Chapter 10 Inventory Management To Accompany Ritzman Krajewski

Inventory Costs · Interest or · · Opportunity Costs Storage and Handling Costs Taxes,

Types of Inventory Cycle Inventory Q+0 Average cycle inventory = 2 Safety Stock Inventory

ABC Analysis Percentage of dollar value 100 — Class C Class B 90 —

How Much? When! To Accompany Ritzman & Krajewski, Foundations of Operations Management © 2003

Economic Order Quantity To Accompany Ritzman & Krajewski, Foundations of Operations Management © 2003

Economic Order Quantity Assumptions 1. Demand rate is constant 2. No constraints on lot

Economic Order Quantity On-hand inventory (units) Receive order Inventory depletion (demand rate) Q Average

Economic Order Quantity Current cost Annual cost (dollars) 3000 — Total cost = Q

Economic Order Quantity Current cost Annual cost (dollars) 3000 — Bird feeder costs Q

Economic Order Quantity Current cost Annual cost (dollars) 3000 — 2000 — Birdfeeder costs

IP On-hand inventory IP Order received Q OH OH Soup p u So Soup

Uncertain Demand Figure 10. 7 On-hand inventory IP Order received Q Q Q OH

Reorder Point / Safety Stock Cycle-service level = 85% Probability of stockout (1. 0

Reorder Point / Safety Stock/R Safety stock = z L = 2. 33(22) =

Lead Time Distributions t = 15 t = 26 + 75 Demand for week

Lead Time Distributions t = 15 + 75 Demand for week 1 t =

Periodic Review Systems On-hand inventory T IP IP Order received Q 1 OH Order

Periodic Review Systems On-hand inventory T IP IP Order. P and T Bird feeder—Calculating

Comparison of Q and P Systems · Convenient to administer · Orders may be

Comparison of P and Q Systems — Solved Problem 6 To Accompany Ritzman &

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Inventory Costs · Interest or · · Opportunity Costs Storage and Handling Costs Taxes, Insurance, and Shrinkage Costs Ordering and Setup Costs Transportation Costs To Accompany Ritzman & Krajewski, Foundations of Operations Management © 2003 Prentice-Hall, Inc. All rights reserved.

Types of Inventory Cycle Inventory Q+0 Average cycle inventory = 2 Safety Stock Inventory Anticipation Inventory Pipeline inventory = DL = d. L To Accompany Ritzman & Krajewski, Foundations of Operations Management © 2003 Prentice-Hall, Inc. All rights reserved.

ABC Analysis Percentage of dollar value 100 — Class C Class B 90 — Class A 80 — 70 — 60 — 50 — 40 — 30 — 20 — 10 — 0— Figure 10. 1 10 20 30 40 50 60 70 80 90 100 Percentage of items To Accompany Ritzman & Krajewski, Foundations of Operations Management © 2003 Prentice-Hall, Inc. All rights reserved.

Economic Order Quantity Assumptions 1. Demand rate is constant 2. No constraints on lot size 3. Only relevant costs are holding and ordering/setup 4. Decisions for items are independent from other items 5. No uncertainty in lead time or supply To Accompany Ritzman & Krajewski, Foundations of Operations Management © 2003 Prentice-Hall, Inc. All rights reserved.

Economic Order Quantity On-hand inventory (units) Receive order Inventory depletion (demand rate) Q Average cycle inventory Q — 2 Figure 10. 2 1 cycle Time To Accompany Ritzman & Krajewski, Foundations of Operations Management © 2003 Prentice-Hall, Inc. All rights reserved.

Economic Order Quantity Current cost Annual cost (dollars) 3000 — Total cost = Q D (H) + (S) 2 Q 2000 — Holding cost = Q (H) 2 1000 — Ordering cost = 0— | 50 | 100 | 150 | 200 | 250 Lot Size (Q) | 300 | 350 D (S) Q | 400 Current Q To Accompany Ritzman & Krajewski, Foundations of Operations Management © 2003 Prentice-Hall, Inc. All rights reserved.

Economic Order Quantity Current cost Annual cost (dollars) 3000 — Bird feeder costs Q D Total cost = D(H) + /week)(52 (S) = (18 weeks) = 936 units 2 Q H = 0. 25 ($60/unit) = $15 S = $45 Q = 75 units 2000 — EOQ = 1000 — Q Holding cost = Q D(H) 2 DS 2 C= (H) + (S) 2 H Q C = $562 + $562 = $1124 Ordering cost = Lowest cost 0— Example 10. 1 | 50 Best Q (EOQ) | 100 | 150 | 200 | 250 Lot Size (Q) | 300 | 350 D (S) Q | 400 Current Q To Accompany Ritzman & Krajewski, Foundations of Operations Management © 2003 Prentice-Hall, Inc. All rights reserved.

Economic Order Quantity Current cost Annual cost (dollars) 3000 — Bird feeder costs Q D Total cost = D(H) + /week)(52 (S) = (18 weeks) = 936 units 2 Q H = 0. 25 ($60/unit) = $15 S = $45 Q = 75 units 2000 — EOQ = 1000 — 2 DS H C= D Q (H) + (S) Q 2 C = $562 + $562 = $1124 Lowest cost 0— Example 10. 1 | 50 Best Q (EOQ) | 100 | 150 | 200 | 250 Lot Size (Q) | 300 | 350 | 400 Current Q To Accompany Ritzman & Krajewski, Foundations of Operations Management © 2003 Prentice-Hall, Inc. All rights reserved.

Economic Order Quantity Current cost Annual cost (dollars) 3000 — 2000 — Birdfeeder costs Time between orders Q D Total cost = D(H) + /week)(52 (S) = (18 weeks) = 936 units 2 Q EOQ = $15 HTBO = 0. 25 ($60/unit) = = 75/936 = 0. 080 year EOQ D S = $45 Q = 75 units TBOEOQ = (75/936)(12) = 0. 96 months TBOEOQ = (75/936)(52) = 4. 17 weeks 1000 — TBOEOQ = (75/936)(365) = 29. 25 days Lowest cost 0— Example 10. 1 | 50 Best Q (EOQ) | 100 | 150 | 200 | 250 Lot Size (Q) | 300 | 350 | 400 Current Q To Accompany Ritzman & Krajewski, Foundations of Operations Management © 2003 Prentice-Hall, Inc. All rights reserved.

Economic Order Quantity Current cost Annual cost (dollars) 3000 — Total cost = Q D (H) + (S) 2 Q 2000 — Holding cost = Q (H) 2 1000 — Ordering cost = Lowest cost 0— Figure 10. 4 | 50 Best Q (EOQ) | 100 | 150 | 200 | 250 Lot Size (Q) | 300 | 350 D (S) Q | 400 Current Q To Accompany Ritzman & Krajewski, Foundations of Operations Management © 2003 Prentice-Hall, Inc. All rights reserved.

IP On-hand inventory IP Order received Q OH OH Soup p u So Soup Continuous Review Q OH R Order placed L TBO Time Figure 10. 6 To Accompany Ritzman & Krajewski, Foundations of Operations Management © 2003 Prentice-Hall, Inc. All rights reserved.

Uncertain Demand Figure 10. 7 On-hand inventory IP Order received Q Q Q OH R L 1 TBO 1 Order placed L 2 TBO 2 L 3 Time TBO 3 To Accompany Ritzman & Krajewski, Foundations of Operations Management © 2003 Prentice-Hall, Inc. All rights reserved.

Reorder Point / Safety Stock Cycle-service level = 85% Probability of stockout (1. 0 – 0. 85 = 0. 15) Average demand during lead time R z L Figure 10. 8 To Accompany Ritzman & Krajewski, Foundations of Operations Management © 2003 Prentice-Hall, Inc. All rights reserved.

Reorder Point / Safety Stock/R Safety stock = z L = 2. 33(22) = 51. 3 = 51 boxes Cycle-service level = 85% Reorder point = ADDLT + SS = 250 + 51 = 301 boxes Probability of stockout (1. 0 – 0. 85 = 0. 15) Average demand during lead time R z L Example 10. 2 To Accompany Ritzman & Krajewski, Foundations of Operations Management © 2003 Prentice-Hall, Inc. All rights reserved.

Lead Time Distributions t = 15 t = 26 + 75 Demand for week 1 t = 15 + 75 Demand for week 2 Figure 10. 9 t = 15 225 Demand for three-week lead time = 75 Demand for week 3 To Accompany Ritzman & Krajewski, Foundations of Operations Management © 2003 Prentice-Hall, Inc. All rights reserved.

Lead Time Distributions t = 15 + 75 Demand for week 1 t = 26 Bird feeder Lead Time Distribution t = 1 week t = 15 d = 18 L=2 Reorder point = 2(18) + 9 = 45 units + 225 75 936 C= ($15) + ($45) + 9($15) Demand for 75 2 75 three-week lead time Demand for week 2 t = 15 C = $562. 50 + $561. 60 + $135 = $1259. 10 Example 10. 3 = 75 Demand for week 3 To Accompany Ritzman & Krajewski, Foundations of Operations Management © 2003 Prentice-Hall, Inc. All rights reserved.

Periodic Review Systems On-hand inventory T IP IP Order received Q 1 OH Order received OH Q 2 Q 3 IP Order received IP 1 IP 3 IP 2 Order placed L L P Figure 10. 10 L P Time Protection interval To Accompany Ritzman & Krajewski, Foundations of Operations Management © 2003 Prentice-Hall, Inc. All rights reserved.

Periodic Review Systems On-hand inventory T IP IP Order. P and T Bird feeder—Calculating received IP 1 received IP Order received Q 3 = 90% t = cycle/service level Q 118 units L = 2 weeks OH OH Q 2 EOQ = 75 units D = (18 units/week)(52 weeks) = 936 units IP 3 IP 2 P = 4 weeks Order placed C= L Order 936 placed 4(18) ($15) + ($45) + 15($15) 2 4(18) C = $540 + $585 + $225 = $1350 L P Example 10. 4 T = 123 units P L Time Protection interval To Accompany Ritzman & Krajewski, Foundations of Operations Management © 2003 Prentice-Hall, Inc. All rights reserved.

Comparison of Q and P Systems · Convenient to administer · Orders may be combined · IP only required at review Q Systems · Individual review frequencies · Possible quantity discounts · Lower, less-expensive safety stocks To Accompany Ritzman & Krajewski, Foundations of Operations Management © 2003 Prentice-Hall, Inc. All rights reserved.