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Inventory control
Lecture Outline
Elements of Inventory Management
Inventory Control Systems
Economic Order Quantity Models
Quantity Discounts
Reorder Point
Order Quantity for a Periodic Inventory
System
What Is Inventory?
Stock of items kept to meet future
demand
Purpose of inventory management
Types of Inventory
Raw materials
Purchased parts and supplies
Work-in-process (partially completed)
products (WIP)
Items being transported
Spare parts, Tools, and equipment
Dependent
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
Assumptions of Basic
EOQ Model
Demand is known with certainty and
is constant over time
No shortages are allowed
Lead time (time from ordering to
receipt) for the receipt of orders is
constant
Order quantity is received all at once
Demand
rate
Reorder point, R
Lead
time
Order Order
placed receipt
Lead
time
Order Order
placed receipt
Time
D - annual demand
Q - order quantity
AD
Q
CQ
2
Total cost =
AD
Q +
CQ
2
CQ
+ 2
C
+ 2
C
+ 2
2AD
C
Proving equality of
costs at optimal point
AD
Q
CQ
= 2
2AD
Q = C
2
Qopt =
2AD
C
Total Cost
Slope = 0
CQ
Carrying Cost = 2
Minimum
total cost
AD
Ordering Cost = Q
Optimal order
Qopt
Order Quantity, Q
EOQ Example
C = $0.75 per yard
Qopt =
Qopt =
A = $150
2CoD
Cc
2(150)(10,000)
(0.75)
D = 10,000 yards
AD
CQ
TCmin = Q + 2
TCmin =
(150)(10,000) (0.75)(2,000)
+
2,000
2
Reorder Point
Level of inventory at which a new order
is placed
R = dL
where
d = demand rate per period
L = lead time
Production Quantity
Model
An inventory system in which an order is
received gradually, as inventory is
simultaneously being depleted
Non-instantaneous receipt model
Q(1-d/p)
Maximum
inventory
level
Q
(1-d/p)
2
Average
inventory
level
0
Order
receipt period
Begin
End
order order
receipt receipt
Time
d = demand rate
2AD
Qopt =
d
C 1p
C 1-
D = 10,000 yards
p = 150 yards per day
2(150)(10,000)
d
p
AD
CQ
d
TC = Q + 2 1 - p
32.2
0.75 1 150
= 2,256.8 yards
= $1,329
2,256.8
Q
Production run =
=
150 = 15.05 days per order
p
d
p
= 2,256.8 1 -
= 1,772 yards
32.2
150
Cont
The goal : is to reduce price (P) for an item when it is purchased in
larger quantities
Discount Number Discount Quantity Discount (%) Discount Price (P)
1
2
3
0 to 999
1,000 to 1,999
2,000 and over
no discount
4
5
$5.00
$4.80
$4.75
= DS/Q + QH/2 + PD
Q : Quantity ordered
D : Annual demand in units
S : Ordering or setup cost per order per setup
P : Price per unit
H : Holding cost per unit per year
2.
Q1* =
Q2* =
Q3* =
700
1,000 adjusted
2,000 adjusted
Discount
Annual Product Annual
Annual
Total
TC Unit =riceDS/Q
+ Quantity
QH/2 +Cost
PD
Number
(P) Order
Ordering Cost Holding Cost Cost
1
2
3
$5.00
$4.80
$4.75
700
1,000
2,000
$25,000.00
$24,000.00
$23,750.00
$350
$245
$122,5
$350
$480
$950
$25,700
$24,725
$24,823
PRICE
1 - 49
50 - 89
90+
$1,400
1,100
900
Qopt =
2 Co D
Cc
A=
C=
D=
$2,500
$190 per computer
200
2(2500)(200)
= 72.5 PCs
190
For Q = 72.5
CQopt
AD
TC = Q
+
+ PD = $233,784
2
opt
For Q = 90
AD
TC = Q
CQ
+ 2
+ PD = $194,105
Safety Stocks
Safety stock
buffer added to on hand inventory during lead
time
Stockout
an inventory shortage
Service level
probability that the inventory available during
lead time will meet demand
Inventory level
Q
Reorder
point, R
Safety Stock
LT
LT
Time
zd
Probability of
a stockout
Safety stock
z d L
dL
Demand
Safety stock = z d L
= (1.64)(5)( 10)
= 325.9 m
= 25.9 m
ABC Classification
The items on hand are classified into A, B, and C types
on the basis of the value in terms of capital or annual
dollar usage (i.e., dollar value per unit multiplied by
annual usage rate), and then allocates control efforts
accordingly.
Thus, the items with high value and low volume are kept
in A-type, items with low value and high volume are kept
in C-type, and the items with moderate value and
moderate volumes belong to the B-type.
A ---- very important, B ---- moderately important,
and C-- least important
5 15 % of units
70 80 % of value
Class B
30 % of units
15 % of value
Class C
50 60 % of units
5 10 % of value
UNIT COST
ANNUAL USAGE
$ 60
350
30
80
30
20
10
320
510
20
90
40
130
60
100
180
170
50
60
120
ABC Classification:
Example (cont.)
PART
9
8
2
1
4
3
6
5
10
7
TOTAL
PART
VALUE
$30,600
1
16,000
2
14,000
3
5,400
4
4,800
5
3,900
3,600
6
3,000
7
2,400
8
1,700
9
$85,400
10
%UNIT
OF TOTAL
% OFANNUAL
TOTAL
COST
USAGE
VALUE
QUANTITY
% CUMMULATIVE
35.9
$ 60
18.7
350
16.4
30
6.3
5.680
4.630
4.220
3.510
2.8
320
2.0
510
20
6.0
5.0
4.0
9.0
6.0
10.0
18.0
13.0
12.0
17.0
90
A40
130
B60
100
180
170
C
50
60
120
6.0
11.0
15.0
24.0
30.0
40.0
58.0
71.0
83.0
100.0
Example 10.1
ABC Classification:
Example (cont.)
PART
TOTAL
PART
VALUE
9 $30,600
1
8
16,000
2
2
14,000
3
1
5,400
4
4
4,800
5
3
3,900
6
3,600
6
5 CLASS
3,000
7
10
2,400
A8
7
1,700
B
9
C
$85,400
10
%UNIT
OF TOTAL
% OFANNUAL
TOTAL
COST
USAGE
VALUE
QUANTITY
% CUMMULATIVE
35.9
6.0
$ 60
18.7
5.0
350
16.4
4.0
30
6.3
9.0
5.680
6.0
4.630
10.0
4.220% OF TOTAL
18.0
ITEMS
3.510 VALUE
13.0
12.0
9, 8, 22.8
71.0
320
17.0
1, 4, 32.0
16.5
510
6, 5, 10,
7
12.5
20
6.0
90
11.0
A40
15.0
130
24.0
30.0
B60
100
40.0
% OF TOTAL
58.0
180
QUANTITY
71.0
170
C 15.083.0
50
100.0
25.0
60 60.0
120
Example 10.1
Purchasing
Purchasing is an important function of
materials management.
In any industry purchase means buying
of equipments, materials, tools, parts etc.
required for industry.
Objectives of Purchasing
The basic objective of the purchasing
function is to ensure continuity of supply
of raw materials, sub-contracted items
and spare parts and to reduce the
ultimate cost of the finished goods.
Parameters of Purchasing
The success of any manufacturing activity is
largely dependent on the procurement of raw
materials of right quality, in the right quantities,
from right source, at the right time and at right
price popularly known as ten Rs of the art of
efficient purchasing.
Purchase parameters
RIGHT PRICE
RIGHT QUALITY
RIGHT TIME
RIGHT SOURCE
RIGHT QUANTITY
RIGHT ATTITUDE
RIGHT CONTRACT
RIGHT MATERIAL
RIGHT TRANSPORTATION
RIGHT PLACE OF
DELIVERY
Purchasing Procedure
Exercise
The XYZ Ltd. carries a wide assortment of items for its
customers.
One of its popular items has annual demand of 8000 units.
Ordering cost per order is found to be Rs. 12.5. The carrying cost
of average inventory is 20% per year and the cost per unit is Rs.
1.00. Determine the optimal economic quantity and make your
recommendations.