UMLOps Analysis 63.210

Don Sutton

Functions of InventoryDecouplingStoring resourcesIrregular supply and demandQuantity discountsAvoiding stock outs

Key Inventory QuestionsHow much to orderWhen to order

Cost FactorsRelevant Costs

Cost of itemsCost of OrderingCost of HoldingCost of Stock outs

Cost Trade offOrdering vs Holding

Economic Order QuantityAssumptions

Constant demandLead time in knownInstantaneous receipt of inventoryConstant purchase costNo stock outHolding cost and ordering cost are constant

h

o

C

DCEOQ

2

Reorder Point

ROP = d x LT

Ordering Cost = Holding Cost

Holding Cost = (Q/2)Ch

Ordering Cost = (D/Q) Co

Quantity DiscountsHolding cost is dependent upon purchase

price ( Ch = IC)Purchase cost is now a factor in analysisMethodology

Compute EOQ for each discount priceIf EOQ < min for discount, adjust the Q to

minimum for discountFor each EOQ or adjusted Q, compute total

costChoose the lowest cost quantity