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I. Introduction
-- What is inventory?
- stored resource used to satisfy current or future demand
-- Types of Inventories:
Raw Materials/Components
In-Process Goods (WIP)
Finished Goods
Supplies
-- Inventory Classification
Identify important items and more inventory control on
important items
Measure of importance:
ABC analysis:
A = 70-80% of total inventory value, but only 15% of items
B = 15-25% of total inventory value, but 30% of items
C = 5% of total inventory value, but 55% of items
-- Monitor Inventory
As important as demand forecast for decision making
Cycle counting: regular inventory audits, ABC approach
-- Inventory Systems
Objective: minimize total inventory cost and maintain
satisfied service level.
Fundamental Questions:
- How much to order?
- When to order?
-- EOQ Model
Assumptions
1. There is one product type
2. Demand is known and constant
3. Lead time is known and constant
4. Receipt of inventory is instantaneous(one batch, same
time)
5. Shortage is not allowed
Order Cost =
-- Example:
Annual demand = 10,000 unit/year, ordering cost = $50/order, unit
cost (price) = $4/unit, expanded interest rate = 25%/year. EOQ?
TC at EOQ?
H =
EOQ =
IC =
TC =
Sensitivity of IC w.r.t. Q
-- Example (continued)
500
1000
1500
- Conclusion:
1. Inventory cost curve is flat around EOQ
2. Flatter when Q increases than when Q decreases from EOQ
- Thinking Challenge:
If the order quantity Q = 2EOQ, by how much IC will
increase?
-- Example:
Order Price
0-399 $2.2/unit
400-699 2.0
700 1.8
Observations:
1. EOQ with a lower price, if feasible, is better than any
order quantity with the same or higher price.
2. Potential best order quantity: cheapest feasible EOQ,
price breaks associated with lower prices.
Solution Procedure:
1. Find the feasible EOQ with cheapest possible price.
2. Calculate TCs of the EOQ (from Step 1) and the price
breaks associated with lower prices.
3. Pick the order quantity with lowest TC
-- Example:
Consider a light switch carried by Litely. Litely sells 1,350 of
these switches per year, and places order for 300 of these
switches at a time. Assuming no safety stock, Litely estimates
following information related to shortage:
Shortage no shortage 5 10 15
Level
Probability 0.5 0.2 0.15 0.15
The carrying cost per unit per year is calculated as $5 while the
stockout cost is estimated at $6 ($3 lost profit per switch and
another $3 lost in goodwill, or future sales loss). Find the best
SS level and ROP for Litely.
-- Example:
Lead Time Frequency Probability ROP Service
Demand Level
3 2
4 3
5 5
6 5
7 3
8 2