Chap017 Inventory Control

7/30/2019 Chap017 Inventory Control

1/15

McGraw-Hill/Irwin Copyright 2011 The McGraw-Hill Companies, All Rights Reserved

Chapter 17

Inventory Control


2/15

17-2

Learning Objectives

1. Explain the different purposes for keeping inventory.

2. Understand that the type of inventory system logic thatis appropriate for an item depends on the type ofdemand for that item.

3. Calculate the appropriate order size when a one-timepurchase must be made.

4. Describe what the economic order quantity is and howto calculate it.

5. Summarize fixedorder quantity and fixedtime period

models, including ways to determine safety stock whenthere is variability in demand.

6. Discuss why inventory turn is directly related to orderquantity and safety stock.


3/15

17-3

Purposes of Inventory

1. To maintain independence of

operations

2. To meet variation in product demand

3. To allow flexibility in production

scheduling

4. To provide a safeguard for variation in

raw material delivery time

5. To take advantage of economic

purchase-order size

LO 2


4/15

17-4

Inventory Costs

1. Holding (or carrying) costs Costs for storage, handling, insurance,

and so on

2. Setup (or production change) costs Costs for arranging specific equipment

setups, and so on

3. Ordering costs

Costs of placing an order

4. Shortage costs Costs of running out

LO 3


5/15

17-5

Inventory Systems

Single-period inventory model One time purchasing decision (Example:

vendor selling t-shirts at a football game)

Seeks to balance the costs of inventoryoverstock and under stock

Multi-period inventory models Fixed-order quantity models

Event triggered (Example: running out of stock) Fixed-time period models

Time triggered (Example: Monthly sales call bysales representative)

LO 2


6/15

17-6

A Single-Period Inventory Model

Consider the problem of deciding howmany newspapers to put in a hotellobby

Too few papers and some customerswill not be able to purchase a paperand they will lose the profit associatedwith these sales

Too many papers and will have paid forpapers that were not sold during theday, lowering profit

LO 3


7/1517-7

Single-Period Inventory ModelFormulas

We should increase the size of the inventory so

long as the probability of selling the last unit added

is equal to or greater than the ratio of Cu/Co+Cu

soldbeunit willy that theProbabilit

estimatedunderdemandofunitperCostC

estimatedoverdemandofunitperCostC

:Where

u

o

P

CC

CP

uo

u

LO 3


8/15


9/1517-9

Key Differences

To use the fixedorder quantity model,the inventory remaining must becontinually monitored

In a fixed

time period model, countingtakes place only at the review period

The fixedtime period model Has a larger average inventory

Favors more expensive items

Is more appropriate for important items

Requires more time to maintain

LO 5


10/1517-10

Fixed-Order Quantity ModelModels

Demand for the product is constant anduniform throughout the period

Lead time (time from ordering to

receipt) is constant Price per unit of product is constant

Inventory holding cost is based onaverage inventory

Ordering or setup costs are constant

All demands for the product will besatisfied

LO 4


11/1517-11

Basic Fixed-Order Quantity (EOQ)Model Formula

inventoryofunitpercoststorageandholdingAnnualH

timeLeadL

pointReorderRcostsetupororderanplacingofCostS

quantityOrderQ

unitperCostC

DemandDcostannualTotalTC

H2

Q+S

Q

D+DC=TC

LO 4


12/1517-12

Establishing Safety Stock Levels

Safety stock: amount of inventory carried in

addition to expected demand

Safety stock can be determined based on many

different criteria

A common approach is to simply keep a

certain number of weeks of supply

A better approach is to use probability

Assume demand is normally distributed

Assume we know mean and standard deviation

To determine probability, we plot a normal

distribution for expected demand and note where the

amount we have lies on the curve

LO 4


13/1517-13

FixedOrder Quantity Model withSafety Stock

timeleadduringusageofdeviationStandard

yprobabilitserviceafordeviationsstandardofNumberz

daysintimeLeadLdemanddailyAveraged

unitsinpointReorderR

L

L

zLdR

LO 5


14/15

17-14

Fixed-Time Period Models

order)onitems(includeslevelinventorycurrent=I

timeleadandreviewover thedemandofdeviationstandard=

yprobabilitservicespecifiedafordeviationsstandardofnumberthe=zdemanddailyaverageforecast=d

daysintimelead=L

reviewsbetweendaysofnumberthe=T

orderedbetoquantitiy=q:Where

I-Z+L)+(Td=q

L+T

L+T

LO 5


15/15

17-15

Price Break Models

Price varies with the order size

To find the lowest-cost, need to calculate the

order quantity for each price and see if the

quantity is feasible1. Sort prices from lowest to highest and calculate

the order quantity for each price until a feasible

order quantity is found

2. If the first feasible order quantity is the lowest

price, this is best, otherwise, calculate the total

cost for the first feasible quantity and calculate

total cost at each price lower than the first feasible

order quantity

LO 4

Chap017 Inventory Control

Documents

Transcript of Chap017 Inventory Control