2 Inventory SystemInventory is the stock of any item or resource used in an organization and can include: raw materials, finished products, component parts, supplies, and work-in-processAn inventory system is 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 be3
3 1. To maintain independence of operations Purposes of Inventory1. To maintain independence of operations2. To meet variation in product demand3. To allow flexibility in production scheduling4. To provide a safeguard for variation in raw material delivery time5. To take advantage of economic purchase-order size4
4 Holding (or carrying) costs Inventory CostsHolding (or carrying) costsCosts for storage, handling, insurance, etcOrdering costsCosts of someone placing an order, etcShortage costsCosts of canceling an order, etc5
5 Fixed-Order Quantity Model (assumption 1) Demand for the product is constant and uniform throughout the periodLead time (time from ordering to receipt) is constantPrice per unit of product is constant
6 Fixed-Order Quantity Model (assumption 2) Inventory holding cost is based on average inventoryOrdering or setup costs are constantAll demands for the product will be satisfied (No back orders are allowed)9
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 Fixed-Order Quantity (EOQ) Model Formula TC=Total annual costD =DemandC =Cost per unitQ =Order quantityS =Cost of placing an order or setup costR =Reorder pointL =Lead timeH=Annual holding and storage cost per unit of inventoryTotalAnnual =CostAnnualPurchaseCostAnnualOrderingCostAnnualHoldingCost++12
10 solving for the optimized (cost minimized) value of Qopt Deriving the EOQsolving for the optimized (cost minimized) value of QoptWe also need a reorder point to tell us when to place an order13
11 1. What is All-Jeans’ inventory control policy? EOQ ExampleAll-Jeans sells 300 pairs of jeans per month. Holding cost is estimated to be $2 per pair of jeans per year. The production cost per pair of jeans is $20. The ordering cost is $120.1. What is All-Jeans’ inventory control policy?2. If the order lead time is 10 days, when should they place order to avoid shortage?1414
13 Days per year considered in average daily demand = 365 In-Class ExerciseAnnual 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 = $15Determine the economic order quantity and the reorder point.1616
15 Price Break (Quantity Discount) Model The more you buy, the more you save …The unit purchase cost reduces as the quantity increases.Given the incentive, how much should you buy?
16 How to find the best order quantity? Calculate the EOQ at each price rangeIf all are feasible, pick the one with minimum cost. Stop.If some are not feasible (most of the time)start with the lowest costfind the minimum feasible quantity and calculate total cost. The quantity that gives the lowest cost is the answer.
17 Quantity Discount-Example A particular raw material is available to a company at three different prices, depending on the size of the order:Less than 100 kg $20 per kg100 kg to 999 kg $19 per kgmore than 1,000 kg $18 per kgThe cost to place an order is $40. Annual demand is 3,000 kg. Holding cost is 25% of the material cost.What is the best quantity to buy each time?
19 Price-Break Example Problem Data (Part 1) A company has a chance to reduce their inventory ordering costs by placing larger quantity orders using the price-break order quantity schedule below. What should their optimal order quantity be if this company purchases this single inventory item with an ordering cost of $4, a carrying cost rate of 2% of the inventory cost of the item, and an annual demand of 10,000 units?Order Quantity(units) Price/unit($)0 to 2,499 $1.202,500 to 3,4,000 or more14
20 Price-Break Example Solution (Part 2) First, plug data into formula for each price-break value of “C”Annual Demand (D)= 10,000 unitsCost to place an order (S)= $4Carrying cost % of total cost (i)= 2%Cost per unit (C) = $1.20, $1.00, $0.98Next, determine if the computed Qopt values are feasible or notInterval from 0 to 2499, the Qopt value is feasibleInterval from , the Qopt value is not feasibleInterval from 4000 & more, the Qopt value is not feasible15
21 ABC Classification System Items kept in inventory are not of equal importance in terms of:dollars investedprofit potentialsales or usage volumestock-out penalties3060ABC% of$ 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
22 Inventory Accuracy and Cycle Counting Inventory accuracy refers to how well the inventory records agree with physical countCycle Counting is a physical inventory-taking technique in which inventory is counted on a frequent basis rather than once or twice a year27