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EOQ
What is inventory?
Inventory is the raw materials, component parts, work-in-process, or finished products that are held at a location in the supply chain.
What is Inventory?
Stock of materials Stored capacity Examples
1995 Corel Corp.
EOQ
Benefits of Inventory
Hedge against uncertain demand
Hedge against uncertain supply Economize on ordering costs Smoothing
To summarize, we build and keep inventory in order to match supply and demand in the most cost effective way.
Types of Inventory
Raw material Work-in-progress Maintenance/repair/operating supply Finished goods
EOQ
EOQ
Disadvantages of Inventory
Higher costs
Item cost (if purchased) Ordering (or setup) cost
EOQ
Inventory Classifications
Inventory
1984-1994 T/Maker Co.
Process stage
Demand Type
Other
Independent Dependent
Maintenance Operating
Cycle Time
1 Run time: Job is at machine and being worked on 2 Setup time: Job is at the work station, and the work station is being "setup." 3 Queue time: Job is where it should be, but is not being processed because other work precedes it. 4 Move time: The time a job spends in transit 5 Wait time: When one process is finished, but the job is waiting to be moved to the next work area. 6 Other: "Just-in-case" inventory.
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Inventory Costs
Holding costs - associated with holding or carrying inventory over time Ordering costs - associated with costs of placing order and receiving goods Setup costs - cost to prepare a machine or process for manufacturing an order
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Example: Assume a car dealer that faces demand for 5,000 cars per year, and that it costs $15,000 to have the cars shipped to the dealership. Holding cost is estimated at $500 per car per year. How many times should the dealer order, and what should be the order size?
EOQ
Ordering Costs
Supplies Forms Order processing Clerical support Etc.
EOQ
Setup Costs
Clean-up costs Re-tooling costs Adjustment costs Etc.
EOQ
Inventory Models
Fixed order-quantity models
Economic order quantity Production order quantity Quantity discount
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Assumptions and Restrictions: - Demand is known with certainty and is relatively constant over time. - No shortages are allowed. - Lead time for the receipt of orders is constant. (will consider later) - The order quantity is received all at once and instantaniously.
18
The total carry cost/yr = Cc x (Q/2).Total order cost = Co x (D/Q) Then , Total cost
TC C D C Q = Q 2
o c
Finding optimal Q*
(to p11)
19
EOQ Assumptions
Known and constant demand Known and constant lead time Instantaneous receipt of material No quantity discounts Only order (setup) cost and holding cost No stockouts
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Usage Rate
Minimum inventory 0
Inventory Level
Time
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Order quantity
To order inven
Total annual inventory cost is sum of ordering and Tocarrying keep inven cost: TC C D C Q Q 2
o c
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Examples
(to p13)
If delivery is not instantaneous, but there is a lead time L: When to order? How much to order?
Order Quantity Q
Inventory
Time
Order quantity
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Order quantity
Purchase Order Purchase Order Purchase OrderQty. Description Purchase Order Description Qty. Qty. Description Microwave Qty. 11 Description Microwave Microwave Microwave 11
Order quantity
EOQ
Deriving an EOQ
1. Develop an expression for setup or ordering costs 2. Develop an expression for holding cost 3. Set setup cost equal to holding cost 4. Solve the resulting equation for the best order quantity
EOQ
Lead Time
EOQ
Time
= Q* =
2 D S H D =N = Q*
=T =
Working Days
/ Year
d =
D
Working Days / Year
ROP = d L
EOQ
D = Demand per year S = Setup (order) cost per order H = Holding (carrying) cost d = Demand per day L = Lead time in days
ROP (Units)
Time (days)
Lead time = L
EOQ
Reduced price when item is purchased in larger quantities Other EOQ assumptions apply
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Probabilistic Models
Answer how much & when to order Allow demand to vary
Follows normal distribution Other EOQ assumptions apply
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Service Level
P(Stockout)
SS
Lead Time
Receive order
Time
Possibility of stockout between intervals Example: P&G representative calls every 2 weeks
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On-Hand Inventory
Q1
Q2 Q3 p p p
Q4
Time
EOQ
Period
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Period
Period
Time