1. Chapter 15 Inventory Systems for Independent Demand
The Definition and Purpose of Inventory
Inventory Costs
Independent vs. Dependent Demand
Basic Fixed Order Quantity Model
Basic Fixed Time Period Model
Miscellaneous Systems and Issues 2 2

2. Inventory
Definition--The stock of any item or resource used in an organization
Raw materials
Finished products
Component parts
Supplies
Work in process 3 3

3. Purposes of Inventory 1. To maintain independence of operations
2. To meet variation in product demand
3. To allow flexibility in production scheduling
4. To provide a safeguard for variation in raw material delivery time
5. To take advantage of economic purchase-order size 4 4

4. Inventory Costs Holding (or carrying) costs
Setup (or production change) costs
Ordering costs
Shortage costs 5 5

5. Independent vs. Dependent Demand
Independent Demand
(Demand not related to other items)
Dependent Demand
(Derived)
E(1) 6 6

6. Classifying Inventory Models
Fixed-Order Quantity Models
Event triggered
Fixed-Time Period Models
Time triggered 7 7

7. Fixed-Order Quantity Models Assumptions
Demand for the product is constant and uniform throughout the period
Lead time (time from ordering to receipt) is constant
Price per unit of product is constant 8 8

8. Fixed-Order Quantity Models Assumptions
Inventory holding cost is based on average inventory
Ordering or setup costs are constant
All demands for the product will be satisfied (No back orders are allowed) 9 9

9. EOQ Model--Basic Fixed-Order Quantity Model
Exhibit 15.3
R = Reorder point
Q = Economic order quantity
L = Lead time L Q R
Time
Number
of units
on hand 10 10

10. Cost Minimization Goal
Total Cost
Holding
Costs
Annual Cost of
Items (DC)
Ordering Costs
QOPT
Order Quantity (Q) 11 11

11. Basic Fixed-Order Quantity Model
Total Annual Cost =
Annual
Purchase
Cost
Ordering
Holding +
TC Total annual cost
D Demand
C Cost per unit
Q Order quantity
S Cost of placing an order
or setup cost
R Reorder point
L Lead time
H Annual holding and storage cost
per unit of inventory 12 12

12. Deriving the EOQ
Using calculus, we take the derivative of the total cost function and set the derivative (slope) equal to zero 13 13

13. EOQ Example Annual Demand = 1,000 units
Days per year considered in average daily demand = 365
Cost to place an order = $10
Holding cost per unit per year = $2.50
Lead time = 7 days
Cost per unit = $15
Determine the economic order quantity and the reorder point. 14 14

14. Solution Why do we round up?
When the inventory level reaches 20, order 90 units. 15 15

15. In-Class Exercise Annual Demand = 10,000 units
Days per year considered in average daily demand = 365
Cost to place an order = $10
Holding cost per unit per year = 10% of cost per unit
Lead time = 10 days
Cost per unit = $15
Determine the economic order quantity and the reorder point. 16 16

16. Solution
When the inventory level reaches 274, order 366 units. 17 17

17. Miscellaneous Systems Bin Systems
Two-Bin System
Full
Empty
Order One Bin of
Inventory
One-Bin System
Periodic Check
Order Enough to
Refill Bin 25 25

18. ABC Inventory Planning
ABC classification scheme divides inventory items into three groupings:
ü High dollar volume (A)
ü Moderate dollar volume (B)
ü Low dollar volume (C)

19. ABC Inventory Planning

20. ABC Classification ü A items constitute roughly the top 15
percent of the items
ü B items the next 35 percent
ü C items the last 50 percent