INDEPENDENT DEMAND INVENTORY SYSTEMS

Reported by: Maria Theresa A. VelascoMaster in Business Administration

WHY HOLDING INVENTORY IS IMPORTANT? Inventory can be a strategic tool Helps level capacity Uncouples production stages Increases flexibility Provides cheaper ordering policies

TWO TYPES OF INVENTORY SYSTEMS

Fixed Order Quantity System When the Order Point (OP) is reached, we

put an order. Also known as the 2 bin system. Fixed Order Period System

Reviews the inventory level at “fixed time

intervals.” Order enough materials to bring

the inventory to a predetermined level.

INVENTORY MODELS FOR THE FIXED ORDER QUANTITY SYSTEM

Economic Order Quantity Model (EOQ) EOQ for Production Lots EOQ with Quantity Discounts Models with uncertain demand during

lead time.

ECONOMIC ORDER QUANTITY (EOQ)

Let D - annual demand (units/year)Q - order quantity (units)C - carrying cost ($/unit/year)S - ordering cost ($/order)TSC =Total Annual Stocking cost

($)LT = lead time (days)

ECONOMIC ORDER QUANTITY

ECONOMIC ORDER QUANTITYThe Greenmore Lawn Products Company produces lawn

fertilizer. One raw material--ammonium nitrate--is purchasedin large quantities in the making of fertilizer. 2,500,000 tons of ammonium nitrate are forecast to be required next year tosupport production. If ammonium nitrate costs $122.50 per ton, carrying cost is 35 percent of acquisition cost, and ordering cost is $1,595 per order:

a. In what quantities should Greenmore buy ammoniumnitrate?

b. What annual stocking costs will be incurred if ammonium nitrate is ordered at the EOQ?

c. How many orders per year must Greenmore placefor ammonium nitrate?

d. How much time will elapse between orders.

EOQ FOR PRODUCTION LOTS

EOQ FOR PRODUCTION LOTS

EOQ FOR PRODUCTION LOTSThe production rate of final assembly is 800 compact

discs per day. After the compact discs are assembled,they go directly to finished-goods inventory. Customer demand averages 400 compact discs perday and about 50,000 compact discs per year. If itcosts $500 to set up the assembly line for the compactdisks and $1.00 per compact disc per year to carry them in inventory:

a. How many compact discs should be in a production lot at final assembly?

b. What is the TSC at the EOQ?

EOQ WITH QUANTITY DISCOUNT

EOQ WITH QUANTITY DISCOUNT

Steps:1. Compute EOQ of each sales price2. Determine which EOQ is within the quantity range

for its price3. Compute the TMC for the feasible EOQ and the TMCs

of quantities with lower sales prices4. The quantity with the lowest TMC is the order

quantity

EOQ WITH QUANTITY DISCOUNT