Scribd
Upload
24 views23 pages

Inventory Management

Uploaded by

Tanmay Sachdeva
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
24 views23 pages

Inventory Management

Uploaded by

Tanmay Sachdeva
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
You are on page 1/ 23

Inventory

Management
What Is Inventory?
 Stockof items kept to meet future
demand
 Purpose of inventory management
– How much to order?
– When to order?
– How much safety stock should be kept?
Types of Inventory
 Movement Inventories
 Buffer Inventories
 Anticipation Inventories
 Decoupling Inventories
 Cycle Inventories
Inventory Costs
 Purchase/Production cost-
Cost of purchasing or producing an item.
 Carrying cost
 cost of holding an item in inventory
 Ordering cost
 cost of replenishing inventory
 Shortage cost
 temporary or permanent loss of sales when
demand cannot be met
Two Forms of Demand
 Dependent
 Demand for items used to
produce final products
 Tires stored at a Goodyear
plant are an example of a
dependent demand item
 Independent
 Demand for items used by
external customers
 Cars, appliances, computers,
and houses are examples of
independent demand
inventory
Inventory Control Systems
 Continuous system (fixed-
order-quantity)
 constant amount ordered
when inventory declines to
predetermined level

 Periodic system (fixed-time-


period)
 order placed for variable
amount after fixed passage of
time
Some basic terms:
 Safety stock
 buffer added to on hand inventory during lead time
Stock out
an inventory shortage
Reorder Point
-Level of inventory at which a new order is placed.
Inventory Cycle
The interval b/w two successive points when orders
are placed.
Economic Order Quantity (EOQ)
Models

 EOQ
– optimal order quantity that will minimize
total inventory costs
 Basic
EOQ model
 EOQ with price breaks
Assumptions of Basic EOQ Model

 Demand is known with certainty and is


constant over time
 No shortages are allowed
 Lead time for the receipt of orders is
constant.
 Purchase price of the item is constant.
Inventory Order Cycle
Order quantity, Q
Demand
rate
Inventory Level

Reorder point, R

0 Time
Lead Lead
time time
Order Order Order Order
placed receipt placed receipt
EOQ Cost Model

A - cost of placing order D - annual demand


h - annual per-unit carrying cost Q - order quantity

AD
Annual ordering cost =
Q
hQ
Annual carrying cost =
2
AD hQ
Total cost = +
Q 2
EOQ Cost Model (cont.)

Annual
cost ($) Total Cost

Slope = 0 hQ
Carrying Cost =
2
Minimum
total cost

AD
Ordering Cost =
Q

Optimal order Order Quantity, Q


Qopt
Reorder Point

Level of inventory at which a new order is


placed
R = dL

where

d = demand rate per period


L = lead time
Case Let:
 Easton electronics Co produces 2000 TV sets
in a year for which it needs an equal number
of tubes of a certain type.Each tube costs Rs
10 and the cost to hold a tube in stock for a
year is Rs 2.40.Besides,the cost of placing an
order is RS 150,which is not related to its
size. Find its annual ordering cost, annual
holding cost and total annual cost.If the
working days in the year are 250 and lead
time is of 15 working days then find reorder
level, number of orders and inventory cycle.
EPQ/ How much to produce?

Economic production quantity (or run


size)
A contractor has to supply 10,000
bearings per day to an automobile
manufacturer. He finds that when he
starts the production run, he can
produce 25,000 bearings per day. The
cost of holding a bearing in stock for a
year is Rs 2 and the set-up cost of a
production run is Rs 1800. How
frequently should production run be
made?
Numerical
5. Race One Motors is an Indonesian car manufacturer. At its
largest manufacturer facility, in Jakarta, the company produces
subcomponents at a rate of 300 per day, and it uses these
subcomponents at a rate of 12,500 per year. Holding costs are
$2 per item per year, and setup costs are $30 per run.
a)What is the economic production quantity?
b)How many production runs per year will be made?
c)What will be the maximum inventory level?
d)What percentage of time will the facility be producing
components?
e)What is the annual cost of ordering and holding inventory?
Quantity Discounts

Price per unit decreases as order quantity


increases

AD hQ
TC = + + CD
Q 2

where

C = per unit price of the item


D = annual demand
Quantity Discount: Example
QUANTITY PRICE
A = $2,500
1 - 49 $1,400 h = $190 per computer
50 - 89 1,100 D = 200
90+ 900

2AD 2(2500)(200)
Qopt = = = 72.5 PCs
h 190

For Q = 72.5
AD hQopt
TC = + + PD = $233,784
Qopt 2

For Q = 90
AD hQ
TC = + + PD = $194,105
Q 2
Question for practice
A hardware store procures and sells
hardware items, information on an item
is given here:

 Expected annual sales 8000 units


 Ordering cost Rs 180/order
 Holding cost 10% of average inv.
Value
 The item can be purchased according
to the following schedule:
 Lot Size Unit price(Rs)
 1-999 22.00
 1000-1499 20.00
 1500-1999 19.00
 2000 & above 18.50
 Now to determine best order size.

You might also like