PREPARED BY BILAL AHMEDINVENTORY MANAGEMENT EOCONOMIC ORDER QUANTIT SAFETY STOCK QUESTION

3. SAFETY STOCK

2. ECONOMIC ORDER QUANTITY

1. INVENTORY MANAGEMENT

PREVIEW OF TOPIC

INVENTORY MANAGEMENT

DEFINATION OF INVENTORY

INVENTORY MANAGEMEN

T

ASSUMPTION OF EOQ DIAGRAM

SAFETY STOCK

EXAMPLES QUESTIONS

EOQ SAFETY STOCK QUESTIONS

DEFINITION OF INVENTORY

“The term inventory include materials-raw, in progress, finished packaging,spares, and other stock in order tomeet an un expected demand ordistribution in the future.”

INVENTORY MANAGEMENT EOQ SAFETY STOCK QUESTIONS

INVENTORY MANAGEMENT

INVENTORY MANAGEMENT EOQ SAFETY STOCK QUESTIONS

Inventory management involves the:

“Development and administration of policiessystems and procedures, which will minimize totalcost related to inventory decisions and relatedfunctions such as production scheduling,purchasing and traffic”.

INVENTORY COST

INVENTORY MANAGEMENT EOQ SAFETY STOCK QUESTIONS

INVENTORY COST

INVENTORY MANAGEMENT EOQ SAFETY STOCK QUESTIONS

INVENTORY COST

INVENTORY MANAGEMENTEOQ SAFETY STOCK QUESTIONS

DEFINITION OF EOQ

INVENTORY MANAGEMENT EOQ SAFETY STOCK QUESTION

“ EOQ is essentially an accounting formula that determines at which the combination of order, costs and inventory carrying cost are the least. The result is the most cost effective quality to order. In purchasing this is known as order quantity, in manufacturing it is known as the production lot size.”

- Dave Piasecki

ASSUMPTION OF EOQ

INVENTORY MANAGEMENT EOQ SAFETY STOCK QUESTION

Demand is known and is deterministic, i.e. constant;

The lead time, i.e. the time between placement ofthe order and the receipt of the order is knownand constant;

The receipt of inventory is instantaneous. In otherwords the inventory from an order arrives in onebatch at one point in time;

That only costs pertinent to inventory model arethe cost of placing an order and cost of holding orstoring inventory over time.

INVENTORY COST DIGRAM

INVENTORY MANAGEMENT EOQ SAFETY STOCK QUESTION

AnnualCost

EOQ

Ordering Cost

Holding Cost

Re-order quantity

Total cost

EOQ FORMULA

INVENTORY MANAGEMENT EOQ SAFETY STOCK QUESTIONS

EOQ EXAMPLE

INVENTORY MANAGEMENT EOQ SAFETY STOCK QUESTION

Weekly demand = 240 units

No. of weeks per year = 52

Ordering cost = $50

Unit cost = $15

Annual carrying charge = 20%

SOLUTION

INVENTORY MANAGEMENT EOQ SAFETY STOCK QUESTION

yearperunitperH 3$152.0

unitsH

DSQ 64598.644

3

50480,1222

yearunitsD /480,1224052

HQ

SQ

DTC

$1,934.945.96744.967

32

64550

645

480,12

2

+

+

+

QUANTITY DISCOUNT ASSUMPTIONS

INVENTORY MANAGEMENT EOQ SAFETY STOCK QUESTION

Same as the EOQ, except:

Unit price depends upon the quantity ordered

Adjusted total cost equation:

PDHQ

SQ

DTCQD +

+

2

QUANTITY DISCOUNT PROCEDURE

INVENTORY MANAGEMENT EOQ SAFETY STOCK QUESTION

Calculate the EOQ at the lowest price

Determine whether the EOQ is feasible at that price Will the vendor sell that quantity at that price?

If yes, stop – if no, continue

Check the feasibility of EOQ at the next higher price

Continue to the next slide ...

QUANTITY DISCOUNT PROCEDURE (cont.)

INVENTORY MANAGEMENT EOQ SAFETY STOCK QUESTION

Continue until you identify a feasible EOQ

Calculate the total costs (including total item cost) for the feasible EOQ model

Calculate the total costs of buying at the minimum quantity required for each of the cheaper unit prices

Compare the total cost of each option & choose the lowest cost alternative

Any other issues to consider?

EXAMPLE OF QUANTITY DISCOUNT

INVENTORY MANAGEMENT EOQ SAFETY STOCK QUESTION

Annual Demand = 5000 units

Ordering cost = $49

Annual carrying charge = 20%

Unit price schedule:Quantity Unit Price

0 to 999 $5.00

1000 to 1999 $4.80

2000 and over $4.75

SOLUTION

INVENTORY MANAGEMENT EOQ SAFETY STOCK QUESTION

Step 1

FeasibleQP 70000.52.0

49000,5200.5$

QP 71480.42.0

49000,5280.4$

QP 71875.42.0

49000,5275.4$

Not Feasible

Not Feasible

2000--minimum

1000--minimum

SOLUTION(cont.)

INVENTORY MANAGEMENT EOQ SAFETY STOCK QUESTION

Step 2

700,25$500000.500.52.02

70049

700

000,5700 ++QTC

50.822,24$500075.475.42.02

200049

2000

000,52000 ++QTC

725, 24$500080.480.42.02

100049

1000

000,51000

++QTC

SAFETY STOCK

INVENTORY MANAGEMENT EOQ SAFETY STOCK QUESTION

SAFETY STOCK

INVENTORY MANAGEMENT EOQ SAFETY STOCK QUESTIONS

Safety stock is the stock held by a company in excess of its requirement for the lead time. Companies hold safety stock to guard against stock-out.

LEAD TIME

INVENTORY MANAGEMENT EOQSAFETY STOCK

QUESTION

Number of minutes, hours, or days that must be allowed for the completion of an operation or process, or must elapse before a desired action takes place.

Source: http://www.businessdictionary.com/definition/lead-time.html#ixzz3soV8Sdj0

How to calculate safety stock

INVENTORY MANAGEMENT EOQ SAFETY STOCK QUESTIONS

Safety Stock = (Maximum Daily Usage − Average Daily Usage) × Lead Time

INVENTORY MANAGEMENT EOQ SAFETY STOCKQUESTIONS

INVENTORY MANAGEMENT EOQ SAFETY STOCK QUESTIONS