1. Chapter 6 Inventory Control Models 6-1
To accompany Quantitative Analysis for Management, 8e
by Render/Stair/Hanna
6-1

2. Chapter Learning Objectives
Students will be able to:
Understand the importance of inventory control.
Use the economic order quantity (EOQ) to determine how much to order.
Compute the reorder point (ROP) in determining when to order more inventory.
Perform sensitivity analysis on basic inventory quantities.
To accompany Quantitative Analysis for Management, 8e
by Render/Stair/Hanna
6-2

3. Chapter Learning Objectives continued
Students will be able to:
Determine the economic order quantity without the instantaneous receipt assumption.
Handle inventory problems that allow quantity discounts or have planned shortages.
Understand the use of safety stock with known and unknown stockout costs.
Perform ABC analysis.
To accompany Quantitative Analysis for Management, 8e
by Render/Stair/Hanna
6-3

4. Chapter Outline 6.1 Introduction 6.2 Importance of Inventory Control
6.3 Inventory Decision
6.4 Economic Order Quantity(EOQ): Determining How Much to Order
6.5 Reorder Point: Determining When to Order
To accompany Quantitative Analysis for Management, 8e
by Render/Stair/Hanna
6-4

5. Chapter Outline - continued
6.6 EOQ without the Instantaneous Receipt Assumption
6.7 Quantity Discount Models
6.8 Use of Safety Stock
6.9 ABC Analysis
6.10 Sensitivity Analysis
To accompany Quantitative Analysis for Management, 8e
by Render/Stair/Hanna
6-5

6. Inventory as an Important Asset
Inventory can be the most expensive and the most important asset for an organization
Inventory
40%
Other Assets
60%
Inventory as a
percentage of total assets
To accompany Quantitative Analysis for Management, 8e
by Render/Stair/Hanna
6-6

7. Inventory Planning and Control - Fig. 6.1
Planning on what Inventory to Stock and How to Acquire It
Forecasting Parts/Product Demand
Controlling Inventory Levels
Feedback Measurements to Revise Plans and Forecasts
To accompany Quantitative Analysis for Management, 8e
by Render/Stair/Hanna
6-7

8. The Inventory Process Suppliers Customers Finished Goods Raw Materials
Work in
Process
Fabrication
and
Assembly
Inventory Storage
Inventory Processing
To accompany Quantitative Analysis for Management, 8e
by Render/Stair/Hanna
6-8

9. Importance of Inventory Control
Five Functions of Inventory
Decoupling
Storing resources
Adapting to irregular supply and demand
Enabling the company to take advantage of quantity discounts
Avoiding stockouts and shortages
To accompany Quantitative Analysis for Management, 8e
by Render/Stair/Hanna
6-9

10. wish to minimize total inventory cost
Inventory Decisions
How much to order
When to order
wish to minimize total inventory cost
To accompany Quantitative Analysis for Management, 8e
by Render/Stair/Hanna
6-10

11. Inventory Costs Cost of the items Cost of ordering
Cost of carrying, or holding inventory
Cost of safety stock
Cost of stockouts
To accompany Quantitative Analysis for Management, 8e
by Render/Stair/Hanna
6-11

12. Ordering Costs Developing and sending purchase orders
Processing and inspecting incoming inventory
Bill paying
Inventory inquiries
Utilities, phone bills, etc., - purchasing department.
Salaries/wages - purchasing department employees
Supplies (e.g., forms and paper) - purchasing department
To accompany Quantitative Analysis for Management, 8e
by Render/Stair/Hanna
6-12

13. Carrying Costs Cost of capital Taxes Insurance Spoilage Theft
Obsolescence
Salaries/wages - warehouse employees
Utilities/building costs - warehouse
Supplies (e.g., forms, paper) - warehouse
To accompany Quantitative Analysis for Management, 8e
by Render/Stair/Hanna
6-13

14. Inventory Usage Over Time - Fig. 6.2
To accompany Quantitative Analysis for Management, 8e
by Render/Stair/Hanna
6-14

15. Costs as Functions of Order Quantity - Fig. 6.3
Annual
Cost
Order Quantity Q*
Total Cost Curve
Carrying (holding)
Cost Curve
Ordering (set-up)
Minimum
To accompany Quantitative Analysis for Management, 8e
by Render/Stair/Hanna
6-15

16. Costs as Functions of Order Quantity - Fig. 6.3
Total Cost
Minimum Cost
Carry Cost
Order Cost
Optimal Quantity
To accompany Quantitative Analysis for Management, 8e
by Render/Stair/Hanna
6-16

17. Steps in Finding the Optimum Inventory
Develop an expression for the ordering cost.
Develop and expression for the carrying cost.
Set the ordering cost equal to the carrying cost.
Solve this equation for the optimum desired.
To accompany Quantitative Analysis for Management, 8e
by Render/Stair/Hanna
6-17

18. EOQ : Basic Assumptions
Demand is known and constant
Lead time is known and constant
Receipt of inventory is instantaneous
Quantity discounts are not possible
The only variable costs are the cost of setting up or placing an order, and the cost of holding or storing inventory over time
Stockouts can be completely avoided if orders are placed at the appropriate time
To accompany Quantitative Analysis for Management, 8e
by Render/Stair/Hanna
6-18

19. Developing the EOQ Annual ordering cost:
Annual holding or carrying cost:
Total inventory cost:
To accompany Quantitative Analysis for Management, 8e
by Render/Stair/Hanna
6-19

20. EOQ 2 DC IP Per Unit Carrying Cost: 2DC * = Q C h
Percentage Carrying Cost: IP DC 2
To accompany Quantitative Analysis for Management, 8e
by Render/Stair/Hanna
6-20

21. Inputs and Outputs of the EOQ Model
Models
Input Values
Output Values
Annual Demand
(D)
Ordering Cost
(Co)
Carrying Cost
(Ch)
Lead Time
(L)
Demand Per Day
(d)
Economic
Order
Quantity
(EOQ)
Reorder
Point
(ROP)
To accompany Quantitative Analysis for Management, 8e
by Render/Stair/Hanna
6-21

22. The Reorder Point (ROP) Curve - Fig. 6.4
ROP = (Demand per day) x (Lead time for a new order, in days) = d x L
Inventory Level (Units) Q*
ROP
(Units)
Slope = Units/Day = d
Lead Time (Days) L
To accompany Quantitative Analysis for Management, 8e
by Render/Stair/Hanna
6-22

23. Inventory Control and the Production Process
Portion of
Cycle
Maximum Inventory
Level
Inventory Level
Demand
Portion
of Cycle
Demand
Portion
of Cycle
Time
To accompany Quantitative Analysis for Management, 8e
by Render/Stair/Hanna
6-23

24. Production Quantity EOQ
Annual Carrying Cost:
Annual Ordering Cost:
Setup Cost:
Ordering Costs:
To accompany Quantitative Analysis for Management, 8e
by Render/Stair/Hanna
6-24

25. Production Quantity EOQ
To accompany Quantitative Analysis for Management, 8e
by Render/Stair/Hanna
6-25

26. Quantity Discount Models - Fig. 6.6
To accompany Quantitative Analysis for Management, 8e
by Render/Stair/Hanna
6-26

27. Quantity Discount Steps
1. Calculate Q for each discount
2. Adjust Q upward if quantity is too low for discount
3. Compute total cost for each discount
4. Select Q with the the lowest total cost
To accompany Quantitative Analysis for Management, 8e
by Render/Stair/Hanna
6-27

28. The Use of Safety Stock Fig. 6.7
Inventory on
Hand
Stockout
Time
is avoided
Safety Stock
To accompany Quantitative Analysis for Management, 8e
by Render/Stair/Hanna
6-28

29. The Use of Safety Stock Known stockout costs: Unknown stockout costs:
Given probability of demand, find total cost for each safety stock alternative
Unknown stockout costs:
Set service level; use normal distribution
To accompany Quantitative Analysis for Management, 8e
by Render/Stair/Hanna
6-29

30. Service Level versus Carrying Costs
To accompany Quantitative Analysis for Management, 8e
by Render/Stair/Hanna
6-30

31. Summary of ABC Analysis Table 6.6
Group A Items - Critical
Group B Items - Important
Group C Items - Not That Important
Inventory
Group
Dollar
Usage (%)
Items (%)
Are Complex
Quantitative Control
Techniques Used? A B C 70 20 10
Yes
In some cases No
To accompany Quantitative Analysis for Management, 8e
by Render/Stair/Hanna
6-31

32. ABC Inventory Analysis
100 90 80 70 60 50 40 30 20 10
Percent of Inventory Items
Percent of Annual
Dollar Usage A
Items
B Items
C Items
To accompany Quantitative Analysis for Management, 8e
by Render/Stair/Hanna
6-32

33. ABC Inventory Policies
Greater expenditure on supplier development for A items than for B items or C items
Tighter physical control on A items than on B items or on C items
Greater expenditure on forecasting A items than on B items or on C items
To accompany Quantitative Analysis for Management, 8e
by Render/Stair/Hanna
6-33