Presentation on theme: "INVENTORY Based on slides for Chase Acquilano and Jacobs, Operations Management, McGraw-Hill."— Presentation transcript:
1 INVENTORYBased on slides for Chase Acquilano and Jacobs, Operations Management, McGraw-Hill
2 Inventory System What is inventory? What is an inventory system? the stock of any item or resource used in an organization and can include: raw materials, finished products, component parts, supplies, and work-in-processWhat is an inventory system?the set of policies and controls that monitor levels of inventory and determines what levels should be maintained, when stock should be replenished, and how large orders should beWhat are some purposes of inventory?3
3 Independent vs. Dependent Demand Independent Demand (Demand for the final end-product or demand not related to other items)FinishedproductDependent Demand(Derived demand items for component parts,subassemblies,raw materials, etc)E(1)Component parts6
4 Independent Demand Inventory Issues:How much to order?When to order?Some Models:Single period (Newsvendor)Order quantity and order levelFixed order periodThis slide adds the average demand line and advances automatically.
5 Inventory Costs Holding (or carrying) costs Costs for storage, handling, insurance, etcSetup (or production change) costsCosts for arranging specific equipment setups, etcOrdering costsCosts of someone placing an order, etcShortage costsCosts of canceling an order, etc5
6 Multi-Period Models: Fixed-Order Quantity Model Model Assumptions Demand for the product is constant and uniform throughout the periodLead time (time from ordering to receipt) is constantPrice per unit of product is constantInventory holding cost is based on average inventoryOrdering or setup costs are constantAll demands for the product will be satisfied (No back orders are allowed)
7 Basic Fixed-Order Quantity Model and Reorder Point Behavior 4. The cycle then repeats.1. You receive an order quantity Q.R = Reorder pointQ = Economic order quantityL = Lead timeLQRTimeNumberof unitson hand2. Your start using them up over time.3. When you reach down to a level of inventory of R, you place your next Q sized order.
8 Basic Formulas Total Cost Total Ordering and Carrying Cost TC=Total annual costD = Yearly Demand (d is daily demand)C =Cost per unitQ =Order quantityS =Cost of placing an order or setup costR =Reorder pointL =Lead timei=Annual holding and storage cost per unit of inventory expressed at a percentageTotal CostTotal Ordering and Carrying CostEconomic Order QuantityReorder Point
9 EOQ Example (1) Problem Data Determine EOQ and ROP for:Annual Demand = 1,000 unitsDays per year considered in average daily demand = 365Cost to place an order = $10Holding cost per unit per year = $2.50Lead time = 7 daysCost per unit = $1514
10 EOQ Example (2) Problem Data Determine EOQ and ROP for –Annual Demand = 10,000 unitsDays per year considered in average daily demand = 365Cost to place an order = $10Holding cost per unit per year = 10% of cost per unitLead time = 10 daysCost per unit = $1516
11 Summary of Some Key Points Re: EOQ Model How much to order: Economic Order Quantity Q*When to order: Reorder PointTotal Cost (Item plus Holding plus Ordering)
12 EOQ Class ProblemDickens Electronics stocks and sells a particular brand of PC. It costs the firm $450 each time it places and order with the manufacturer. The cost of carrying one PC in inventory for a year is $170. The store manager estimates that total annual demand for computers will be 1200 units with a constant demand rate throughout the year. Orders are received two days after placement from a local warehouse maintained by the manufacturer. The store policy is to never have stockouts. The store is open for business every day of the year. Determine the following:Optimal order quantity per order.Minimum total annual inventory costs (i.e. carrying plus ordering – ignore item costs).The optimum number of orders per year (D/Q*)The reorder point.
13 Problem 2A store specializing in selling wrapping paper is analyzing their inventory system. Currently the demand for paper is 100 rolls per week, where the company operates 50 weeks per year.. Assume that demand is constant throughout the year. The company estimates it costs $20 to place an order and each roll of wrapping paper costs $5.00 and the company estimates the yearly cost of holding one roll of paper to be 50% of its cost.If the company currently orders 200 rolls every other week (i.e., 25 times per year), what are its current holding and ordering costs (per year)?
14 Problem 2The company is considering implementing an EOQ model. If they do this, what would be the new order size (round-up to the next highest integer)? What is the new cost? How much money in ordering and holding costs would be saved each relative to their current procedure as specified in part a)?The vendor says that if they order only twice per year (i.e., order 2500 rolls per order), they can save 10 cents on each roll of paper – i.e., each roll would now cost only $ Should they take this deal (i.e., compare with part b’s answer) [Hint: For c]. calculate the item, holding, and ordering costs in your analysis.]
15 ABC Classification System Items kept in inventory are not of equal importance in terms of:dollars investedprofit potentialsales or usage volumestock-out penalties3060ABC% of$ ValueUseSo, identify inventory items based on percentage of total dollar value, where “A” items are roughly top 15 %, “B” items as next 35 %, and the lower 65% are the “C” items26