CHAPTER 13
Inventory Management
Sections 13.1 to 13.5 (basic EOQ)
Raw materials and purchased parts
Work-in-process (WIP)
Finished goods inventories or merchandise
Tools and supplies
Maintenance and repairs (MRO) inventory
Goods-in-transit to warehouses or customers (pipeline inventory)
Types of Inventory (Refer pg. 552)
13-3
Functions of Inventory Control (Refer pg. 553)
To meet customer demand
To smooth production
To decouple operations
To protect against stock outs
To produce economically
To hedge against price increase
Objectives of Inventory Control (Refer pg. 554)
To achieve satisfactory levels of customer service by keeping the costs low
Inventory Management: 1. Establish a system for tracking items in inventory
2. Make decisions about When to order
How much to order
Requirements for Effective Inventory Management (Refer pg. 555) 1. A system to keep track of inventory
2. A reliable forecast of demand
3. Knowledge of lead time and lead time variability
4. Reasonable estimates of
holding costs
ordering costs
shortage costs
5. A classification system for inventory items
Inventory Counting Systems (Refer pg. 555)
? Periodic System ? Physical count of items in inventory made at periodic intervals
? Perpetual Inventory System ? System that keeps track of removals from inventory continuously, thus
monitoring current levels of each item ? An order is placed when inventory drops to a predetermined minimum level
Two-bin system Two containers of inventory; reorder when the first is empty
Inventory Costs (Refer pg. 557)
? Purchase cost ? The amount paid to buy the inventory
? Holding (carrying) costs ? Cost to carry an item in inventory for a length of time, usually a year
? Ordering costs ? Costs of ordering and receiving inventory
? Setup costs ? The costs involved in preparing equipment for a job ? Analogous to ordering costs
? Shortage costs ? Costs resulting when demand exceeds the supply of inventory; often unrealized profit
per unit
ABC Classification System (Refer pg. 558)
A-B-C approach Classifying inventory according to some measure of importance, and allocating control efforts
accordingly
A items (very important)
10 to 20 percent of the number of items in inventory and about 60 to 70 percent of the annual dollar value
B items (moderately important)
C items (least important)
50 to 60 percent of the number
of items in inventory but only
about 10 to 15 percent of the
annual dollar value
ABC Classification System (Refer pg. 559)
How Much to Order: EOQ Models (Refer pg. 561)
Economic order quantity models identify the optimal order quantity by minimizing the sum of annual costs that vary with order size and frequency
1. The basic economic order quantity model
2. The economic production quantity model
3. The quantity discount model
Basic EOQ Model (Refer pg. 561)
The basic EOQ model is used to find a fixed order quantity that will minimize total annual inventory costs
Assumptions: 1. Only one product is involved
2. Annual demand requirements are known
3. Demand is even throughout the year
4. Lead time does not vary
5. Each order is received in a single delivery
6. There are no quantity discounts
The Inventory Cycle (Refer pg. 562)
Profile of Inventory Level Over Time
Quantity
on hand
Q
Receive
order
Place
order Receive
order Place
order
Receive
order
Lead time
Reorder
point
Usage
rate
Time
Total Annual Cost (Refer pg. 563)
orderper cost Ordering
yearper unitsin usually Demand,
yearper usually unit,per cost (carrying) Holding
unitsin quantity Order
where
2
Cost Ordering AnnualCost Holding AnnualCost Total
?
?
?
?
??
??
S
D
H
Q
S Q
D H
Q
Total Cost Minimization (Refer pg. 563)
Order Quantity
(Q)
The Total-Cost Curve is U-Shaped
Ordering Costs
QO
A n
n u
a l
C o
s t
(optimal order quantity)
Holding Costs
S Q
D H
Q TC ??
2
Finding EOQ (Refer pg. 564)
The total cost curve reaches its minimum where the carrying and ordering costs are equal.
H
DS Q
2 O ?
yearper usually unit,per cost carrying)(or Holding
orderper cost Ordering
yearper unitsin usually Demand,
units)(in Quantity Ordering Economic O
?
?
?
?
H
S
D
Q
Example (pg.564)
A tire company expects to sell approximately 9600 tires in a year. Annual carrying cost for one tire is estimated to be $16. the cost for the company to process each order is estimated to be $75. (288 working days)
In what quantities should they order?
How many times should they order in a year?
What is the length of the order cycle?
What is the total inventory cost not including the cost of the tires?
Example 2
A tire company expects to sell approximately 900 tires in a month. Annual carrying cost for one tire is estimated to be $15. the cost for the company to process each order is estimated to be $80. The lead time for delivery is (4) days.
a) What is the Economic Ordering Quantity (EOQ)?
b) How many times in a year should she reorder based on EOQ?
c) What is the length of an order cycle?
d) What is the reorder point (ROP)? (assume 365 days in a year)
e) What will be the total inventory cost if the items are ordered based on EOQ?
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Home>Business & Finance homework help>Operations Management homework help>Operation Management
Operations Management MGT 320
CHAPTER 13
Inventory Management
Sections 13.1 to 13.5 (basic EOQ)
Raw materials and purchased parts
Work-in-process (WIP)
Finished goods inventories or merchandise
Tools and supplies
Maintenance and repairs (MRO) inventory
Goods-in-transit to warehouses or customers (pipeline inventory)
Types of Inventory (Refer pg. 552)
13-3
Functions of Inventory Control (Refer pg. 553)
To meet customer demand
To smooth production
To decouple operations
To protect against stock outs
To produce economically
To hedge against price increase
Objectives of Inventory Control (Refer pg. 554)
To achieve satisfactory levels of customer service by keeping the costs low
Inventory Management: 1. Establish a system for tracking items in inventory
2. Make decisions about When to order
How much to order
Requirements for Effective Inventory Management (Refer pg. 555) 1. A system to keep track of inventory
2. A reliable forecast of demand
3. Knowledge of lead time and lead time variability
4. Reasonable estimates of
holding costs
ordering costs
shortage costs
5. A classification system for inventory items
Inventory Counting Systems (Refer pg. 555)
? Periodic System ? Physical count of items in inventory made at periodic intervals
? Perpetual Inventory System ? System that keeps track of removals from inventory continuously, thus
monitoring current levels of each item ? An order is placed when inventory drops to a predetermined minimum level
Two-bin system Two containers of inventory; reorder when the first is empty
Inventory Costs (Refer pg. 557)
? Purchase cost ? The amount paid to buy the inventory
? Holding (carrying) costs ? Cost to carry an item in inventory for a length of time, usually a year
? Ordering costs ? Costs of ordering and receiving inventory
? Setup costs ? The costs involved in preparing equipment for a job ? Analogous to ordering costs
? Shortage costs ? Costs resulting when demand exceeds the supply of inventory; often unrealized profit
per unit
ABC Classification System (Refer pg. 558)
A-B-C approach Classifying inventory according to some measure of importance, and allocating control efforts
accordingly
A items (very important)
10 to 20 percent of the number of items in inventory and about 60 to 70 percent of the annual dollar value
B items (moderately important)
C items (least important)
50 to 60 percent of the number
of items in inventory but only
about 10 to 15 percent of the
annual dollar value
ABC Classification System (Refer pg. 559)
How Much to Order: EOQ Models (Refer pg. 561)
Economic order quantity models identify the optimal order quantity by minimizing the sum of annual costs that vary with order size and frequency
1. The basic economic order quantity model
2. The economic production quantity model
3. The quantity discount model
Basic EOQ Model (Refer pg. 561)
The basic EOQ model is used to find a fixed order quantity that will minimize total annual inventory costs
Assumptions: 1. Only one product is involved
2. Annual demand requirements are known
3. Demand is even throughout the year
4. Lead time does not vary
5. Each order is received in a single delivery
6. There are no quantity discounts
The Inventory Cycle (Refer pg. 562)
Profile of Inventory Level Over Time
Quantity
on hand
Q
Receive
order
Place
order Receive
order Place
order
Receive
order
Lead time
Reorder
point
Usage
rate
Time
Total Annual Cost (Refer pg. 563)
orderper cost Ordering
yearper unitsin usually Demand,
yearper usually unit,per cost (carrying) Holding
unitsin quantity Order
where
2
Cost Ordering AnnualCost Holding AnnualCost Total
?
?
?
?
??
??
S
D
H
Q
S Q
D H
Q
Total Cost Minimization (Refer pg. 563)
Order Quantity
(Q)
The Total-Cost Curve is U-Shaped
Ordering Costs
QO
A n
n u
a l
C o
s t
(optimal order quantity)
Holding Costs
S Q
D H
Q TC ??
2
Finding EOQ (Refer pg. 564)
The total cost curve reaches its minimum where the carrying and ordering costs are equal.
H
DS Q
2 O ?
yearper usually unit,per cost carrying)(or Holding
orderper cost Ordering
yearper unitsin usually Demand,
units)(in Quantity Ordering Economic O
?
?
?
?
H
S
D
Q
Example (pg.564)
A tire company expects to sell approximately 9600 tires in a year. Annual carrying cost for one tire is estimated to be $16. the cost for the company to process each order is estimated to be $75. (288 working days)
In what quantities should they order?
How many times should they order in a year?
What is the length of the order cycle?
What is the total inventory cost not including the cost of the tires?
Example 2
A tire company expects to sell approximately 900 tires in a month. Annual carrying cost for one tire is estimated to be $15. the cost for the company to process each order is estimated to be $80. The lead time for delivery is (4) days.
a) What is the Economic Ordering Quantity (EOQ)?
b) How many times in a year should she reorder based on EOQ?
c) What is the length of an order cycle?
d) What is the reorder point (ROP)? (assume 365 days in a year)
e) What will be the total inventory cost if the items are ordered based on EOQ?
Applied Sciences
Architecture and Design
Biology
Business & Finance
Chemistry
Computer Science
Geography
Geology
Education
Engineering
English
Environmental science
Spanish
Government
History
Human Resource Management
Information Systems
Law
Literature
Mathematics
Nursing
Physics
Political Science
Psychology
Reading
Science
Social Science
Home
Blog
Archive
Essay
Reviews
Contact
google+twitterfacebook
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