Inventory ISQA 459/559 Mellie Pullman

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Inventory ISQA 459/559Mellie Pullman
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Inventory Costs

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

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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.

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Inventory Game Round ONE
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(No Transcript)
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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

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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 heldcost to carry one unit)

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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 storageinterestC 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).
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Deriving the EOQ Economic Order Quantity

• Setting the total holding cost equal to the total
  setup cost and determining Q

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EOQ Model--Basic Fixed-Order Quantity Model (Q)
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The Reorder Point
Reorder point (average period demand)Lead Time
periods d L
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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
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Determine the economic order quantity reorder
point.
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Minor Deviations Here

• What causes minor deviations from the ideal order
  size?
• Assumptions behind the regular EOQ Model?

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Inventory Game Round TwoVariable demand
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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(dL) 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).

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Service Level or of time inventory will meet
demand during lead time
Z Value Resulting Service Level
1.28 90
1.65 95
2.33 99
3.08 99.9
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Example

• Annual Demand 1000 units
• 250 work days in the yeard1000/250 4
  units/day
• Q 200 unitsL9 days sL 3 units
• z2 (97.7 likelihood that we wont run out
  during lead time)Reorder point dL zsL
  (49) (23) 42 units

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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 (Q100 orders D 1200 orders per year so
  PQ/D 1/12 year or every month.
• How much should you order to bring inventory
  level up to some predetermined level, R?

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P Method (periodic review)

• R restocking level
• Current Inventory position IP
• Order Quantity R-IP
• How do we determine R?

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Restocking Level

• Needs to meet most demand situations
• R Restocking level Average demand during
  lead time review period safety stock mPL
  z sPLwheremPL 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). sRPL
  standard deviation of demand during lead time
  review period