Lecture Purchasing and supply chain management (3/e): Chapter 5 - W. C. Benton

Chapter 5 - Inventory management. Inventory management is presented in Chapter 5. Inventory is the life blood of any business. Most firms store thousands of different items. There are many inexpensive supply or operating type items. The type of business a firm is in will usually determine how much of the firm’s assets are invested in inventories.

3rd edition

Chapter 5:

Inventory Management

• Independent demand 

• Dependent demand

Decoupling stocks

ABC Classification

ABC Analysis Curve

• EOQ is the optimal lot size for purchasing

• Minimizes the total cost of ordering and holding inventory

• Place an order of EOQ when the inventory levels fall below reorder 

point (R)

• Simplified total cost associated with inventory

Total Cost (TC)= Ordering Cost (CP)

+Holding Cost(CH)

Economic Order Size (EOQ)

Reorder Point (ROP)

1 Demand is continuous at a constant rate

2 Constant lead time

3 Constant unit price

Fixed­order cost per order

6 Instantaneous replenishment

7 No shortages allowed

8 No demand uncertainty

9 No quantity discounts available

• Relaxation 

• A probability distribution of demands

(cont.)

• Safety stock

• Extra inventory carried to protect against stocking out because of  demand uncertainty

• What is the appropriate level of safety stock to carry?

Safety Stock (SS) and Reorder Point (ROP)

• For components of assembled products: 

• Inventory depletion for component parts tends to occur in discrete 

“lumps” because of lot sizing of the final product

• Requirements dependent on the final product are usually discontinuous

Questions?