Lecture Introduction to operations management - Chapter 15: Independent demand inventory

In this chapter we will discuss: Purpose of inventories, costs of inventories, independent versus dependent demand, economic order quantity, continuous review system, periodic review system, using P and Q system in practice, ABC inventory management.

Contemporary Concepts and Cases

Chapter FifteenIndependent Demand Inventory 

Inventory:  a stock of materials used to facilitate production or satisfy customer demand

Materials-Flow Process (Fig 15.1)

Work in process

Work in process

Work in process Finishedgoods

Raw Materials

Productive Process

Inventory Cost Structures ( 1 )

Inventory Cost Structures (3)

How the 35% carrying cost is distributed:

Inventory Cost Structures (5)

Two Forms of Demand (2)

Figure 15.4: Demand Patterns

A pattern plus random influences ‘Lumpy’ because of production lots

Economic Order Quantity (EOQ)

Developed in 1915 by F.W. Harris

Answers the question ‘How much do I order?’

Used for independent demand items.

Objective is to find order quantity (Q) that minimizes  the total cost (TC) of managing inventory.

Must be calculated separately for each SKU.

Widely used and very robust (i.e., works well in a 

variety of situations, even when its assumptions don’t  hold exactly). 

Economic Order Quantity (EOQ)

Basic Model Assumptions

EOQ Lot Size Choice

Average Inventory Level = Q/2

Han

Notation in EOQ Calculation

Total Cost of Inventory (Fig 15.6)

TC and EOQ

TC =  ordering cost + holding cost 

= S*(D/Q) + iC*(Q/2)  EOQ =

note:  Although we use annual costs, any time period can be used.   Just be consistent!  The same is true for currency designations.

iC

SD

15­24

EOQ Example

Sales = 10 cases/week S = $12/order

i = 30% per year C = $80/case      _

Relevant Supply Chain Costs for

Personal Computer Inventories

Component devaluation costs

Price protection costs

Product return costs

Obsolescence costs (end­of­life)

Continuous Review (Q) System (Fig 15.7)

R = Reorder Point

Q = Order Quantity

L  = Lead time

Periodic Review System (2)

Periodic Review (P) System (Fig 15.9)

Time Between Orders (P) and

Target Level (T) Calculation

D C i

Using P and Q Systems in Practice

Service Level versus Inventory Level (Fig 15.10)

1.1

2.5 2.4 2.3 2.2 2.1 2.0

1.9 1.8 1.7 1.6 1.5

1.3 1.2 1.0

ABC Inventory Management (2)

items may be classified as ‘A.’

ABC Chart for Table 15.4

End of Chapter Fifteen