Inventory management Part 2 By Anita LeePost 2003
Inventory management Part 2 By Anita Lee-Post © 2003 Anita Lee-Post
Inventory management • Provide the desired level of customer service • Enable cost-efficient operations • Minimize the inventory investment àEstablish a system for managing inventory àMake decisions about how much and when to order © 2003 Anita Lee-Post
Inventory control systems • Keep track of items in inventory – Inventory accuracy • Keep track of items ordered and received – Inventory model © 2003 Anita Lee-Post
Inventory control systems continued • Keep track of items in inventory – Periodic counting: physical inventory is taken periodically – Cycle counting: physical inventory is taken continuously © 2003 Anita Lee-Post
Inventory control systems continued • Keep track of items ordered and received – Single-period inventory models • Perishable products: order exactly what is needed – balance the risk of lost sales with zero inventory costs – Multi-period inventory models • Fixed-time period models: an order is placed when the review period arrives – balance a large inventory with minimum inventory ordering and monitoring costs • Fixed-order quantity models: order a predetermined amount each time an order is placed – balance the holding costs of inventory with its ordering costs © 2003 Anita Lee-Post
Fixed-order quantity models • Determine order quantity to minimize inventory costs – Economic order quantity model (EOQ) – Economic production quantity model (EPQ) – Quantity discount model (QD) © 2003 Anita Lee-Post
EOQ assumptions • Demand is known & constant - no safety stock is required • Lead time (time between order placement and arrival) is known & constant – no back order is considered • No quantity discounts are available • Ordering (or setup) costs are constant • All demand is satisfied (no shortages) • The order quantity arrives in a single shipment © 2003 Anita Lee-Post
EOQ inventory profile © 2003 Anita Lee-Post
EOQ total costs Total annual costs = annual ordering costs + annual holding costs © 2003 Anita Lee-Post
EOQ: Total cost equation © 2003 Anita Lee-Post
EOQ: reorder point © 2003 Anita Lee-Post
EOQ example Given: • Annual demand = 60, 000 • Ordering cost = $25 per order • Holding cost = $3 per item per year • Number of working days per year = 240 (a) (b) (c) (d) (e) (f) What is the EOQ? What is the total cost at EOQ? What is the total number of orders placed in a year? What is the time between orders? What is the reorder point if lead time is 3 days? What is the reorder point if lead time is 5 days? © 2003 Anita Lee-Post
EOQ example continued © 2003 Anita Lee-Post
EOQ example continued © 2003 Anita Lee-Post
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