2 Chapter Learning Objectives Students will be able to:Use the economic order quantity (EOQ) to determine how much to order.Compute the reorder point (ROP) in determining when to order more inventory.Understand the importance of inventory control.Perform sensitivity analysis on basic inventory quantities.
3 Chapter Learning Objectives continued Students will be able to:Understand the use of safety stock with known and unknown stockout costs.Perform ABC analysis.
4 Inventory as an Important Asset Inventory can be the most expensive and the most important asset for an organizationInventory40%Other Assets60%Inventory as apercentage of total assets
5 The Inventory Process Suppliers Customers Finished Goods Raw Materials Work inProcessFabricationandAssemblyInventory StorageInventory Processing
6 Importance of Inventory Control Five Functions of InventoryDecouplingStoring resourcesAdapting to irregular supply and demandEnabling the company to take advantage of quantity discountsAvoiding stockouts and shortages
7 wish to minimize total inventory cost Inventory DecisionsHow much to orderWhen to orderwish to minimize total inventory cost
8 Inventory Costs Cost of the items Cost of ordering Cost of carrying, or holding inventoryCost of safety stockCost of stockouts
9 Ordering Costs Developing and sending purchase orders Processing and inspecting incoming inventoryBill payingInventory inquiriesUtilities, phone bills, etc., - purchasing department.Salaries/wages - purchasing department employeesSupplies (e.g., forms and paper) - purchasing department
12 Costs as Functions of Order Quantity AnnualCostOrder QuantityQ*Total Cost CurveCarrying (holding)Cost CurveOrdering (set-up)Minimum
13 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.
14 EOQ : Basic Assumptions Demand is known and constantLead time is known and constantReceipt of inventory is instantaneousQuantity discounts are not possibleThe only variable costs are the cost of setting up or placing an order, and the cost of holding or storing inventory over timeStockouts can be completely avoided if orders are placed at the appropriate time
15 Developing the EOQ Annual ordering cost: Annual holding or carrying cost:Total inventory cost:
16 EOQ 2 DC IP Per Unit Carrying Cost: 2DC * Q = C h Percentage Carrying Cost:IPDC2
17 Inputs and Outputs of the EOQ Model ModelsInput ValuesOutput ValuesAnnual Demand(D)Ordering Cost(Co)Carrying Cost(Ch)Lead Time(L)Demand Per Day(d)EconomicOrderQuantity(EOQ)ReorderPoint(ROP)
18 The Reorder Point (ROP) Curve ROP = (Demand per day) x (Lead time for a new order, in days) = d x LInventory Level (Units)Q*ROP(Units)Slope = Units/Day = dLead Time (Days)L
19 The Use of Safety Stock Inventory on Hand Time Stockout Safety Stock is avoidedSafety Stock
20 The Use of Safety Stock Known stockout costs: Unknown stockout costs: Given probability of demand, find total cost for each safety stock alternativeUnknown stockout costs:Set service level; use normal distribution
22 Summary of ABC Analysis Group A Items - CriticalGroup B Items - ImportantGroup C Items - Not That ImportantInventoryGroupDollarUsage (%)Items (%)Are ComplexQuantitative ControlTechniques Used?ABC702010YesIn some casesNo
23 ABC Inventory Analysis 100908070605040302010Percent of Inventory ItemsPercent of AnnualDollar UsageAItemsB ItemsC Items
24 ABC Inventory Policies Greater expenditure on supplier development for A items than for B items or C itemsTighter physical control on A items than on B items or on C itemsGreater expenditure on forecasting A items than on B items or on C items