DCSN200-Chapter 12 Inventory Management Part 2 - Fall 24
DCSN200-Chapter 12 Inventory Management Part 2 - Fall 24
Chapter 12
Inventory Management
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
• 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
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
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
2 DS
Q =
*
H
2(1,000)(10)
Q =
*
= 40,000 = 200 units
0.50
15
An EOQ Example
Determine expected number of orders
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
An EOQ Example
Determine the total annual 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?
An EOQ Example
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
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
Solution
• ROP=167 (round to the nearest integer)
29
Figure 12.6
30
H 1 − (d / p )
2 DS
Q*p =
H 1 − (d / p )
34
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
D 1,000
d =4= =
Number of days the plant is in operation 250
* 2 DS
Q =
Annual demand rate
p
H 1-
Annual production rate
37
Solution
• Q=200 units