INVENTORY

MANAGEMENT

SYSTEM

The Material Flow Cycle

Input Wait for Wait to Move Wait in queue Setup Run Outputinspection be moved time for operator time time

Cycle time95% 5%

The EOQ ModelQ = Number of pieces per order

Q* = Optimal number of pieces per order (EOQ)D = Annual demand in units for the inventory itemS = Setup or ordering cost for each orderH = Holding or carrying cost per unit per year

Annual holding cost = (Average inventory level) x (Holding cost per unit per year)

Order quantity2= (Holding cost per unit per year)

= (H)Q2

Basic EOQ Model

1. Demand is known, constant, and independent2. Lead time is known and constant3. Receipt of inventory is instantaneous and

complete4. Quantity discounts are not possible5. Only variable costs are setup and holding6. Stockouts can be completely avoided

Important assumptions

An EOQ Example

Determine optimal number of needles to orderD = 1,000 unitsS = $10 per orderH = $.50 per unit per year

Q* = 2DSH

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

Holding, Ordering, and Setup Costs

Holding costs - the costs of holding or “carrying” inventory over time

Ordering costs - the costs of placing an order and receiving goods

Setup costs - cost to prepare a machine or process for manufacturing an order

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