1 / 20

Inventory ISQA 459/559 Mellie Pullman

Inventory ISQA 459/559 Mellie Pullman. Inventory Costs. Holding (or carrying) costs Setup (or production change) costs Ordering costs. Shortage costs. Inventory costs. C = Unit cost or production cost: the additional cost for each unit purchased or produced.

makani
Download Presentation

Inventory ISQA 459/559 Mellie Pullman

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Inventory ISQA 459/559Mellie Pullman

  2. Inventory Costs • Holding (or carrying) costs • Setup (or production change) costs • Ordering costs. • Shortage costs.

  3. Inventory costs • C = Unit cost or production cost: the additional cost for each unit purchased or produced. • H = Holding costs: cost of keeping items in inventory(cost of lost capital, taxes and insurance for storage, breakage, etc., handling and storing) • S = Setup or ordering costs: a fixed cost incurred every time you place an order or a batch is produced.

  4. Inventory Game Round ONE

  5. Total costs of carrying inventory • Assumptions • demand is constant and uniform throughout the period for your products (5 cases per day) • Price per unit is constant for the period ($16/case) • Inventory holding cost is based on an average cost. • Total Inventory Policy Cost annually= annual purchase cost + annual order cost + annual holding cost

  6. Total cost of Inventory Policy • = annual purchase cost (annual demand * Cost/item)+ annual order cost (annual # orders * Cost to order)+ annual holding cost (average units held*cost to carry one unit)

  7. Total Inventory Cost Equation D = yearly demand of units C = cost of each unit Q = quantity ordered S = cost to place order H = average yearly holding cost for each unit = storage+interest*C D/Q = number of orders per year Q/2 = average inventory held during a given period assuming with start with Q and drop to zero before next order arrives (cycle inventory).

  8. Deriving the EOQ :Economic Order Quantity • Setting the total holding cost equal to the total setup cost and determining Q:

  9. Number of units on hand Q Q Q R L L Time R = Reorder point Q = Economic order quantity L = Lead time EOQ Model--Basic Fixed-Order Quantity Model (Q)

  10. The Reorder Point Reorder point = (average period demand)*Lead Time periods = d * L

  11. Another EOQ Example Annual Demand = 1,000 units Days per year considered in average daily demand = 365 Cost to place an order = $10 Holding cost per unit per year = $2.50 Lead time = 7 days Cost per unit = $15 Determine the economic order quantity & reorder point.

  12. Minor Deviations Here • What causes minor deviations from the ideal order size? • Assumptions behind the regular EOQ Model?

  13. Inventory Game Round Two:Variable demand

  14. Variations in lead time • If we have variations in lead time, how should we change the reorder point so we rarely run out? Reorder Point = Average demand during lead time(d*L) + safety stock (Z* sL) • where: d = average daily (or weekly) demandL = Lead time (matching days or weeks)sL = standard deviation of demand during lead time. sD = standard deviation of demand (days or weeks).

  15. Service Level or % of time inventory will meet demand during lead time

  16. Example • Annual Demand = 1000 units • 250 work days in the yeard=1000/250 = 4 units/day • Q= 200 unitsL=9 days sL = 3 units • z=2 (97.7% likelihood that we won’t run out during lead time)Reorder point= d*L +z*sL= (4*9) + (2*3) = 42 units

  17. P Method (periodic review) • You have a predetermined time (P) between orders • (sales rep comes by every 10 days) • or the average time between orders from EOQ is Q/D (Q=100 orders; D =1200 orders per year so P=Q/D = 1/12 year or every month. • How much should you order to bring inventory level up to some predetermined level, R?

  18. P Method (periodic review) • R = restocking level • Current Inventory position = IP • Order Quantity= R-IP • How do we determine R?

  19. Restocking Level • Needs to meet most demand situations • R= Restocking level = Average demand during lead time & review period+ safety stock= mP+L + z* sP+Lwhere:mP+L = average demand during lead time and review period z = # of standard dev from mean above the average demand (higher z is lower probability of running out). sRP+L= standard deviation of demand during lead time + review period

More Related