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58 views7 pages

Inv Notes

Uploaded by

Nguyễn Ngọc Quỳnh Anh
Copyright
© © All Rights Reserved
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Inventory Notes by Dr.

Abe Feinberg

What is the order quantity such that the total cost is minimized?
1. Total cost = holding cost + ordering cost
= (order quantity/2) x holding cost per unit per year + (annual demand/order quantity) x
cost per order

2. Optimal order quantity (Q*) is found when annual holding cost = ordering cost

3. Number of orders = Annual Demand/Q*


4. Time between orders = No. of working days per year / number of orders
5. Reorder point = daily demand x lead time + safety stock
Example:
Given:
Annual Demand = 60,000
Ordering cost = $25 per order
Holding cost = $3 per item per year
No. of working days per year = 240
Then, it can be computed:
Q* = 1000
Total cost = $3000
Number of orders = 60000/1000 = 60
Time between orders = 240/60 = 4 days
Daily demand = 60000/240 = 250
If lead time = 3 days (lead time < time between orders)
Reorder point = (60000/240)x3=750
Reorder when inventory on hand = 750

If lead time = 5 days (lead time > time between orders)


Reorder point = 250x5 = 1250
Reorder when inventory on hand = 1250-Q*=1250-1000=250
In class exercise
Pg.540, Problems 10
Annual demand = 2000
Ordering cost = $10
Holding cost = $5
EOQ = sqrt(2*2000*10/5) = 89
Annual ordering cost = 2000/89*$10 = $223.6
Annual holding cost = 89/2*$5 = $223.6

ABC Analysis -- classify inventory into 3 groups according to its annual dollar
volume/usage
Annual dollar volume = annual demand x cost
An example:

A Top 80% of total dollar volume


B Next 15%
C Next 5%
Item# Annual Demand Cost Demand x Cost % of total cost Class
234 50 200 10000 10% B
170 10 200 2000 2% C
222 100 800 80000 80% A
410 50 100 5000 5% B
160 15 200 3000 3% C
Total 100000
Exercise
Pg.541 Problem 13, 27
Purposes of inventory
1. Smooth-out variations in operation performances
2. Avoid stock out or shortage
3. Safeguard against price changes and inflation
4. Take advantage of quantity discounts

Inventory costs
1. Holding or carrying costs: storage, insurance, investment, pilferage, etc.

Annual holding cost = average inventory level x holding cost per unit per year
= order quantity/2 x holding cost per unit per year

2. Setup or ordering costs: cost involved in placing an order or setting up the equipment
to make the product

Annual ordering cost = no. of orders placed in a year x cost per order
= annual demand/order quantity x cost per order

1. Function of Inventories: Decouple Supply from Demand.


2. Types of Inventory Systems:
a. Multi-Period
(1) Continuous Review (also called Fixed Quantity): when inventory drops
to the reorder level, a fixed quantity is ordered. This is used for high
volume, valuable, or important items.
(2) Periodic Review: when inventory drops at or below the reorder level, a
quantity that brings inventory up to the maximum inventory level is
ordered. This is used for moderate volume items.
(3) Two Bin: when Bin A is empty, start using Bin B and order another Bin of
items. This is used for low value or slow moving items.
(4) A-B-C System: this combines the three systems above for high, moderate
and low importance items.
b. Single Period
(1) Dollar Limit System: used for one time ordering for seasonal
products or spare parts purchases.

3. Inventory Decisions: how much to order and when to order.

4. Fixed Order Quantity System Models p. 540ff. in text

Notation (p. 542)

Q= quantity ordered (units)


D=annual demand (units per year)
C=carrying cost for one unit in inventory for one year (dollars per unit per year)
S=order cost (for buying) or setup cost (for manufacturing) in (dollars per order)
TSC= total stocking costs (dollars per year)
EOQ=economic order quantity (the quantity that minimizes TSC

Cost formulas
Annual carrying cost =Average Inventory*C = (Q/2)*C
Annual Ordering Cost=orders per year*S= (D/Q)*S
TSC= carrying cost plus order cost == (Q/2)*C + (D/Q)*S
_______ ______
EOQ =  2DS/C and for the EOQ the minimum TSC= 2DSC = C*EOQ

Example for the Basic Model

D=annual demand (units per year)= 10,000


C=carrying cost for one unit in inventory for one year (dollars per unit per year)=$4
S= order cost=$50
______ _____________
Then, EOQ =  2DS/C =  2*10,000*50/4 = 500 units per order
______ _____________
And TSC=  2DSC = 2*10,000*50*4 =$2,000 per year
________________________________________________________________

Second Inventory Model – Determining production lot size (p. 544ff)

Assumptions 1,3 and 4 for the Basic model still hold, but the second assumption is
changed so that delivery lead time is known but delivery takes place at a rate of p units
per day until the order is filled and the delivery rate p is greater than the usage rate d units
per day.

Formulas are given on p. 545

The maximum inventory level = buildup rate* period of delivery = (p-d)*(Q/p)


Average Inventory = .5* Maximum inventory = .5*(p-d)*(Q/p) which is smaller than the
average inventory in the basic model =.5*Q
_______________
The EOQ is derived on p. 363 to be  (2DS/C)*[p/(p-d)]
_______________
And for the EOQ the minimum TSC= (2DSC )/[p/(p-d)] = C/[p/(p-d)] *EOQ

Example for the Production Lot Size Model:

D=annual demand (units per year)= 10,000


C=carrying cost for one unit in inventory for one year (dollars per unit per year)=$4
S= order cost=$50
d=daily demand = annual demand/250= D/250= 10,000/250= 40 units per day
p=daily production rate = 90 units per day
_______________ ________________________
Then, EOQ =  (2DS/C)*[p/(p-d)] = (2*10,000*50/4)*[90/(90-40)] = 671 units
______________ _________________________
And TSC= (2DSC)/[p/(p-d)] = (2*10,000*50*4)/[90/(90-40)] =$1,491 per year

Note that the order quantity is up and the total costs are down.

Third Inventory Model – EOQ with Quantity Discounts (p. 546ff)

Assumptions 1, 2 and 3 for the Basic model hold, but quantity discounts are allowed.

In addition to the previous notation, we’ll have

TMC= total annual material costs = carrying cost + order cost + acquisition cost

TMC=(Q/2)*C + (D/Q)*S + ac*D, where

ac=acquisition cost per unit at a specific price.

The procedure to be used is:

1. Compute the theoretical EOQ for each price using the formula for the basic model
______
 2DS/C but noting that C will be a fraction of the acquisition cost.

2. For each price, find the nearest feasible quantity to the theoretical EOQ. This is the
best feasible quantity for that price.

3. For each best feasible quantity determined in step 2, calculate the TMC.

4. The best overall order quantity is the one determined in step 2 with the lowest TMC
determined in step 3.

The template on the last page of this material may be useful in organizing your
calculations.

Example for the Quantity Discount Model

ac1 = $25 per unit if 1 to 599 units are ordered

ac2 = $24 per unit if 600 or more units are ordered


D=annual demand (units per year)= 10,000
C=carrying cost for one unit in inventory for one year (dollars per unit per year)=$4
S= order cost=$50
f=fraction of acquisition cost attributable to holding cost so C=f*ac
f=.16

Range Quantities Acquisition EOQ Best Feasible Total Annual


Allowed Cost (ac) Theoretica Quantity Material
l (Nearest) Cost

1 1-599 $25 500 500 $252,000


2 600-up $24 510 600 $241,985
(Optimum) (minimum)

Determining Order Points pp. 550-558.

Using the expected demand during the lead time (EDDLT) and the standard deviation of
demand during the lead time DDLT the order point OP can be determined as expected
demand during the lead time plus Safety Stock or OP= EDDLT + SS.

Example for determining the order point:

Demand during the known lead time is normally distributed with a mean of 400 and a
standard deviation of 50. Determine the order point if the risk of a stockout is desired to be
not more than .04 .

The order point would be the demand value that is exceeded not more than .04 of the
time. Looking in the normal probability table on p. 774, for the z value that yields an
area of .96 (from 1.0-.04) we find z = 1.75 .

The order point is then the mean plus 1.75*DDLT


i.e., EDDLT + 1.75*DDLT = 400 + 1.75*50 = 400 + 87.5 =487.5 taken to the next highest
integer or 488 = OP. The safety stock = OP - EDDLT = 488 – 400 = 88.
Template for Quantity Discount Inventory Model
(Add Rows if Necessary)

Range Quantities Acquisition EOQ Best Feasible Total Annual


Allowed Cost (ac) Theoretica Quantity Material
l (Nearest) Cost

1
2
3
4

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