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DCSN200-Chapter 12 Inventory Management Part 2 - Fall 24

Inventory management

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0% found this document useful (0 votes)
23 views37 pages

DCSN200-Chapter 12 Inventory Management Part 2 - Fall 24

Inventory management

Uploaded by

omarazakir
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 37

Operations Management: Sustainability

and Supply Chain Management


Thirteenth Edition, Global Edition

Chapter 12
Inventory Management

Copyright © 2020 Pearson Education Ltd. All Rights Reserved.


2

Outline
• Global Company Profile: Amazon.com
• The Importance of Inventory
• Managing Inventory
• Inventory Models
• Inventory Models for Independent Demand
• Probabilistic Models and Safety Stock
• Single-Period Model
Inventory Models for Independent
Demand
4

Inventory Models for Independent


Demand
Need to determine when and how much to order
1. Basic economic order quantity (EOQ) model
2. Production order quantity model
3. Quantity discount model
5

Basic EOQ Model


Important assumptions
1. Demand is known, constant, and independent
2. Lead time is known and constant
3. Receipt of inventory is instantaneous and complete
4. Quantity discounts are not possible
5. Only variable costs are setup (or ordering) and holding
6. Stockouts can be completely avoided
6

Inventory Usage Over Time


Figure 12.3

• Let Q be the order size. Whenever the inventory level reaches zero, order Q.
• Now we can determine the optimal value of Q that minimizes cost per unit
time.
7

Minimizing Costs
Objective is to minimize total costs

Figure 12.4c
8

Minimizing Costs
• By minimizing the sum of setup (or ordering) and holding
costs, total costs are minimized
• Optimal order size Q* will minimize total cost
• A reduction in either cost reduces the total cost
• Optimal order quantity occurs when holding cost and setup
cost are equal
9

Minimizing Costs
The necessary steps are:
1. Develop an expression for setup or ordering cost
2. Develop an expression for holding cost
3. Set setup (order) cost equal to holding cost
4. Solve the equation for the optimal order quantity.
10

Minimizing Costs
Q = Number of units per order

Q* = Optimal number of units per order (EOQ)

D = Annual demand in units for the inventory item

S = Setup or ordering cost for each order

H = Holding or carrying cost per unit per year

Annual setup cost = ( Number of orders placed per year )  ( Setup or order cost per order )
 Annual demand 
= 
 Number of units in each order 
(Setup or order cost per order )
 D
=  S
 Q
11

Minimizing Costs

Annual holding cost = ( Average inventory level)  ( Holding cost per unit per year )
 Order quantity 
= 
  ( Holding cost per unit per year )
2
 Q
=  H
 2

D
Annual setup cost = S
Q
Q
Annual holding cost = H
2
12

Minimizing Costs

D Q
Annual setup cost = S Annual holding cost = H
Q 2

Optimal order quantity is found when annual setup cost


equals annual holding cost
Solving for Q*
 D  Q 2DS = Q 2 H
 Q  S =   H
2 2 DS
Q2 =
H
2 DS
Q* =
H
13

An EOQ Example
• Sharp, Inc., a company that markets painless hypodermic
needles to hospitals, would like to reduce its inventory cost
by determining the optimal number of hypodermic needles
to obtain per order
• The annual demand is 1,000 units; the setup or ordering
cost is $10 per order; and the holding cost per unit per
year is $.50. Assume a 250-day working year.
• Determine optimal number of needles to order
• Determine expected number of orders
• Determine optimal time between orders
• Determine the total annual cost
14

An EOQ Example
Determine optimal number of needles to order

D = 1,000 units

S = $10 per order

H = $.50 per unit per year

2 DS
Q =
*

H
2(1,000)(10)
Q =
*
= 40,000 = 200 units
0.50
15

An EOQ Example
Determine expected number of orders

D = 1,000 units Q* = 200 units


S = $10 per order

H = $.50 per unit per year

Demand D
Expected number of orders = N = =
Order quantity Q *
1,000
N= = 5 orders per year
200
16

An EOQ Example
Determine optimal time between orders

D = 1,000 units Q* = 200 units


S = $10 per order N = 5 orders/year

H = $.50 per unit per year

Number of working days per year


Expected time between orders = T =
Expected number of orders
250
T= = 50 days between orders
5
17

An EOQ Example
Determine the total annual cost

D = 1,000 units Q* = 200 units


S = $10 per order N = 5 orders/year

H = $.50 per unit per year T = 50 days


Total annual cost = Setup cost + Holding cost
D Q
TC = S+ H
Q 2
1,000 200
= ($10) + ($.50)
200 2
= (5)($10) + (100)($.50)
= $50 + $50 = $100
18

The EOQ Model


When including actual cost of material P

Total annual cost = Setup cost + Holding cost + Product cost

D Q
TC = S + H + PD
Q 2
19

Robust Model
• The EOQ model is robust
• It works even if all parameters and assumptions are not met
• The total cost curve is relatively flat in the area of the EOQ

Example
• Management in the Sharp, Inc., underestimates total annual
demand by 50% (say demand is actually 1,500 needles
rather than 1,000 needles) while using the same Q. How will
the annual inventory cost be impacted?
20

Example Continued
• Management in the Sharp, Inc., underestimates total annual
demand by 50% (say demand is actually 1,500 needles
rather than 1,000 needles) while using the same Q. How will
the annual inventory cost be impacted?

• If Demand is actually 1,500 needles rather than


1,000, the Q optimal should be Q=244.9 based on
D=1,500
• However, management is using the order quantity
of Q=200 (because the underestimation wasn’t
anticipated)
21

An EOQ Example

Ordering old Q* (200) Ordering new Q* (244.9)


D Q
TC = S + H 1,500 244.9
Q 2 = ($10) + ($.50)
244.9 2
1,500 200 = 6.125($10) + 122.45($.50)
= ($10) + ($.50)
200 2
= $61.25 + $61.22 = $122.47
= $75 + $50 = $125

• 122.27 is only 2% less than the total cost of $125 when


the order quantity was 200
22

Test your Knowledge


The Warren W. Fisher Computer Corporation purchases
8,000 transistors each year as components in
minicomputers. The unit cost of each transistor is $10, and
the cost of carrying one transistor in inventory for a year is
$3. Ordering cost is $30 per order.
What are (a) the optimal order quantity, (b) the expected
number of orders placed each year, and (c) the expected
time between orders? Assume that Fisher operates on a
200-day working year.
23

Solution
a. 𝑄∗ = 400
b. N=20 orders
c. Time between orders= 10 working days
24

Reorder Points
• EOQ answers the “how much” question
• The reorder point (ROP) tells “when” to order
• Lead time (L) is the time between placing and receiving an
order

ROP = (Demand per day)(Lead time for a new order in days)


ROP = d  L
D
d=
Number of working days in a year
25

Reorder Point Curve


26

Reorder Point Example


• Demand = 8,000 iPhones per year
• 250 working day year
• Lead time for orders is 3 working days, may take 4 days

D
d=
Number of working days in a year
= 8,000 / 250 = 32 units
ROP = d  L
= 32 units per day  3 days = 96 units
= 32 units per day  4 days = 128 units
27

Test Your Knowledge


Annual demand for notebook binders at Meyer’s Stationery
Shop is 10,000 units. Brad Meyer operates his business 300
days per year and finds that deliveries from his supplier
generally take 5 working days. Calculate the reorder point
for the notebook binders.
28

Solution
• ROP=167 (round to the nearest integer)
29

Production Order Quantity Model


1. Used when inventory builds up over a period of time after
an order is placed
2. Used when units are produced and sold simultaneously

Figure 12.6
30

Production Order Quantity Model


Q = Number of units per order p = Daily production rate
H = Holding cost per unit per year d = Daily demand (usage) rate
t = Length of the production run in days
31

Production Order Quantity Model


Q = Number of units per order p = Daily production rate
H = Holding cost per unit per year d = Daily demand (usage) rate
t = Length of the production run in days
33

Production Order Quantity Model


Q = Number of units per order p = Daily production rate
H = Holding cost per unit per year d = Daily demand (usage) rate
t = Length of the production run in days

Setup cost = ( D/Q) S


Holding cost = 12 HQ1 − (d p )
D 1
S = HQ 1 − (d / p ) 
Q 2
2 DS
Q =
2

H 1 − (d / p ) 
2 DS
Q*p =
H 1 − (d / p ) 
34

Production Order Quantity Example


Nathan Manufacturing, Inc., makes and sells specialty
hubcaps for the retail automobile aftermarket. Nathan’s
forecast for its wire-wheel hubcap is 1,000 units next year,
with an average daily demand of 4 units. However, the
production process is most efficient at 8 units per day. So
the company produces 8 per day but uses only 4 per day.
The company wants to solve for the optimum number of
units per order. (Note: This plant schedules production of
this hubcap only as needed, during the 250 days per year
the shop operates.)
• S=$10
• H =$0.50 per unit per year
35

Production Order Quantity Example


D = 1,000 units p = 8 units per day
S = $10 d = 4 units per day
H = $0.50 per unit per year

2 DS
Q*p =
H 1 − (d / p ) 
2(1,000)(10)
Q*p =
0.50 1 − (4 / 8) 
20,000
= = 80,000
0.50(1 / 2)
= 282.8 hubcaps, or 283 hubcaps
36

Production Order Quantity Model


Note:

D 1,000
d =4= =
Number of days the plant is in operation 250

When annual data are used the equation becomes:

* 2 DS
Q =
 Annual demand rate 
p

H 1- 
 Annual production rate 
37

Test Your Knowledge


Leonard Presby, Inc., has an annual demand rate of 1,000
units but can produce at an average production rate of 2,000
units. Setup cost is $10; carrying cost is $1. What is the
optimal number of units to be produced each time?
38

Solution
• Q=200 units

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