1. Chapter 17
Inventory Control

2. Learning Objectives
Explain the different purposes for keeping inventory.
Understand that the type of inventory system logic that is appropriate for an item depends on the type of demand for that item.
Calculate the appropriate order size when a one-time purchase must be made.
Describe what the economic order quantity is and how to calculate it.
Summarize fixed–order quantity and fixed–time period models, including ways to determine safety stock when there is variability in demand.
Discuss why inventory turn is directly related to order quantity and safety stock.

3. To maintain independence of operations
Purposes of Inventory
To maintain independence of operations
To meet variation in product demand
To allow flexibility in production scheduling
To provide a safeguard for variation in raw material delivery time
To take advantage of economic purchase-order size
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4. Holding (or carrying) costs
Inventory Costs
Holding (or carrying) costs
Costs for storage, handling, insurance, and so on
Setup (or production change) costs
Costs for arranging specific equipment setups, and so on
Ordering costs
Costs of placing an order
Shortage costs
Costs of running out
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5. Single-period inventory model
Inventory Systems
Single-period inventory model
One time purchasing decision (Example: vendor selling t-shirts at a football game)
Seeks to balance the costs of inventory overstock and under stock
Multi-period inventory models
Fixed-order quantity models
Event triggered (Example: running out of stock)
Fixed-time period models
Time triggered (Example: Monthly sales call by sales representative)
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6. A Single-Period Inventory Model
Consider the problem of deciding how many newspapers to put in a hotel lobby
Too few papers and some customers will not be able to purchase a paper and they will lose the profit associated with these sales
Too many papers and will have paid for papers that were not sold during the day, lowering profit
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7. Single-Period Inventory Model Formulas
We should increase the size of the inventory so long as the probability of selling the last unit added is equal to or greater than the ratio of Cu/Co+Cu
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8. There are two general types of multi-period inventory systems
Multi-Period Models
There are two general types of multi-period inventory systems
Fixed–order quantity models
Also called the economic order quantity, EOQ, and Q-model
Event triggered
Fixed–time period models
Also called the periodic system, periodic review system, fixed-order interval system, and P-model
Time triggered
LO 5

9. The fixed–time period model
Key Differences
To use the fixed–order quantity model, the inventory remaining must be continually monitored
In a fixed–time period model, counting takes place only at the review period
The fixed–time period model
Has a larger average inventory
Favors more expensive items
Is more appropriate for important items
Requires more time to maintain
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10. Fixed-Order Quantity Model Models
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
Inventory holding cost is based on average inventory
Ordering or setup costs are constant
All demands for the product will be satisfied
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11. Basic Fixed-Order Quantity (EOQ) Model Formula
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12. Establishing Safety Stock Levels
Safety stock: amount of inventory carried in addition to expected demand
Safety stock can be determined based on many different criteria
A common approach is to simply keep a certain number of weeks of supply
A better approach is to use probability
Assume demand is normally distributed
Assume we know mean and standard deviation
To determine probability, we plot a normal distribution for expected demand and note where the amount we have lies on the curve
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13. Fixed–Order Quantity Model with Safety Stock
LO 5

14. Fixed-Time Period Models
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15. Price Break Models Price varies with the order size
To find the lowest-cost, need to calculate the order quantity for each price and see if the quantity is feasible
Sort prices from lowest to highest and calculate the order quantity for each price until a feasible order quantity is found
If the first feasible order quantity is the lowest price, this is best, otherwise, calculate the total cost for the first feasible quantity and calculate total cost at each price lower than the first feasible order quantity
LO 4