Operations management by stevenson 9th student slides chapter 12

Chapter 12: Learning Objectives• You should be able to: – Define the term inventory, list the major reasons for holding inventories, and list the main requirements for effective invento

Chapter 12

Inventory Management

Chapter 12: Learning Objectives

• You should be able to:

– Define the term inventory, list the major reasons for holding

inventories, and list the main requirements for effective inventory management

– Discuss the nature and importance of service inventories

– Discuss periodic and perpetual review systems

– Discuss the objectives of inventory management

– Describe the A-B-C approach

– Describe the basic EOQ model and its assumptions and solve

typical problems

Chapter 12: Learning Objectives (contd.)

• You should be able to:

– Describe the economic production quantity model and solve

typical problems

– Describe the quantity discount model and solve typical problems – Describe reorder point models and solve typical problems

– Describe situations in which the single-period model would be

appropriate

– A stock or store of goods

– Items that are ready to be sold or used

Inventory Costs

– Cost to carry an item in inventory for a length of time,

usually a year

– Costs of ordering and receiving inventory

– Costs resulting when demand exceeds the supply of

inventory; often unrealized profit per unit

Basic EOQ Model

• The basic EOQ model is used to find a fixed order

quantity that will minimize total annual inventory costs

• Assumptions

– Only one product is involved

– Annual demand requirements are known

– Demand is even throughout the year

– Lead time does not vary

– Each order is received in a single delivery

– There are no quantity discounts

Deriving EOQ

• Using calculus, we take the derivative of the

total cost function and set the derivative (slope) equal to zero and solve for Q.

• The total cost curve reaches its minimum where

the carrying and ordering costs are equal.

cost) der

demand)(or annual

( 2

2

*



Q

Economic Production Quantity (EPQ)

• Assumptions

– Only one product is involved

– Annual demand requirements are known

– Usage rate is constant

– Usage occurs continually, but production occurs periodically

– The production rate is constant

– Lead time does not vary

– There are no quantity discounts

u p

p H

DS

Q p



*

When to Reorder

• Reorder point

– When the quantity on hand of an item drops to this amount, the

item is reordered

– Determinants of the reorder point

1 The rate of demand

2 The lead time

3 The extent of demand and/or lead time variability

4 The degree of stockout risk acceptable to management

Reorder Point: Under Certainty

) as units time

same (in

time Lead

LT

per week) day,

per period,

per (units

rate Demand

where

LT ROP

d d

d









Reorder Point: Under Uncertainty

• Demand or lead time uncertainty creates the possibility

that demand will be greater than available supply

• To reduce the likelihood of a stockout, it becomes

necessary to carry safety stock

– Safety stock

• Stock that is held in excess of expected demand due to variable demand and/or lead time

Stock Safety

demand Expected

ROP

How Much Safety Stock?

• The amount of safety stock that is appropriate

for a given situation depends upon:

1 The average demand rate and average lead time

2 Demand and lead time variability

3 The desired service level

where

time lead

during

demand Expected

ROP   z dLT

Reorder Point: Demand Uncertainty

) as units time

(same time

Lead

LT

) as units time

(same period

per demand

of stddev.

The

per week) day,

(per period

per demand

Average

deviations standard

of Number

where

LT ROP

d

d d

z

z d

d

d

















Operations Strategy

• Improving inventory processes can offer significant cost

reduction and customer satisfaction benefits

– Areas that may lead to improvement:

• Record keeping

– Records and data must be accurate and up-to-date

• Variation reduction

– Lead variation – Forecast errors

• Lean operations

• Supply chain management