Exercise 1. Inventory Management

Kathrina ArdanKristiana Mikaela Ayeng

Christian BalanquitTrisha Gatdula

Abstract

Introduction

Inventory is a stock of items kept by an organization to meet internal or external customer demand (1). It is usually perceived as a stock of finished product but actually can be composed of different types mainly:

a) Raw material inventoryb) Work-in-process inventory (WIP)c) Maintenance/repair/operating inventoryd) Finished goods inventory (2).

Significance to the Industry and To Your Everyday Life

Inventory is one of the basic but most important part of the operations… . Example kung bakit.

Having a good inventory management can make the firm’s operations flexible. Through inventory, a firm can be able to provide the anticipated customer demand. It also allows a smooth operation process with the use of WIP when the operation experiences disruptions. If the production encounters supplier shortages, quality or delivery problems, the inventory can protect the firm form providing varied products.

Basically, there are two types of inventory system: Periodic and Perpetual Inventory Systems. The main difference between the two inventory methods is the frequency of (inventory) data updates. Periodic Inventory System is usually conducted by businesses that sell many small products. The inventory data are recorded in a specified interval (usually once ayear) and the sold merchandises are not considered as cost of goods sold (CoGS). Perpetual Inventory System on the other hand deducts the sold products from the inventory instantly. Inventory data are updated every time sales occur, which is why it is also referred to as “point-of-sale” system.Companies select the inventory system that they will use based on sales rate and demand.

Moreover, inventory control models depend whether the demand for an item is either dependent or independent. An item has an independent demand if its demand is determined by the market place. Its demand cannot be associated to the demand of another item. Unlike if an item has a dependent demand, its demand is controlled directly or associated with the demand of another item. For example, the demand for the paper is independent to the demand of the shampoo while the demand of the conditioner is dependent on the demand of the shampoo.

Key Terms To Remember and Formula Review

Key Terms:

Inventory Management- is the supervision of inventories, mainly to keep it in an adequate amount to meet customer demand and also be cost-effective.

Inventory System- is the guidelines which keep the inventory in track.

Independent Demand – the demand of an item is not tied to the demand of another item

Dependent Demand – the demand of an item is tied to the demand of another item

Periodic Inventory System – conducted on a specified time interval, usually once a year

Perpetual Inventory System – conducted every time a good is sold

Economic Order Quantity – Production Order Quantity –

Formulas:

Single Period Inventory Model:

Q¿=davg+zσwhereQ¿=optimumorder quantit ydavg=average demand

z=tabular value of the probabillityPσ=standard deviationof demand

Where P=Cu

¿¿, Co=Excess cost per unit

¿Cu=Shortage cost per unit

Multi Period Inventory System:

1) Fixed-Order Quantity Models (FOQ)

A. Economic Order Quantity (EOQ)

Assumptions:

1. Demand is known, constant and independent.2. Lead time is known and constant.3. Receipt of inventory is instantaneous and complete.4. Quantity discounts are not possible.5. Ordering/set-up cost and holding cost are the only variable costs.6. Stockouts can be completely avoided if orders are on time. (2)

B. Product Order Quantity (POQ)

Assumptions:1. When inventory builds up over a period of time after an order has been placed.2. when units are produced and sold simultaneously. (2)

Fixed Order Quantity Models

FOQ models are inventory models for independent demand.

A. Economic Order Quantity

Descriptions ng EOQ

Figure 1: Annual cost versus Order Quantity

Minimizing total cost is the objective of inventory models. With the assumptions on EOQ as stated before, it can be concluded that minimizing the set-up and holding cost will also minimize the total cost given that the cost for the inventory is held constant. Figure 1 shows the relationship between the total cost curve, holding cost curve, set-up/ordering cost curve. The total costs is graphed as a function of the order quantity.For the set-up or order cost curve, the set-up/ordering cost decreases as the order quantity increases because as the quantity ordered increases, the total number of orders placed per year will also decrease. While for the holding cost curve, the holding cost increases as the order quantity increases. Larger number of inventories are maintained resulting for a larger holding cost.At the point of intersection of the order cost curve and the holding cost curve, the optimal order quantity occurs. This is where the ordering cost is equal to the holding cost. It can also be seen from the graph that at the optimal order quantity, Q*, the total cost is at its minimum. Thus, reducing the order or holding cost will reduce the total cost curve. Also, reducing the total cost curve reduces the optimal order quantity.

B. Product Order QuantityDescriptions ng POQ

The three types of FOQ with safety stock

Application

3. Given: D = 36000S = $25H = $0.45Purchase Price = $0.85Discount Price = $0.82Quantity needed to qualify for the discount = 6000 disks

Using Purchase Price:

Q¿=√ 2DSH =√ 2 (36000 ) (25 )0.45

=2000disks

Using Discount Price:

Q¿=6000

Plugging in Q¿ (using purchase price) in TC

TC=DC+ DQS+Q2H

TC=(36000 )(0.85)+ 360002000

(25)+ 20002

(0.45)

TC=$31500

Plugging in Q¿ (using purchase price) in TC

TC=DC+ DQS+Q2H

TC=(36000 )(0.82)+ 360006000

(25)+ 60002

(0.45)

TC=$31020

Therefore, Cesar Rogo Computers should take the discount, as it will reduce the total cost for purchasing the disks.

4. Given:D = 20000S = $40H = 0.2 c, i = 0.2

Purchase Price:

Conclusions and Areas for Further Investigation

References

(1) R. Russel and B. Taylor III, Operations Management, 3rd ed., Multimedia Version, Upper Saddle River, N.J.: Prentice Hall, 2000, pp 588-620.

(2) Heizer, J. and Render