1. Chapter: 15 Inventory management(MSC 301)
MD. TAMZIDUL ISLAM
FACULTY, BBS

2. Approaches – 9 Box Model (ABC Classification)
Low
Medium
High
Expensive
JF 46
NB 92
YG 78
Average
BY 17
NT 55
ST 52
Cheap
MR 21
DD 39
AB 33
YG 74
10,000 B A A
1,000 C A
Cost (£) B
100 C C B 10
100
1,000
Demand (unit)

3. Approaches – 9 Box Model (Strategies)
JIT & Regular Review
Maintain Safety stock
Place Annual Orders A B C

4. CONTROL METHODS FOR ‘A’ CLASS ITEMS

5. CONTROL METHODS FOR ‘B’ CLASS ITEMS

6. CONTROL METHODS FOR ‘C’ CLASS ITEMS

7. Food for Thought
By changing lot size, what type of inventory will be affected?
Reducing lead time will ensure reduced ……………..Inventory
Increasing inventory ensures better customer service but……….
How can we reduce lead time?

8. EOQ Model-Assumptions
The demand rate is Constant.
There are no other constraints on the size of each lot
Two relevant cots are considered as inventory holding cost and fixed cost per lot for ordering or setup
Decisions are made independently
No uncertainty in lead time.

9. Combined Graph of AHC, AOC and TC
Cost
Total Cost Curve
Holding Cost Curve
Ordering & Setup Costs Curve
Order Quantity
Optimal Order Quantity (Q*)

10. Inventory Order Cycle

11. Balance between two costs
Annual Holding Cost=(Average cycle inventory)(Unit Holding Cost)
Annual Ordering Cost=(No of orders/year)(Ordering or setup cost per order)
Total Cost= Annual Holding Cost+ Annual Ordering Cost
C=Q/2 (H)+D/Q (S)
C=total Annual Cost
Q=Lot size
H=Unit Holding Cost
D=Annual demand
S=Setup cost per order

12. Classroom exercise
One of the top-selling items in the container group at a museum’s gift shop is a bird feeder. Sales are 18 units per week and the supplier charges Tk60 per unit. The cost of placing an order is tk 45. Annual holding cost is 25% of a feeder’s value and the museum operates 52 weeks per year. Management chose a 390 unit lot size so that new orders could be placed less frequently. What is the annual cost of the current lot size of 390 units? Would a lot size of 468 be better?

13. Answer D=(18units/week)(52 weeks/year)=936 units
H=0.25(60/units)=tk 15
Now,
C=Q/2 (H)+D/Q (S)
=390/2 (tk 15)+936/390 (tk 45)=tk 3,033
When Q=468
=468/2 (tk 15)+936/468 (tk 45)=tk 3,600

14. Derive the EOQ: Finding Q* that Minimizes the Total Costs
Total inventory cost = Order (Setup) cost + Holding cost

15. Classroom exercise
One of the top-selling items in the container group at a museum’s gift shop is a bird feeder. Sales are 18 units per week and the supplier charges Tk60 per unit. The cost of placing an order is tk 45. Annual holding cost is 25% of a feeder’s value and the museum operates 52 weeks per year. Management chose a 390 unit lot size so that new orders could be placed less frequently.
Identify EOQ.
Determine annual cost of the current lot size of 390 units?
Determine annual cost considering the EOQ?

16. Solution
EOQ=75
Annual Cost (when Q=75)
Order per year=12.48
Annual Ordering Cost=561.80
Annual Holding Cost=562.50
Annual Inventory Cost=
Parameters: Q=390 D=936 S=45 H=15 Annual Cost (when Q=936) Order per year=2.4 Annual Ordering Cost=108 Annual Holding Cost=2,925 Annual Inventory Cost=3033

17. How to calculate Safety Stock
3 factors influencing level of SS
ROP under certainty
ROP under uncertainty
Deriving Z value

18. Classroom Exercise
Returning to the birdfeeders, suppose that demand during lead time is normally distributed with 36 units as average demand during lead time. The SD in demand per week is estimated from past records to be 50 and the lead time is four week. What safety stock should be carried for a 90% service level? What is ROP in that case?

19. Inventory Control System
Continuous Review System
Periodic Review System

20. Continuous Review System (Q System)
Remaining quantity of an item is reviewed each time a withdrawal is made from inventory to determine whether it is time to reorder. In that case Q will be fixed but P is vary .
The Inventory position (IP) measures the item’s ability to satisfy future demand, relying only on SR and on hand inventory.
Thus, IP=OH+SR-BO

21. Food for Thought
Demand for chicken at Walmart is always 25 cases a day and the lead time is always four days. The shelves were just restocked with chicken, leaving an on-hand inventory of only 10 cases. There were backorder of 50 units and open order for 200 units. What is the inventory position? Considering this situation, graphically draw the replenishment schedule for a week. Also identify the re-order point with no uncertainty in demand.

22. Exercise
On hand inventory of an item is only 10 units and the reordering point R is 100. There are no back order, but there is one open order for 200 units. Should a new order be placed?

23. Periodic Review System (P System)
An item’s inventory position is reviewed periodically rather than continuously.
Thus review of item’s inventory position IP every P time periods. Place an order equal to (T-IP) where T is the target inventory. In that case P is fixed but Q will vary.