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© 2003 Anita Lee-Post Inventory management Part 2 By Anita Lee-Post

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© 2003 Anita Lee-Post Inventory management Provide the desired level of customer service Enable cost-efficient operations Minimize the inventory investment Establish a system for managing inventory Make decisions about how much and when to order

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© 2003 Anita Lee-Post Inventory control systems Keep track of items in inventory –Inventory accuracy Keep track of items ordered and received –Inventory model

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© 2003 Anita Lee-Post Inventory control systems continued Keep track of items in inventory –Periodic counting: physical inventory is taken periodically –Cycle counting: physical inventory is taken continuously

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© 2003 Anita Lee-Post Inventory control systems continued Keep track of items ordered and received –Single-period inventory models Perishable products: order exactly what is needed – balance the risk of lost sales with zero inventory costs –Multi-period inventory models Fixed-time period models: an order is placed when the review period arrives – balance a large inventory with minimum inventory ordering and monitoring costs Fixed-order quantity models: order a predetermined amount each time an order is placed – balance the holding costs of inventory with its ordering costs

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© 2003 Anita Lee-Post Fixed-order quantity models Determine order quantity to minimize inventory costs –Economic order quantity model (EOQ) –Economic production quantity model (EPQ) –Quantity discount model (QD)

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© 2003 Anita Lee-Post EOQ assumptions Demand is known & constant - no safety stock is required Lead time (time between order placement and arrival) is known & constant – no back order is considered No quantity discounts are available Ordering (or setup) costs are constant All demand is satisfied (no shortages) The order quantity arrives in a single shipment

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© 2003 Anita Lee-Post EOQ inventory profile

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© 2003 Anita Lee-Post EOQ total costs Total annual costs = annual ordering costs + annual holding costs

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© 2003 Anita Lee-Post EOQ: Total cost equation

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© 2003 Anita Lee-Post EOQ: reorder point

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© 2003 Anita Lee-Post EOQ example Given: Annual demand = 60,000 Ordering cost = $25 per order Holding cost = $3 per item per year Number of working days per year = 240 (a)What is the EOQ? (b)What is the total cost at EOQ? (c)What is the total number of orders placed in a year? (d)What is the time between orders? (e)What is the reorder point if lead time is 3 days? (f)What is the reorder point if lead time is 5 days?

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© 2003 Anita Lee-Post EOQ example continued

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© 2003 Anita Lee-Post EOQ example continued

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