Embed Size (px)
Citation preview
2000 by Prentice-Hall, Inc 1
Inventory Management – Chapter 10
Stock of items held to meet Stock of items held to meet future demandfuture demand
Inventory management answers Inventory management answers two questionstwo questions
How much to orderHow much to order When to orderWhen to order
2000 by Prentice-Hall, Inc 2
Types of Inventory
Raw materialsRaw materials Purchased parts and suppliesPurchased parts and supplies LaborLabor In-process (partially completed) productsIn-process (partially completed) products Component partsComponent parts Working capitalWorking capital Tools, machinery, and equipmentTools, machinery, and equipment
2000 by Prentice-Hall, Inc 3
Reasons to Hold Inventory
Meet unexpected demandMeet unexpected demand Smooth seasonal or cyclical demandSmooth seasonal or cyclical demand Meet variations in customer demandMeet variations in customer demand Take advantage of Take advantage of
price discountsprice discounts Hedge against price Hedge against price
increasesincreases Quantity discountsQuantity discounts
2000 by Prentice-Hall, Inc 4
Two Forms of Demand
DependentDependent Items used to produce final productsItems used to produce final products
IndependentIndependent Items demanded by external customersItems demanded by external customers
2000 by Prentice-Hall, Inc 5
Inventory Costs
Carrying CostCarrying Cost Cost of holding an item in inventoryCost of holding an item in inventory
Ordering CostOrdering Cost Cost of replenishing inventoryCost of replenishing inventory
Shortage CostShortage Cost Temporary or permanent loss of Temporary or permanent loss of
sales when demand cannot be metsales when demand cannot be met
2000 by Prentice-Hall, Inc 6
Inventory Control Systems
Continuous system (fixed-order-Continuous system (fixed-order-quantity)quantity)
Constant amount ordered when Constant amount ordered when inventory declines to predetermined inventory declines to predetermined levellevel
Periodic system (fixed-time-period)Periodic system (fixed-time-period) Order placed for variable amount Order placed for variable amount
after fixed passage of timeafter fixed passage of time
2000 by Prentice-Hall, Inc 7
ABC Classification System
Demand volume and value of items varyDemand volume and value of items vary Classify inventory into 3 categories, Classify inventory into 3 categories,
typically on the basis of the dollar value typically on the basis of the dollar value to the firmto the firm
PERCENTAGEPERCENTAGE PERCENTAGEPERCENTAGECLASSCLASS OF UNITSOF UNITS OF DOLLARSOF DOLLARS
AA 5 - 155 - 15 70 - 8070 - 80BB 3030 1515CC 50 - 6050 - 60 5 - 105 - 10
2000 by Prentice-Hall, Inc 8
ABC Classification
11 $ 60$ 60 909022 350350 404033 3030 13013044 8080 606055 3030 10010066 2020 18018077 1010 17017088 320320 505099 510510 6060
1010 2020 120120
PARTPART UNIT COSTUNIT COST ANNUAL USAGEANNUAL USAGE
Example 10.1Example 10.1
2000 by Prentice-Hall, Inc 9
ABC Classification
Example 10.1Example 10.1
11 $ 60$ 60 909022 350350 404033 3030 13013044 8080 606055 3030 10010066 2020 18018077 1010 17017088 320320 505099 510510 6060
1010 2020 120120
PARTPART UNIT COSTUNIT COST ANNUAL USAGEANNUAL USAGETOTAL % OF TOTAL % OF TOTALPART VALUE VALUE QUANTITY % CUMMULATIVE
9 $30,600 35.9 6.0 6.08 16,000 18.7 5.0 11.02 14,000 16.4 4.0 15.01 5,400 6.3 9.0 24.04 4,800 5.6 6.0 30.03 3,900 4.6 10.0 40.06 3,600 4.2 18.0 58.05 3,000 3.5 13.0 71.0
10 2,400 2.8 12.0 83.07 1,700 2.0 17.0 100.0
$85,400
2000 by Prentice-Hall, Inc 10
ABC Classification
Example 10.1Example 10.1
11 $ 60$ 60 909022 350350 404033 3030 13013044 8080 606055 3030 10010066 2020 18018077 1010 17017088 320320 505099 510510 6060
1010 2020 120120
PARTPART UNIT COSTUNIT COST ANNUAL USAGEANNUAL USAGETOTAL % OF TOTAL % OF TOTALPART VALUE VALUE QUANTITY % CUMMULATIVE
9 $30,600 35.9 6.0 6.08 16,000 18.7 5.0 11.02 14,000 16.4 4.0 15.01 5,400 6.3 9.0 24.04 4,800 5.6 6.0 30.03 3,900 4.6 10.0 40.06 3,600 4.2 18.0 58.05 3,000 3.5 13.0 71.0
10 2,400 2.8 12.0 83.07 1,700 2.0 17.0 100.0
$85,400
AA
BB
CC
2000 by Prentice-Hall, Inc 11
ABC Classification
Example 10.1Example 10.1
11 $ 60$ 60 909022 350350 404033 3030 13013044 8080 606055 3030 10010066 2020 18018077 1010 17017088 320320 505099 510510 6060
1010 2020 120120
PARTPART UNIT COSTUNIT COST ANNUAL USAGEANNUAL USAGETOTAL % OF TOTAL % OF TOTALPART VALUE VALUE QUANTITY % CUMMULATIVE
9 $30,600 35.9 6.0 6.08 16,000 18.7 5.0 11.02 14,000 16.4 4.0 15.01 5,400 6.3 9.0 24.04 4,800 5.6 6.0 30.03 3,900 4.6 10.0 40.06 3,600 4.2 18.0 58.05 3,000 3.5 13.0 71.0
10 2,400 2.8 12.0 83.07 1,700 2.0 17.0 100.0
$85,400
AA
BB
CC
% OF TOTAL % OF TOTALCLASS ITEMS VALUE QUANTITY
A 9, 8, 2 71.0 15.0B 1, 4, 3 16.5 25.0C 6, 5, 10, 7 12.5 60.0
2000 by Prentice-Hall, Inc 12
ABC Classification
100 100 –
80 80 –
60 60 –
40 40 –
20 20 –
0 0 –| | | | | |00 2020 4040 6060 8080 100100
% of Quantity% of Quantity
% o
f V
alu
e%
of
Val
ue
AA
BBCC
2000 by Prentice-Hall, Inc 13
Assumptions of Basic EOQ Model
Demand is known with certainty Demand is known with certainty and is constant over timeand is constant over time
No shortages are allowedNo shortages are allowed Lead time for the receipt of orders Lead time for the receipt of orders
is constantis constant The order quantity is received all The order quantity is received all
at onceat once
2000 by Prentice-Hall, Inc 14
The Inventory Order Cycle
Demand Demand raterate
TimeTimeLead Lead timetime
Lead Lead timetime
Order Order placedplaced
Order Order placedplaced
Order Order receiptreceipt
Order Order receiptreceipt
Inve
nto
ry L
evel
Inve
nto
ry L
evel
Reorder point, Reorder point, RR
Order quantity, Order quantity, QQ
00
Figure 10.1Figure 10.1
2000 by Prentice-Hall, Inc 15
EOQ Cost Model
CCoo - cost of placing order - cost of placing order DD - annual demand - annual demand
CCcc - annual per-unit carrying cost - annual per-unit carrying cost QQ - order quantity - order quantity
Annual ordering cost =Annual ordering cost =CCooDD
Annual carrying cost =Annual carrying cost =CCccQQ
22
Total cost = +Total cost = +CCooDD
CCccQQ
22
2000 by Prentice-Hall, Inc 16
EOQ Cost Model
Slope = 0Slope = 0
Total CostTotal Cost
Order Quantity, Order Quantity, QQ
Annual Annual cost ($)cost ($)
Minimum Minimum total costtotal cost
Optimal orderOptimal order QQoptopt
Carrying Cost =Carrying Cost =CCccQQ
22
Ordering Cost =Ordering Cost =CCooDD
Figure 10.2Figure 10.2
2000 by Prentice-Hall, Inc 17
Quantity Discounts
Price per unit decreases as order Price per unit decreases as order quantity increasesquantity increases
TCTC = + + = + + PDPDCCooDD
CCccQQ
22
wherewhere
PP = per unit price of the item = per unit price of the itemDD = annual demand = annual demand
2000 by Prentice-Hall, Inc 18
Quantity Discounts
Price per unit decreases as order Price per unit decreases as order quantity increasesquantity increases
TCTC = + + = + + PDPDCCooDD
CCccQQ
22
wherewhere
PP = per unit price of the item = per unit price of the itemDD = annual demand = annual demand
ORDER SIZE PRICE
0 - 99 $10
100 - 199 8 (d1)
200+ 6 (d2)
2000 by Prentice-Hall, Inc 19
Quantity Discount Model
Figure 10.4Figure 10.4QQoptopt
Carrying cost Carrying cost
Ordering cost Ordering cost
Inve
nto
ry c
ost
($)
Inve
nto
ry c
ost
($)
QQ((dd1 1 ) = 100) = 100 QQ((dd2 2 ) = 200) = 200
TC TC ((dd2 2 = $6 ) = $6 )
TCTC ( (dd1 1 = $8 )= $8 )
TC TC = ($10 )= ($10 )
2000 by Prentice-Hall, Inc 20
When to Order
Reorder Point is the level of inventory Reorder Point is the level of inventory at which a new order is placed at which a new order is placed
RR = = dLdL
wherewhere
dd = demand rate per period = demand rate per periodLL = lead time = lead time
2000 by Prentice-Hall, Inc 21
Safety Stocks
Safety stockSafety stock buffer added to on hand inventory during buffer added to on hand inventory during
lead timelead time
Stockout Stockout an inventory shortagean inventory shortage
Service level Service level probability that the inventory available probability that the inventory available
during lead time will meet demandduring lead time will meet demand
2000 by Prentice-Hall, Inc 22
Variable Demand with a Reorder Point
Figure 10.5Figure 10.5
ReorderReorderpoint, point, RR
LTLT
TimeTimeLTLT
Inve
nto
ry le
vel
Inve
nto
ry le
vel
00
2000 by Prentice-Hall, Inc 23
Reorder Point with a Safety Stock
Figure 10.6Figure 10.6
ReorderReorderpoint, point, RR
LTLT
TimeTimeLTLT
Inve
nto
ry le
vel
Inve
nto
ry le
vel
00
Safety Stock
2000 by Prentice-Hall, Inc 24
Reorder Point With Variable Demand
RR = = dLdL + + zzdd L L
wherewhere
dd == average daily demandaverage daily demandLL == lead timelead time
dd == the standard deviation of daily demand the standard deviation of daily demand
zz == number of standard deviationsnumber of standard deviationscorresponding to the service levelcorresponding to the service levelprobabilityprobability
zzdd L L == safety stocksafety stock
