Economic Principles Inventory

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• Economic Principles Inventory

David Galligan
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• Basic Concept

Time
Input Purchase ----------gt Input Utilized
Product value
realized
Inventory
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• Inventory

Quantity used/ unit time
Quantity Ordered Q
Q
Time
Time Interval between Orders
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• Average Inventory

Q
.5xQ
Time
Average Inventory will equal half the reorder
volume Q
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• Inventory

Q
Q
Re-Order
Time
Lead Time - till order is filled
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• Demand for Inventory

Q
12 months
Time
3 Q Demand where 3 is the number of
orders/year generalizing, n Q D , also n D/Q
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• Cost with Inventory

Inventory order cost Each time an order is
placed it cost money Inventory Storage cost
Money invested in feed is money that is not at
"work". The rate of return to the farm can be
used as the "time cost" of money
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• Order Cost

Order Cost cost of placing a order C
Order
Number of orders per year must meet the
Demand for the year.
n Demand / Quantity per order D/Q
C D/Q Total order cost
Order
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• Storage Cost

The value that a unit of inventory would make
1 ton of SBM 48 costing 200/ton and stored for
a year would make 20 dollars/year C 20
Price/ton Time Value of money
storage
The number of units in inventory at any point
is 1/2 Quantity ordered
Storage Cost 1/2 Q C
storage
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• Total Inventory Cost with
• each level of Quantity Ordered

Order Cost Storage Cost
1/2 Q C

storage
What level of Q (order quantity) will make
this minimal in total cost
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• Graph of Inventory Cost

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• Graph of Total Inventory Cost

Minimun Cost
Q optimal
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• Minimum Cost is when

Order Quantity 2 D C order /C holding
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• Other Related Equations

• Reorder Point Daily use rate Lag time
• Number (n) of orders/year D/Q
• Cycle Time 365/n

optimal
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Spread-sheet Model
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Comparison of Different Prices at Fixed Order
Quantities