CH9 Inventory PDF
CH9 Inventory PDF
CH9 Inventory PDF
Management
Chapter 9
Inventory
A stock of materials
used to satisfy
customer demand or
to support the
production of services
or goods.
Inventory level
Scrap flow
Figure 9.1 Output flow of materials
• Accounting Inventories
– Raw materials
– Work-in-process
– Finished goods
Figure 9.2
– Cycle Inventory
– Anticipation Inventory
– Pipeline Inventory
Q+0 Q
Average cycle inventory = =
2 2
Pipeline inventory = DL = d L
= 210 drills
= 140 drills
• Pipeline inventory
– Reduce lead times
• Find more responsive suppliers and select new carriers
• Change Q in those cases where the lead time depends on the
lot size
ABC Analysis 90 —
Class A
80 —
according to their 40 —
dollar usage, so 30 —
that managers can 20 —
focus on items that 10 —
have the highest
0—
dollar value. 10 20 30 40 50 60 70 80 90 100
Figure 9.4 Percentage of SKUs
• Five assumptions
1. Demand rate is constant and known with certainty.
2. No constraints are placed on the size of each lot.
3. The only two relevant costs are the inventory holding
cost and the fixed cost per lot for ordering or setup.
4. Decisions for one item can be made independently of
decisions for other items.
5. The lead time is constant and known with certainty.
Q
On-hand inventory (units)
Q Average
cycle
2 inventory
1 cycle
Time
Figure 9.5
Total cost
Annual cost (dollars)
Holding cost
Ordering cost
Figure 9.6
Lot Size (Q)
Q D
C= (H) + (S)
2 Q
where
C = total annual cycle-inventory cost
Q = lot size (in units)
H = holding cost per unit per year
D = annual demand (in units)
S = ordering or setup costs per lot
3000 –
Total Q D
cost = (H) + (S)
2 Q
Annual cost (dollars)
2000 –
Q
Holding cost = (H)
2
1000 –
D
Ordering cost = (S)
Lowest Q
cost
0– | | | | | | | |
50 100 150 200 250 300 350 400
Lot Size (Q)
Best Q Current
Figure 9.7 (EOQ) Q
EOQ
TBOEOQ = (12 months/year)
D
Figure 9.8
EOQ 75
TBOEOQ = (12 months/year) = (12) = 0.96 month
D 936
EOQ 75
TBOEOQ = D
(52 weeks/year) = (52) = 4.17 weeks
936
EOQ 75
TBOEOQ = (365 days/year) = (365) = 29.25 days
D 936
2DS 2(3,120)(30)
EOQ = = = 97 units
H 20
360
TBO360 = (52 weeks per year) = 6 weeks
3,120
97
TBOEOQ = (52 weeks per year) = 1.6 weeks
3,120
Demand 2DS ↑ ↑
Increase in lot size is in proportion
to the square root of D.
H
Q Q Q
OH OH OH
R
Order Order Order
placed placed placed
L L L Time
TBO TBO TBO
IP = OH + SR – BO
= 10 + 200 – 0 = 210 cases
IP = OH + SR – BO = 10 + 200 – 0 = 210
R = 100
Q Q Q
R
Order Order Order
placed placed placed
0
L1 L2 L3 Time
TBO1 TBO2 TBO3
Figure 9.10
Selecting the Reorder Point When Demand is
Variable and Lead Time is Constant
Copyright ©2016 Pearson Education, Inc. All rights reserved. 9-39
Example 9.5
• A distribution center (DC) in Wisconsin stocks Sony
plasma TV sets. The center receives its inventory
from a mega warehouse in Kansas with a lead time
(L) of 5 days. The DC uses a reorder point (R) of 300
sets and a fixed order quantity (Q) of 250 sets.
Current on-hand inventory at the end of Day 1 is
400 sets. There are no scheduled receipts (SR) and
no backorders (BO). All demands and receipts occur
at the end of the day.
• Determine when to order using a Q system
3 260 250 after ordering 260 < R before ordering 250 due
80 260 + 250 = 510 after ordering Day 8
4 40 220 250 220 + 250 = 470
σdLT = σd2L = σd L
+ + =
75 75 75
Demand for week 1 Demand for week 2 Demand for week 3
σdlt = 25.98
225
Demand for 3-week lead
Figure 9.11
time
Copyright ©2016 Pearson Education, Inc. All rights reserved. 9-48
Continuous Review System
Probability of stockout
(1.0 – 0.85 = 0.15)
Average
demand
during
lead time R
zσdLT
Figure 9.12
where
z = number of standard deviations needed to
achieve the cycle-service level
σdLT = stand deviation of demand during lead time
Q D
C= (H) + (S) + (H) (Safety stock)
2 Q
Copyright ©2016 Pearson Education, Inc. All rights reserved. 9-56
Continuous Review System
• Advantages of the Q System
– The review frequency of each SKU may be
individualized.
– Fixed lot sizes can results in quantity discounts.
– The system requires low levels of safety stock for
the amount of uncertainty in demands during
the lead time.
2DS 2(520)(45)
EOQ = = = 62 units
H 12
OH Q2 OH
IP1
IP3
Order Order
placed placed
IP2
L L L Time
P P
Protection interval
Figure 9.13
1 50 400 400
7 95 90 + 280 –
95 = 275 270 + 0 = 275
8 50 225 395 after 225 + 0 = 225 before ordering 620 – 225 = 395
ordering 225 + 395 = 620 after ordering due Day 13
The P system
requires more
inventory for the
same level of
protection against
stockouts or
backorders.
EOQ 75
P= (52) = (52) = 4.2 or 4 weeks
D 936
Previous information:
Demand = 10 units/wk (assume 52 weeks per year) = 520
EOQ = 62 units (with reorder point system)
Lead time (L) = 3 weeks
Standard deviation in weekly demand = 8 units
z = 0.525 (for cycle-service level of 70%)
Safety stock
Safety Stock = σd 𝑷𝑷 + 𝑳𝑳
= (0.525 )(8 ) 6 + 3 = 12.6 or 13 unit s
Target inventory
T = d(P + L) + safety stock for protection interval
T = 10(6 + 3) + 13 = 103 units
Figure 9.14
Figure 9.14
� = 100 mixers
• Average daily demand (𝒅𝒅)
• Standard deviation of daily demand (σd ) = 30 mixers
• Lead time (L ) = 3 days
• Holding cost (H ) = $9.40/unit/year
• Ordering cost (S) = $35/order
• Cycle-service level = 92 percent
• The distributor uses a continuous review (Q ) system
= 26,000 mixers/year
The order quantity is
2DS 2(26,000)($35)
EOQ = =
H $9.40
440 26,000
C= ($9.40) + 440 ($35) + ($9.40)(73) = $4,822.38
2
EOQ 440
P= (260 days/year) = (260) = 4.4 or 4 days
D 26,000
Figure 9.15
2DS 2(100,375)($10)
EOQ = =
H $0.30
Q D
C= (H) + Q (S) + (H)(Safety stock)
2
2,587 100,375
C= ($0.30) + 2,587 ($10) + ($0.30)(660) = $974.05
2