Chapter 15 Inventory Systems for Independent Demand The
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Chapter 15 Inventory Systems for Independent Demand • The Definition and Purpose of Inventory • Inventory Costs • Independent vs. Dependent Demand • Basic Fixed Order Quantity Model • Basic Fixed Time Period Model • Miscellaneous Systems and Issues 2
Inventory • Definition--The stock of any item or resource used in an organization – Raw materials – Finished products – Component parts – Supplies – Work in process 3
Purposes of Inventory 1. To maintain independence of operations 2. To meet variation in product demand 3. To allow flexibility in production scheduling 4. To provide a safeguard for variation in raw material delivery time 5. To take advantage of economic purchaseorder size 4
Inventory Costs • Holding (or carrying) costs • Setup (or production change) costs • Ordering costs • Shortage costs 5
Independent vs. Dependent Demand Independent Demand (Demand not related to other items) Dependent Demand (Derived) E(1) 6
Classifying Inventory Models • Fixed-Order Quantity Models – Event triggered • Fixed-Time Period Models – Time triggered 7
Fixed-Order Quantity Models Assumptions • Demand for the product is constant and uniform throughout the period • Lead time (time from ordering to receipt) is constant • Price per unit of product is constant 8
Fixed-Order Quantity Models Assumptions • Inventory holding cost is based on average inventory • Ordering or setup costs are constant • All demands for the product will be satisfied (No back orders are allowed) 9
EOQ Model--Basic Fixed. Order Quantity Model Number of units on hand Q Q Exhibit 15. 3 Q R L L Time R = Reorder point Q = Economic order quantity L = Lead time 10
Cost Minimization Goal C O S T Total Cost Holding Costs Annual Cost of Items (DC) Ordering Costs QOPT Order Quantity (Q) 11
Basic Fixed-Order Quantity Model Annual Total Annual Cost = Purchase + Ordering + Cost TC D C Q S R L H Annual Holding Cost Total annual cost Demand Cost per unit Order quantity Cost of placing an order or setup cost Reorder point Lead time Annual holding and storage cost per unit of inventory 12
Deriving the EOQ • Using calculus, we take the derivative of the total cost function and set the derivative (slope) equal to zero 13
EOQ Example Annual Demand = 1, 000 units Days per year considered in average daily demand = 365 Cost to place an order = $10 Holding cost per unit per year = $2. 50 Lead time = 7 days Cost per unit = $15 Determine the economic order quantity and the reorder point. 14
Solution Why do we round up? When the inventory level reaches 20, order 90 units. 15
In-Class Exercise Annual Demand = 10, 000 units Days per year considered in average daily demand = 365 Cost to place an order = $10 Holding cost per unit per year = 10% of cost per unit Lead time = 10 days Cost per unit = $15 Determine the economic order quantity and the reorder point. 16
Solution When the inventory level reaches 274, order 366 units. 17
Miscellaneous Systems Bin Systems Two-Bin System Order One Bin of Inventory Full Empty One-Bin System Order Enough to Refill Bin Periodic Check 25
ABC Inventory Planning ABC classification scheme divides inventory items into three groupings: üHigh dollar volume (A) üModerate dollar volume (B) üLow dollar volume (C)
ABC Inventory Planning
ABC Classification ü A items constitute roughly the top 15 percent of the items ü B items the next 35 percent ü C items the last 50 percent
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