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L8_Inventory Management under Deterministic Demand

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7 views

L8_Inventory Management under Deterministic Demand

Uploaded by

ashi06712
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Inventory Management

• In a production environment with setup time, increasing batch size can increase the
capacity of the production process
• With respect to capacity, increase in batch size is a favorable aspect
• However, increase in batch size can increase the average inventory in the system
(refer to the ABC Shirt case)
• According to Little’s law, for a constant average flow rate, then higher average
inventory results in higher average flow time
• I.e., manufacturing lead time increases---an undesirable aspect
Inventory Management: Economies of Scale
• In a production system, there is a fixed cost for setup, which is independent of the
order size
• If a firm is placing an order with supplier, then there is fixed cost of placing an order
• For the items held in stock, the organization incurs holding cost (based on quantity
stocked and duration of stocking)
• If the required items are purchased, then the firm incurs purchase cost for the units
purchased
• In the production system, firm incurs production cost for the units produced
• The purchase cost (production cost) is independent of the order size (batch size)
• From the economic perspective, optimal order quantity (optimal production quantity)
is the quantity which minimizes the total cost
Inventory Management under Known Demand:
Continuous Review System
Economic Order Quantity (EOQ) Model

• Purchase cost (c/unit)


– Cost incurred in purchasing a unit
• Holding cost (h/unit/time)
– Cost of capital
– Obsolescence cost
– Handling cost
– Occupancy cost etc.
• Fixed ordering cost (K/order)
– Buyer time
– Transportation cost
– Receiving cost etc.
Economic order quantity (EOQ) Model

• Assumptions:
– Known and constant demand rate
– No shortages
– Zero lead-time (or constant lead time)
– No resource limitation
– Cost of inventory analysis is negligible
• Costs
– Holding cost (per unit per time)
– Purchase cost (per unit; independent of order size)
– Fixed ordering cost ( per order)
• Trade-off:
– Holding cost vs ordering cost
Inventory Profile for EOQ model
Q= order quantity, decision variable

On hand inventory
λ = demand rate
T = cycle length

-λ

T
Time, t
Economic Order Quantity Model

= + +
Costs in Economic Order Quantity Model

Total cost

Holding cost
Cost

Purchase cost

Fixed ordering cost


∗
𝑄
Quantity
Economic Order Quantity Model
• EOQ is given by,

• Total relevant cost = +


• = +=
• Average inventory = cycle inventory =
• Average flow time = =
Continuous Review System
Economic Production Quantity (EPQ) Model

• =
Economic Production Quantity (EPQ) Model
Inventory

𝑟
−𝜆
𝑟−𝜆

𝑇1 𝑇2
𝑇 Time
Economic Production Quantity (EPQ) Model
Example 1

Landmark sells Pilot ink pen imported from Japan. Per unit cost of the pen is Rs. 2000.
Annual holding cost is based on 20% interest rate. Fixed ordering cost is Rs. 1000.
Monthly demand is 50. If the lead time is three months, and Landmark follows
continuous review policy, when should the order be placed and how much should be
the order size, which minimizes the total cost?
√ √
K 1000
2𝐾 𝜆 2×1000×600
h 400 𝐸𝑂𝑄= =¿ =54.77¿
h 400
λ 600

3/12 year
𝑅=𝜆𝜏 =150
Example 1

Landmark sells Pilot ink pens that they manufacture. The per unit production cost of
the pen is Rs. 2000. Annual holding cost is based on a 20% interest rate. The fixed setup
cost is Rs. 1000. The annual production rate is 1000 units. The monthly demand is 50.
How much should be the optimal production size for Landmark? Is manufacturing
better than purchasing in the context of Landmark?
√( )√
K 1000
2𝐾 𝜆 2×1000 × 600
𝐸 𝑃 𝑄= = =86.60
( )
h 400 𝜆 600
h 1− 400× 1−
λ 600 𝑟 1000

r 1000

13856.4065

= 21908.9023

Producing is cheaper than manufacturing in this context. Hence, the firm will be better off by internal manufacturing.

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