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Replenishment
order
Factory
Production
Delay
Replenishment Replenishment
order
order
Wholesaler
Distributor
Shipping
Delay
Wholesaler
Inventory
Retailer
Shipping
Delay
Distributor
Inventory
Customer
order
Customer
Item Withdrawn
Retailer
Inventory
Learning Objectives
18-2
Role of Inventory
Decoupling inventories
Seasonal inventories
Speculative inventories
Cyclical inventories
In-transit inventories
Safety stocks
18-3
Considerations in Inventory
Systems
Ordering costs
Shortage costs
18-5
Inventory Management
Questions
18-6
Inventory Models
18-7
17-8
R = Reorder point
Q = Economic order quantity
L = Lead time
Time
L
3. When you reach down to
a level of inventory of R,
you place your next Q
sized order.
17-9
Total
Annual =
Cost
Annual
Annual
Annual
Purchase + Ordering + Holding
Cost
Cost
Cost
D
Q
TC = DC + S + H
Q
2
TC=Total annual
cost
D =Demand
C =Cost per unit
Q =Order quantity
S =Cost of placing
an order or setup
cost
R =Reorder point
L =Lead time
H=Annual holding
and storage cost
per unit of
inventory
900
800
700
600
500
400
300
200
100
0
14
0
12
0
10
0
80
60
40
Holding Cost
Ordering Cost
Total Cost
20
Annual Cost, $
Order Quantity, Q
18-10
17-11
2DS
=
H
We also need a
reorder point to
tell us when to
place an order
R eorder p oint, R = d L
_
17-12
17-13
Q OPT =
2DS
=
H
2(1,000 )(10)
= 89.443 units or 90 units
2.50
17-14
17-15
Q OPT =
2D S
=
H
2(10,000 )(10)
= 365.148 units, or 366 u n its
1.50
17-16
2DS
2(Annual Demand)(Order or Setup Cost)
Q OPT =
=
iC
Annual Holding Cost
i = percentage of unit cost attributed to carrying inventory
C = cost per unit
Since C changes for each price-break, the formula
above will have to be used with each price-break cost
value
17-17
17-18
Q OPT =
2DS
=
iC
2(10,000)(4)
= 1,826 units
0.02(1.20)
Q OPT =
2DS
=
iC
2(10,000)(4)
= 2,000 units
0.02(1.00)
Q OPT =
2DS
=
iC
2(10,000)(4)
= 2,020 units
0.02(0.98)
17-19
Since the feasible solution occurred in the first pricebreak, it means that all the other true Qopt values occur
at the beginnings of each price-break interval. Why?
Because the total annual cost function is
a u shaped function
Total
annual
costs
So the candidates
for the pricebreaks are 1826,
2500, and 4000
units
0
1826
2500
4000
Order Quantity
17-20
Next, we plug the true Qopt values into the total cost
annual cost function to determine the total cost under
each price-break
D
Q
TC = DC +
S+
iC
Q
2
TC(0-2499)=(10000*1.20)+(10000/1826)*4+(1826/2)(0.02*1.20)
= $12,043.82
TC(2500-3999)= $10,041
TC(4000&more)= $9,949.20
Questions
18.7
18.9
A.D. Small Consulting
u=3
u=3
15
.
15
.
15
.
u=3
u=3
d L 12
ROP
ss
18-22
ROP SS d L
18-23
EOQ
Reorder point, ROP
d3
Safety stock, SS
d1
d2 EOQ
First lead
time, LT1
LT2
LT3
Time
Order 1 placed
Order 2 placed
Shipment 1 received
Order 3 placed
Shipment 2 received
Shipment 3 received
18-24
Review period
RP
RP
RP
Q3
Q2
d3
d1
d2
Safety stock, SS
LT2
LT3
Time
Order 1 placed
Order 2 placed
Shipment 1 received
Order 3 placed
80
90
10
0
60
70
40
50
20
30
110
100
90
80
70
60
50
40
30
20
10
0
0
10
Unit cost
($)
Monthly
Sales
(units)
Dollar
Volume ($)
Home Theater
Computers
5000
2500
30
30
150,000
75,000
Television sets
Refrigerators
Displays
400
1000
250
60
15
40
24,000
15,000
10,000
Speakers
Cameras
Software
Thumb drives
CDs
150
200
50
5
10
60
40
100
1000
400
9,000
8,000
5,000
5,000
4,000
Totals
305,000
Percent of
Dollar
Volume
Percent of
SKUs
Class
74
20
16
30
10
50
100
100
18-28
Demand
Frequency
10
11
12
Demand
Frequency Probability
0.0278
0.0556
0.0833
0.1111
0.1389
0.1667
0.1389
0.1111
10
0.0833
11
0.0556
12
0.0278
Stock Q
8
.028
.055
.083
.111
.139
.167
.139
.111
.083
.055
.028
2
3
4
5
6
7
8
9
10
11
12
4
12
20
28
36
36
36
36
36
36
36
2
10
18
26
34
42
42
42
42
42
42
0
8
16
24
32
40
48
48
48
48
48
-2
6
14
22
30
38
46
54
54
54
54
-4
4
12
20
28
36
44
52
60
60
60
$31.54
$34.43
$35.77
$35.99
$35.33
Expected Profit
10
18-32
Demand
Frequency Probability
P (D<Q)
0.0278
0.0556
0.0278
0.0833
0.0833
0.1111
0.1667
0.1389
0.2778
0.1667
0.4167
0.1389
0.5833
0.1111
0.7222
10
0.0833
10
0.8333
11
0.0556
11
0.9167
12
0.0278
12
0.9722
P( D Q)Cu P( D Q)Co
1 P( D Q)C
P ( D Q) Co
Cu
P ( D Q)
Cu Co
(Critical Fractile)
where:
Cu = unit contribution from newspaper sale ( opportunity cost of underestimating demand)
Co = unit loss from not selling newspaper (cost of overestimating demand)
D = demand
Q = newspaper stocked
18-34
Probability
P(D>Q)
(Cu applies)
0.722
10
12
14
Questions
Example 3 page 501
18.11
18.15
Case last resort restaurant
18-36
2.
3.
Tue.
Wed.
Thurs.
Fri.
250
275
260
300
290
235
250
295
310
360
2430
275
286
236
294
289
315
340
256
311
18-38