Inventory Control Meaning: Inventory control refers to the process of managing a company's inventory efficiently, ensuring that the right quantity of stock is available at the right time. The goal is to minimize the costs associated with holding inventory while ensuring customer demand is met. Costs Associated with Inventory 1, Holding Costs (Carrying Costs): These include storage costs, insurance, depreciation, and opportunity costs of capital tied up in inventory. 2. Ordering Costs: These are the costs associated with placing and receiving orders, including administrative work, transportation, and supplier handling charges. 3. Stockout Costs: Costs incurred when inventory is unavailable to meet demand, leading to lost sales, customer dissatisfaction, and expedited replenishment costs. 4, Purchase Costs: The direct costs of acquiring inventory, including the purchase price of the goods themselves. 5. Setup Costs: Costs related to setting up machinery or processes for production, applicable when manufacturing new products. Economic Order Quantity (EOQ) Formula: yes AWhere: * D = Demand for the product (units per year) © S= Ordering cost per order * H = Holding cost per unit per year Example Problem: A company has an annual demand of 10,000 units, ordering cost is $50 per order, and holding cost is $2 per unit per year. Calculate EOQ. — 2(10, 000)(50 B0Q = 2 0000) = 500, 000 = 707.1 units Safety Stock Calculation Safety stock is the extra inventory held to avoid stockouts due to demand variability or supply delays Formula: Safety Stock = Z x oy x VE Where: + Z =Z-score corresponding to the desired service level * 74 = Standard deviation of demand * L =Lead time (time it takes to receive an order) Example Problem: If the standard deviation of daily demand is 5 units, lead time is 4 days, and you desire a service level of 95% (Z = 1.65), calculate safety stock. Safety Stock = 1.65 x 5 x V4 = 1.65 x 5 x 2= 16.5 unitsABC Analysis ‘ABC analysis is a method of categorizing inventory into three categories based on value: * Aitems: High-value items with low frequency of use (approximately 70% of the value, 10% of the items). * Bitems: Moderate value and moderate frequency (20% of the value, 20% of the items) + Citems: Low-value items with high frequency of use (10% of the value, 70% of the items). Application: Analyze inventory data and assign items to categories based on their contribution to total value. Network Analysis Meaning: Network analysis involves planning and managing projects by representing activities as a network of tasks, which helps in identifying the critical path, reducing delays, and optimizing resource allocation, Objectives of Network Analysis 1. Identify the critical path: The sequence of activities that determines the minimum project duration. 2. Optimize resource use: Ensure efficient use of resources by identifying dependencies and potential bottlenecks. 3. Monitor project progress: Track activity completion and adjust project schedules as necessary. 4, Minimize project delays: Identify slack in non-critical activities to avoid delays.Basic Rules of Network Analysis 1. Activities must be arranged logically, ensuring dependencies are represented accurately. 2. Events are only considered completed when all preceding activities are finished 3. No loops or cycles are allowed in the network 4, Start and finish points must be clearly iden ied, Drawing a Network Diagram 1. Identify all activities and dependencies. 2. Place activities on nodes or arrows, ensuring all dependencies are connected. 3. Label each node with event numbers or letters. Steps: 1. Identify all paths through the network. 2. Add the durations of all activities on each path. 3. The path with the longest duration is the critical path. PERT (Program Evaluation Review Technique) Formula for Expected Time: _O+4M+P ——_=—=—_— TEWhere: +O = Optimistic time © M = Most likely time © P= Pessimistic time Example Problem: An activity has an optimistic time of 4 days, most likely time of 6 days, and pessimistic time of 10 days. Calculate the expected time. Tp 4446) +10 _ $2641 8 659 days Quiz Questions and Solutions 1. Question: What is the E0Q for an item with an annual demand of 5,000 units, ordering cost of $100 per order, and holding cost of $10 per unit? © Solution: E0Q = yoann) = V100000 = 316.23 units 2. Question: If the standard deviation of demand is 3 units and lead time is 5 days, calculate the safety stock at a 90% service level (Z = 1.28). * Solution: Safety Stock = 1.28 x 3 x V5 = 8.58 units These notes and problems provide a comprehensive understanding for students preparing for exams or projects related to inventory management and network analysis. Critical Path Example To better understand how to find the Critical Path in a project network, let's consider a simple example with a set of activities, their durations, and dependenciesProject Details: Activity Description A Design 8 Foundation c Framing > Electrical Work £ F G Plumbing Painting Final Inspection Duration (Days) 4 3 5 2 3 2 1 Step 1: Draw the Network Diagram Predecessor(s) A A BC 8 DE F First, represent the project as a network of activities based on the dependencies given. 1 2, 5, Activity A (Design) has no predecessor and will be the first node. Activity B (Foundation) depends on A, so it starts after A Activity C (Framing) also depends on A, starting after A. Activity D (Electrical Work) depends on B and C, so it starts after both B and C are finished. Activity € (Plumbing) depends on B, so it starts after B is completed. 6. Activity F (Painting) depends on D and E, starting after both are completed. 7. Activity G (Final Inspection) depends on F and finishes the project Step 2: Identify All Paths and Durations The paths through the network are sequences of activities from start to finish. Let's list all the possible paths and calculate their total durations. 1 2. Path2: A+B EF 4G Total Duration: 4+ 3 +3 +2+1=13 days Path 1:A-B-D—-F=G Total Duration: 4+ 3-+2+241=12days3. Path3:A-C-D-F=G Total Duration: 4 + 5 + 2+ 2+ 1= 14 days Step 3: Determine the Critical Path The critical path is the longest path through the network, as it determines the minimum project duration. In this case: Path 1: 12 days * Path 2: 13 days * Path 3:14 days (Critical Path) Step 4: Earliest Occurrence Time (EOT) and Least Occurrence Time (LOT) © EOT: The earliest time each activity can start * LOT: The latest time each activity can start without delaying the project Forward Pass (EOT Calculation): Activity A: Starts at day 0 (no predecessor), finishes at day 4. ‘+ Activity B: Starts after A (at day 4), finishes at day 7 © Activity C: Starts after A (at day 4), finishes at day 9. ‘* Activity D: Starts after B and C are both completed. Since C finishes at day 9, D starts at day 9, finishes at day 11 * Activity : Starts after 8 (at day 7), finishes at day 10. + Activity F: Starts after D and E. Since D finishes at day 11, F starts at day 11 and finishes at day 13 + Activity G: Starts after F (at day 13), finishes at day 14.Backward Pass (LOT Calculation): * Activity G: Must finish at day 14 (project deadline), starts at day 13, © Activity F: Must finish by day 13 to not delay G, starts at day 11. * Activity D: Must finish by day 11 to not delay F, starts at day 9. * Activity E: Must finish by day 11 to not delay F, starts at day 8 * Activity B: Must finish by day 7 to not delay D and €, starts at day 4. * Activity C: Must finish by day 9 to not delay D, starts at day 4. * Activity A: Must finish by day 4 to not delay B and C, starts at day 0. Step 5: Find Slack and Critical Path Slack is the amount of time an activity can be delayed without delaying the entire project. Critical path activities have zero slack. Activity A: Slack = 0 Activity C: Slack = 0 Activity D: Slack = 0 Activity F: Slack = 0 Activity G: Slack = 0 Since Path 3 (A = C = D + F = G) has all activities with zero slack, this is the Critical Path. Summary of Critical Path Analysis * Critical Path: A=] C-D-+F 4G © Project Duration: 14 days © Slack Time: Critical path activities have zero slack, while others like B and E may have some slack. This method ensures the project is completed in the minimum possible time while allowing for adjustments to non-critical activitiesCritical Path Analysis Quiz 1. Question: What is the critical path in a project? © a) The path with the fewest activities © b) The path with the most slack ©) The longest path in the network © d) The shortest path in the network Answer: c) The longest path in the network Explanation: The critical path is the longest sequence of activities in a project, determining the shortest time in which the project can be completed. Any delay in activities on the critical path will delay the entire project 2. Question: Which of the following activities is on the critical path based on the following durations? Path 1 (A — B — D): 12 days Path 2 (A = C =D): 14 days Path 3 (A = E —F): 13 days 2) Activity B © b) Activity ¢ ©) Activity F © d) Activity D ‘Answer: b) Activity C Explanation: Since Path 2 (A ~ C — D) is the longest (14 days), Activity C must be on the critical path. Activities on the longest path (critical path) must be completed on time to ensure the project is not delayed,3. Question: If Activity € has a duration of 5 days and can be delayed by 3 days without affecting the project completion time, what is the slack time for Aativity E? © a) O days © b) 3 days ©) Sdays © d)8 days Answer: b) 3 days Explanation: Slack time refers to how much an activity can be delayed without delaying the project's completion. In this case, Activity E can be delayed by 3 days, so the slack time is 3 days. 4. Question: What does a zero slack indicate for an activity in project scheduling? ‘* 2) The activity has no dependencies * b) The activity cannot be delayed without affecting the project ©) The activity can be delayed without affecting the project ‘© d) The activity has no duration Answer: b) The activity cannot be delayed without affecting the project Explanation: An activity with zero slack is part of the critical path, meaning that any delay in the activity will delay the entire project completion.Question: In the PERT model, if the optimistic time is 4 days, the most likely time is 5 days, and the pessimistic time is 9 days, what is the expected time (TE) for this activity? + a) Sdays © b) 6 days * dT days +d) 45 days Answer: b) 6 days Explanation: The formula for expected time in PERT is: _ O+4M+P ~ 6 TE Substituting the values: 444 442 TE +4(5) +9 +20+9 33 6 =F = 8 O days Inventory Management Quiz 1. Question: Which of the following is a cost associated with holding inventory? © a) Ordering cost ¢ b) Stockout cost * c) Purchase cost * d) Storage cost Answer: d) Storage costExplanation: Storage cost is a holding cost because it refers to the expenses incurred while keeping inventory in storage, such as warehousing fees, utilities, and insurance. Other holding costs include depreciation, spoilage, and the cost of capital tied up in inventory. 2. Question: What does Economic Order Quantity (EQ) aim to minimize? * a) Total holding and ordering costs # b) Total purchase costs, * ©) Total stockout costs + ) Total setup costs Answer: a) Total holding and ordering costs Explanation: The EOQ formula is designed to determine the optimal order quantity that minimizes the total cost of ordering and holding inventory. It balances the cost of placing orders and the cost of storing items 3. Question: A company has an annual demand of 8,000 units, an ordering cost of $40 per order, and a holding cost of $2 per unit per year. What is the EOQ? © a) 400 units b) 200 units ©) 800 units d) 566 units Answer: c) 800 units Explanation: Using the £0 formula /2DS __ /2(s000)(40) __ 640000 E00 VT 2 V2 = ¥320000 = 800 units4, Question: The standard deviation of daily demand is 10 units, lead time is 5 days, and the service level is 95% (Z = 1.65). What is the safety stock? * a) 50 units * b) 75 units ©) 82.5 units ¢ d) 90 units Answer: b) 75 units Explanation: The formula for safety stock is: Safety Stock = Z x o4 x VE Substituting the values: Safety Stock = 1.65 x 10 x V5 = 1.65 x 10 x 2.236 = 36.99 ~ 75 units 5. Question: In ABC analysis, which category typically represents the majority of items with the lowest total value? * a) Aitems +b) B items * 0) Citems * d)Ditems Answer: c) C itemsExplanation: In ABC analysis, C items are usually low-value items but make up the majority of the inventory. These items contribute the least to the overall value but are numerous in terms of quantity. Problem Example for Students Question: A company uses 12,000 units of a product per year, the ordering cost is $30 per order, and the holding cost is $1.50 per unit per year. Calculate the E0Q. Solution: # Demand (0) = 12,000 units * Ordering cost (S) = $30 per order Holding cost (H) = $1.50 per unit per year Using the E0Q formula: Bog = [205 = / 2C200 60) __ JOON _asn0G = 62.82 ~ 608 units a 15 Vas Explanation: The company should order 693 units each time to minimize the total holding and ordering costs.