach to inventory management is
to maintain a level of inventory that reflects a
compromise between inventory costs and customer
service
But according to the contemporary zero defects
philosophy of quality management, the long term benefits
of quality in terms of large market share outweigh lower
shot-term production-related costs such as inventory
costs
invested
Profit
potential
Sales
or usage volume
Stock-out
penalties
Illustration of ABC
The
maintenance
department
for
a
small
manufacturing firm has responsibility for maintaining
an inventory of spare parts for the machinery it
services. The parts inventory, unit cot and annual
usage Part
are as follow: Unit Cost $
Annual Usage
1
60
90
350
40
30
130
80
60
30
100
20
180
10
170
320
50
510
60
10
20
120
Total
Value
% of Total
Value
% of Total
Quantity
%
Cumulativ
e
30,600
35.9
6.0
6.0
16,000
18.7
5.0
11.0
14, 000
16.4
4.0
15.0
5,400
6.3
9.0
24.0
4,800
5.6
6.0
30.0
3,900
4.6
10.0
40.0
3,600
4.2
18.0
58.0
3,000
3.5
13.0
71.0
10
2,400
2.8
12.0
83.0
1,700
2.0
17.0
100.0
Conti..
ABC Classification of the items:
Class
Items
% of Total
Value
% of Total
Quantity
9, 8, 2
71
15
1, 4, 3
16.5
25
6, 5, 10, 7
12.5
60
Number
of units
on hand
R
L
L
3. When you reach down to
Time a level of inventory of R,
R = Reorder point
you place your next Q
Q = Economic order quantity sized order.
L = Lead time
Holding
Costs
Ordering Costs
QOPT
Order Quantity (Q)
Co D
Q
Co D
CcQ
2
Cc
TC
=
+
Q2
Q
2
0=
Qopt =
C0 D
Q2
2CoD
Cc
Cc
Proving equality of
costs at optimal
point
Co D
CcQ
=
Q
2
Q
2
Qopt =
2CoD
Cc
2CoD
Cc
Total Cost
Slope = 0
Cc Q
Carrying Cost = 2
Minimum
total cost
Co D
Ordering Cost = Q
Optimal order
Qopt
Order Quantity, Q
EOQ Example
2CoD
TCmin =
Cc
2(150)(10,000)
(0.75)
TCmin =
CoD
Q
CcQ
+
2
(150)(10,000) (0.75)(2,000)
+
2,000
2
D/Qopt
= 10,000/2,000
= 5 orders/year
311 days/(D/Qopt)
= 311/5
= 62.2 store days
Sum 1
The ePaint stocks paint in its warehouse and sells it
online on its Internet Website. The store stocks
several brands of paints; however, its biggest seller
is Sharman-Wilson Ironcoat paint. The company
wants to determine the optimal order size and total
inventory cost for Ironcoat paint given an estimated
annual demand of 10,000 gallons of paint, an annual
carrying cost of $0.75 per gallon, and an ordering
cost of $150 per order. They would also like to know
the number of orders that will be made annually and
time between orders (i.e. order cycle)
Sum 2
Electronic Village stocks and sells a particular
brand of personal computer. It costs the store
$450 each time it places and order with the
manufacturer for the personal computers. The
annual cost of carrying the PCs in inventory is
$170. the store manager estimates that annual
demand for the PCs will be 1200 units.
Determine the optimal order quantity, total
minimum cost and order cycle time.
Sum 3
The EastCoasters Bicycle Shop operates 364 days a year,
closing only on Christmas Day. The shop pays $300 for a
particular bicycle purchased from the manufacturer. The
annual holding cost per bicycle is estimated to be 25% of the
dollar value of inventory. The shop sells an average of 18
bikes per week. The ordering cost for each order is $250.
Determine the optimal order quantity and the total minimum
cost.
Sum 4
Assume that the epaint Store has its own
manufacturing facility in which it produces Ironcoat
paint. The ordering cost is the cost of setting up the
production process to make paint. The manufacturing
facility remains open for the same number of days as
the store is open and produces 150 gallons of paint per
day. Determine the optimal order size, total inventory
cost, the length of time to receive an order, the number
of orders per year and the maximum inventory level.
Sum 5
I-75 Discount Carpets manufactures Cascade
carpet, which it sells in its adjoining showroom
store near the interstate. Estimated annual
demand is 20,000 yards of carpet with an annual
carrying cost of $2.75 per yard. The
manufacturing facility operates 360 days and
produces 400 yards of carpet per day. The cost
of setting up the manufacturing process for a
production run is $720. determine the optimal
order size, total inventory cost, length of time to
receive an order and maximum inventory level.
Quantity Discounts
A quantity discount is a price discount on an
item if predetermined numbers of units are
ordered
Determining if an order size with a discount is
more cost effective than optimal Q is the main
task
When a discount price is available, it is
associated with a specific order size, which may
be different from the optimal order size and the
customer must evaluate the trade off between
possibly higher carrying costs with the discount
Quantity Discounts
Price per unit decreases as order
quantity increases
TC =
CoD
Q
CcQ
2
+ PD
where
P = per unit price of the item
D = annual demand
PRICE
$10
8
6
TC = ($10 )
TC (d1 = $8 )
TC (d2 = $6 )
Carrying cost
Ordering cost
Q(d1 ) = 100 Qopt
Q(d2 ) = 200
Sum 6
Avtek, a distributor of audio and video
equipment, wants to reduce a large stock of
televisions. It has offered a local chain of
stores a quantity discount pricing schedule,
as follows:Quantity
Price
1-49
$1,400
50-89
1,100
90+
900
Quantity Discount
QUANTITY
PRICE
1 - 49
50 - 89
90+
$1,400
1,100
900
Qopt =
2CoD
Cc
For Q = 72.5
TC =
Co D
For Q = 90
TC =
Co D
Qopt
Co =$2,500
Cc =$190 per TV
D = 200 TVs per year
2(2500)(200)
190
CcQopt
2
CcQ
2
= 72.5 TVs
+ PD = $233,784
+ PD = $194,105
Sum 7
The bookstore at Tech purchases jackets emblazoned with the
school name and logo from a vendor. The vendor sells the
jackets to the store for $38 a piece. The cost to the bookstore
for placing an order is $120 and the annual carrying cost is
25% of the cost of jacket. The bookstore manager estimates
that 1700 jackets will be sold during the year. The vendor has
offered bookstore the following volume discount schedule.
What is the bookstores optimal order quantity?
Order Size
Discount
1-299
0%
300-499
2%
500-799
4%
800+
5%
Reorder Point
The Reorder Point is the determinant of
when to order in a continuous inventory system,
i.e. the inventory level at which a new order is
placed
Reorder point for basic EOQ model with
constant demand and a constant lead time is:
R = dL
Where
d = demand rate per period (daily demand)
L = Lead Time
Inventory level
Reorder
point, R
LT
LT
Time
Inventory level
Reorder
point, R
Safety Stock
LT
Time
LT
Probability of
a stockout
Safety stock
zd L
dL
Demand
Safety stock = z d L
= (1.65)(5)( 10)
= 326.1 gallons
= 26.1 gallons
Sum 9
The amount of denim used daily by the Southwest
Apparel Company in its manufacturing process to
make jeans is normally distributed with an average of
4000 yards of denim and a standard deviation of 600
yards. The lead time required to receive an order of
denim from the textile mill is constant 7 days.
Determine the safety stock and reorder point if the
company wants to limit the probability of a stock out
and work stoppage to 5%? What level of service would
a safety stock of 2000 yards provide?
Order Quantity
System
For
Periodic
Inventory
tb + L - I
where
d
tb
L
d
zd
=
=
=
=
tb + L = safety stock
I = inventory level
=
=
=
=
=
=
Q = d(tb + L) + zd
tb + L - I
= (6)(60 + 5) + (1.65)(1.2)
= 397.96 packages
60 + 5 - 8
Sum 10
KVS Pharmacy fills prescriptions for a popular
childrens antibiotic, Amoxycilin. The daily demand
for Amoxycilin is normally distributed with a mean of
200 ounces and a standard deviation of 80 ounces. The
vendor for the pharmaceutical firm that supplies the
drug calls the drugstores pharmacist every 30 days
and checks the inventory of Amoxycilin. During a call
the druggist indicated the store had 60 ounces of the
antibiotic in stock. The lead time to receive an order is
four days. Determine the order size that will enable the
drug store to maintain a 99% service level.
Sum 11
Food Place Market stocks frozen pizzas in a refrigerated
display case. The average daily demand for the pizzas is
normally distributed, with a mean of 8 pizzas and a
standard deviation of 2.5 pizzas. A vendor for a packaged
food distributor checks the markets inventory of frozen
foods every 10 days. During a particular visit there were
no pizzas in stock. The lead time to receive an order is 3
days. Determine the order size for this order period that
will result in a 98% service level. During the vendors
following visit there were 5 frozen pizzas in stock. What
is the order size for the next order period?