Inventory Management
Inventory Management
Inventory Management
Introduction
Economic Order Quantity (EOQ) Model
Economic Production Quantity Model
Quantity Discounts Model
Reorder Point (Q System)
Shortages and Service Levels
Single Period Model
1
Definition of Independent Demand Inventory
2
Types of Inventory
• Cycle inventory
• Safety stock
• Anticipation inventory
• Pipeline inventory
3
Managing Independent Demand Inventory
• When to order?
4
Five Assumptions of EOQ
• Whole lots
• Item independence
5
Total Annual Relevant Cost
6
dC H D
Take the first derivative of cost with respect to quality: dQ
= − 2 (S )
2 Q
dC 2 DS
Setting dQ
=0 and solving for Q: EOQ =
H
EOQ
Time between orders: TBO EOQ =
D
7
Overland Motors Example
9
Economic Production Quantity Example
10
Quantity Discounts
Total cost = Annual holding cost + Annual ordering cost + Annual cost of
materials
Q D
C= ( H ) + ( S ) + PD
2 Q
11
Quantity Discounts
Two-Step Procedure
12
Quantity Discounts Example
EOQ50.00 =
Step 2. C76 =
C100 =
13
Reorder Point (Q System)
A continuous review (Q) system tracks the remaining inventory of an item each
time a withdrawal is made, to determine if it is time to reorder.
Decision rule: Whenever a withdrawal brings the inventory down to the reorder
point (R), place an order for Q (fixed) units.
14
Reorder Point
Demand pattern Lead time for ROP
ordering
Known and None ROP = 0
constant
Known and Known and constant ROP = d × LT
constant
Variable, normally Known and constant ROP = d × LT + zσdLT
distributed, σ
dLT
known
Variable, normally Known and constant ROP = d × LT + z LT σd
distributed, σ
d
known
Known and Variable, normally ROP = d × LT + zd σLT
constant distributed, σ
LT
known
Uncertain, discrete unknown Determine ROP for a given service level
probability based on the cumulative probabilities of
distribution demand during lead time.
15
Shortage and Service Levels
16
Q System Example
17
Cycle-Service Level with Discrete Distribution
Application:
Demand Cycle-Service
Level Probability R Level (%)
0 0.30 0
50 0.20 50
100 0.20 100
150 0.15 150
200 0.10 200
250 0.05 250
18
Single Period (Newsvendor) Model
Used to handle ordering of perishables and items that
have a limited useful life.
19
Example of the Newsvendor Model
20