Course

Tahun

: Manajemen Operasional
: 2013

Managing Inventory

Learning Objectives

Conduct an ABC analysis.

Explain and use the EOQ model.
Compute a reorder point and explain
safety stock.
Apply the production order quantity
model.
Explain and use the quantity discount
model.
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What is Inventory?
1995
Corel Corp.

The physical stock of any item or

reaources used in an organization.
The objective of an inventory system is to
specify :
1. When items should be ordered
2. What quantity of each item should be
ordered
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The Functions of Inventory

To decouple or separate various parts of
the production process
To provide a stock of goods that will
provide a selection for customers
To take advantage of quantity discounts
To hedge against inflation and upward
price changes
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Types of Inventory

Raw material
Work-in-progress
Maintenance/repair/operating supply
Finished goods

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Disadvantages of Inventory
Higher costs
Item cost (if purchased)
Ordering (or setup) cost
Costs of forms, clerks wages etc.
Holding (or carrying) cost
Building lease, insurance, taxes
etc.
Difficult to control
Hides production problems
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ABC Analysis
Divides on-hand inventory into 3 classes
A class, B class, C class
Basis is usually annual $ volume
$ volume = Annual demand x Unit cost
Policies based on ABC analysis
Develop class A suppliers more
Give tighter physical control of A items
Forecast A items more carefully
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Classifying Items as ABC

% Annual $ Usage
100
80
60

Class
A
B
C

% $ Vol
80
15
5

40

20

0
0

50

100

% of Inventory Items
8

% Items
15
30
55

Control of Service Inventories

Good personnel selection, training, and
discipline
Tight control of incoming shipments
Effective control of all goods leaving the
facility

Independent versus Dependent

Demand
Independent demand - demand for item
is independent of demand for any other
item
Dependent demand - demand for item is
dependent upon the demand for some
other item

10

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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Holding (Carrying) Costs

Obsolescence
Insurance
Extra staffing
Interest
Pilferage
Damage
Warehousing
Etc.
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Ordering Costs

Supplies
Forms
Order processing
Clerical support
Etc.

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Setup Costs

Clean-up costs
Re-tooling costs
Adjustment costs
Etc.

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Inventory Models
Fixed order-quantity models
Economic order quantity
Production order quantity
Quantity discount
Probabilistic models
Fixed order-period models

15

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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Inventory Usage Over Time

Usage Rate

Average
Inventory
(Q*/2)

Inventory Level

Order quantity =
Q (maximum
inventory level)

Minimum
inventory0

Time

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EOQ Model
How Much to Order?
Annual Cost

Minimu
m total
cost

Order (Setup) Cost Curve

Optimal
Order Quantity (Q*)

Order quantity

EOQ Model Equations

Optimal Order Quantity

= Q* =

Expected Number of Orders = N =

Expected Time Between Orders

d =

D
Working Days

ROP = d L
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/ Year

2 D S
H
D
Q*
=T =

Working Days

D = Demand per year

S = Setup (order) cost per
order
H = Holding (carrying) cost
d = Demand per day
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L = Lead time in days

/ Year

The Reorder Point (ROP) Curve

Q*

Inventory level
(units)

Slope = units/day = d

ROP
(Units)

Time (days)
Lead time = L
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Production Order Quantity Model

Answers how much to order and when to
order
Allows partial receipt of material
Other EOQ assumptions apply
Suited for production environment
Material produced, used immediately
Provides production lot size
Lower holding cost than EOQ model
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21

EOQ POQ Model When To Order

Usage only
takes place

Inventory Level

Maximu
m
inventory
level

Both
production
and usage
take place

Time

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EOQ POQ Model When To Order

Inventory Level

Average
Inventory

Optimal
Order
Quantity
(Q*)
Reorder
Point
(ROP)

Time

Lead Time
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POQ Model Equations

Optimal Order Quantity

= Q* =
p

Maximum inventory level = Q*

Setup Cost
Holding Cost

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D
Q

H*

( )
1 -

( )
1 -

d
p

* S

= 0.5 * H * Q

2*D*S

( )
1-

D = Demand per
year
S = Setup cost
H = Holding cost
d = Demand per
day
p = Production
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per day

Quantity Discount Model

Answers how much to order &
when to order
Allows quantity discounts
Reduced price when item is purchased
in larger quantities
Other EOQ assumptions apply
Trade-off is between lower price &
increased holding cost
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25

Quantity Discount Schedule

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EXERCISES

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