Inventory Management 21 Pankaj

Inventory Management
Pankaj V. Tadaskar Roll No. 70
What Is Inventory?
Stock of items kept to meet future demand Purpose of inventory management
how many units to order when to order
Types of Inventory
Raw
materials Purchased parts and supplies Work-in-process (partially completed) products (WIP) Items being transported Tools and equipment
Inventory and Supply Chain Management
Bullwhip effect
demand information is distorted as it moves away from the end-use customer higher safety stock inventories to are stored to compensate
Seasonal or cyclical demand Inventory provides independence from vendors Take advantage of price discounts Inventory provides independence between stages and avoids work stoppages
Two Forms of Demand

Dependent
Independent
Demand for items used to produce final products Tyres stored at a MRF plant are an example of a dependent demand item Demand for items used by external customers Motorcycle appliances, computers, and houses are examples of independent demand inventory
Inventory and Quality Management

Customers
usually perceive quality service as availability of goods they want and when they want them Inventory must be sufficient to provide high-quality customer service in TQM
Inventory Costs
Carrying cost cost of holding an item in inventory Ordering cost cost of replenishing inventory Shortage cost temporary or permanent loss of sales when demand cannot be met
Inventory Control Systems

Continuous system (fixedorder-quantity)
Periodic system (fixed-timeperiod)
constant amount ordered when inventory declines to predetermined level order placed for variable amount after fixed passage of time
Economic Order Quantity (EOQ) Models

EOQ
optimal
order quantity that will minimize total inventory costs
Basic
EOQ model Production quantity model

Assumptions of Basic EOQ Model

vD e m a n d i kn o w n w i s th ce rta i ty a n d i co n sta n t n s o ve r ti e m vN o sh o rta g e s a re a l o w e d l vLe a d ti e fo r th e re ce i t o f m p o rd e rs i co n sta n t s vO rd e r q u a n ti i re ce i d ty s ve a l t o n ce la
Inventory Order Cycle

Order quantity , Q
Reorder point , R
Inventory Level
Demand rate
Lead time Order Order placed receipt
Lead time Order Order placedreceipt
Time
EOQ Cost Model

Co Cc
cost of placing order annual per-unit carrying cost
D Q
annual demand order quantity
CoD Annual ordering cost = Q CcQ Annual carrying cost = 2 CoD Total cost = Q CcQ + 2
EOQ Cost Model

Deriving Q opt TC = TC = Q 0 = Proving equality of costs at optimal point
C oD Q C oD Q2 C 0D Q2
2 C oD
C cQ + 2 Cc + 2 Cc + 2 Cc
C oD C cQ Q = 2 Q2
= 2 C oD
Cc
2 C oD
Q opt =
Q opt =
Cc
EOQ Cost Model (cont.)

Annual cost ($) Slope = 0 Minimum total cost Total Cost
CcQ Carrying Cost = 2
CoD Ordering Cost = Q

Optimal order Qopt Order Quantity, Q
EOQ Example
Cc = 0.75/- per item Qopt = Qopt =
2CoD
Co = 150/TCmin =
D = 10,000 item CoD Q CcQ + 2

(0.75)(2,000) + 2
Cc
2(150)(10,000) TCmin = (0.75)
(150)(10,000) 2,000
Qopt = 2,000 yards
TCmin = 750 + 750 = 1,500/-
Orders per year = D/Qopt Order cycle time =311 days/(D/Qopt ) = 10,000/2,000 = 311/5 = 5 orders/year = 62.2 store days
Production Quantity Model

An inventory system in which an order is received gradually, as inventory is simultaneously being depleted AKA non-instantaneous receipt model
assumption that Q is received all at once is relaxed
p - daily rate at which an order is received over time, a.k.a. production rate d - daily rate at which inventory is demanded
Production Quantity Model (cont.)

Inventory level Maximum inventory level Average inventory level
Q(1-d/p)
Q 2 (1-d/p)
0 Order receipt period
Begin End order order receip receipt t
Time
Production Quantity Model (cont.)

p = production rate rate
Maximum inventory level = = Q 1 -
d = demand d d p
Q- Q p
Q d Average inventory level = p 2 1 TC = C oD C cQ Q + 2 d p 1 -
Q opt
2 C oD = d Cc 1 - p
18
Production Quantity Model: Example

Cc = $0.75 per yard Co = $150 d = 10,000/311 = 32.2 yards per day
2 C oD 2 ( 150 )( 10 , 000 )
D = 10,000 yards p = 150 yards per day
Q opt =
Cc 1 C oD +Q
d 0 . 75 p C cQ 2 Q = p d 1 p
= 32 . 2 1 - = 2 , 256 . 8 yards yards 150
= $1 , 329 2,256.8 150
on run =
= 15 . 05 days per orde
Production Quantity Model: Example (cont.)
of production runs =
D Q
Q 1 -
10 , 000 = 2 , 256 . 8
= 4 . 43 r 32 . 2 = 2 , 256 . 8 1 150
Maximum inventory level =
d p
= 1 , 772 yards
Quantity Discounts
Price per unit decreases as order quantity increases

TC = + PD
where
CoD Q
CcQ + 2
P = per unit price of the item D = annual demand
Quantity Discount Model (cont.)

ORDER SIZE 0 - 99 $10 100 199 8 (d1) 200+ 6 (d2) PRICE
TC = ($10 ) TC (d1 = $8 ) TC (d2 = $6 )
Inventory cost ($)
Carrying cost
Ordering cost
Q(d1 ) = 100 Qopt
Q(d2 ) = 200
Quantity Discount: Example

QUANTITY 1 - 49 50 - 89 90+ PRICE $1,400 1,100 900 2CoD = Cc
Co = $2,500 Cc = $190 per computer D = 200

2(2500)(200) 190
Qopt =
For Q = 72.5 TC= For Q = 90 TC=
= 72.5 PCs
CoD + Qopt CoD Q +
CcQopt 2 CcQ 2
+ PD = $233,784
+ PD = $194,105
Reorder Point
Level of inventory at which a new order is placed
R = dL
where
d = demand rate per period L = lead time
Reorder Point: Example

Demand = 10,000 yards/year Store open 311 days/year Daily demand = 10,000 / 311 = 32.154 yards/day Lead time = L = 10 days R = dL = (32.154)(10) = 321.54 yards
Safety Stocks
Safety stock Stockout
buffer added to on hand inventory during lead time an inventory shortage probability that the inventory available during lead time will meet demand
Service level
Variable Demand with a Reorder Point

Inventory level
Reorder point , R
LT Time
LT
Reorder Point with a Safety Stock
Inventory level
Q
Reorder point , R
Safety Stock
LT Time
LT
Reorder Point With Variable Demand

R = dL + z d
where
zd
d = average daily demand L = lead time d = the standard deviation of daily demand z = number of standard deviations corresponding to the service level probability L = safety stock
Reorder Point for a Service Level

Probability of meeting demand during lead time = service level
Probability of a stockout Safety stock
zd dL Demand
L
R
Reorder Point for Variable Demand

The carpet store wants a reorder point with a 95% service level and a 5% stockout probability
d = 30 yards per day L = 10 days d = 5 yards per day
For a 95% service level, z = 1.65
R = dL + z
L
10)
Safety stock = z d
= 30(10) + (1.65)(5)( = 326.1 yards
= (1.65)(5)( 10) = 26.1 yards
Order Quantity for a Periodic Inventory System

Q = d(tb + L) + zd
where
tb + L
- I
d tb L d zd
= = = =
average demand rate the fixed time between orders lead time standard deviation of demand
t b + L = safety stock I = inventory level
Fixed-Period Model with Variable Demand

d= d= tb = L= I= z=
6 bottles per day 1 . 2 bottles 60 days 5 days 8 bottles 1 . 65 ( for a 95 % service level )
Q = d(tb + L) + zd
tb + L
- I 60 + 5 - 8
= ( 6 )( 60 + 5 ) + ( 1 . 65 )( 1 . 2 ) = 397 . 96 bottles
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Inventory Management

Pankaj V. Tadaskar Roll No. 70

how many units to order when to order

Inventory and Supply Chain Management

Two Forms of Demand

Inventory and Quality Management

Inventory Control Systems

Periodic system (fixed-timeperiod)

Economic Order Quantity (EOQ) Models

order quantity that will minimize total inventory costs

EOQ model Production quantity model

Assumptions of Basic EOQ Model

Inventory Order Cycle

Lead time Order Order placed receipt

Lead time Order Order placedreceipt

EOQ Cost Model

annual demand order quantity

EOQ Cost Model

EOQ Cost Model (cont.)

CcQ Carrying Cost = 2

CoD Ordering Cost = Q

D = 10,000 item CoD Q CcQ + 2

2(150)(10,000) TCmin = (0.75)

Qopt = 2,000 yards

TCmin = 750 + 750 = 1,500/-

Production Quantity Model

assumption that Q is received all at once is relaxed

Production Quantity Model (cont.)

0 Order receipt period

Begin End order order receip receipt t

Production Quantity Model (cont.)

Q d Average inventory level = p 2 1 TC = C oD C cQ Q + 2 d p 1 -

Production Quantity Model: Example

D = 10,000 yards p = 150 yards per day

= 32 . 2 1 - = 2 , 256 . 8 yards yards 150

= $1 , 329 2,256.8 150

= 15 . 05 days per orde

Production Quantity Model: Example (cont.)

Maximum inventory level =

Price per unit decreases as order quantity increases

P = per unit price of the item D = annual demand

Quantity Discount Model (cont.)

TC = ($10 ) TC (d1 = $8 ) TC (d2 = $6 )

Inventory cost ($)

Q(d1 ) = 100 Qopt

Quantity Discount: Example

Co = $2,500 Cc = $190 per computer D = 200

CoD + Qopt CoD Q +

d = demand rate per period L = lead time

Reorder Point: Example

Variable Demand with a Reorder Point

Reorder Point with a Safety Stock

Reorder Point With Variable Demand

Reorder Point for a Service Level

Probability of a stockout Safety stock

Reorder Point for Variable Demand

For a 95% service level, z = 1.65

= 30(10) + (1.65)(5)( = 326.1 yards

= (1.65)(5)( 10) = 26.1 yards

Order Quantity for a Periodic Inventory System