Why is Inventory Important?

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Why is Inventory Important?

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Title: Why is Inventory Important? Author: DePaul University Last modified by: Valued Gateway Customer Created Date: 5/17/1996 1:15:18 PM Document presentation format – PowerPoint PPT presentation

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Title: Why is Inventory Important?


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Why is Inventory Important?
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Water Tank Analogy
Demand Flow (Finished Goods)
Inventory Level
Flow of Receipts (Raw Materials Parts)
Scrap or Reject Flow
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Outflow exceeds Inflow
Demand Flow (Finished Goods)
Flow of Receipts (Raw Materials Parts)
Scrap or Reject Flow
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Inflows exceed Outflows
Demand Flow (Finished Goods)
Flow of Receipts (Raw Materials Parts)
Scrap or Reject Flow
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Types of Demand
  • Independent
  • Items demand is influenced ONLY by market
    conditions and is NOT related to production
    decisions for any other items.
  • Only end items
  • Demand must be forecast
  • Examples
  • Cars, TVs, Bicycles, Number of Seats in a
    restaurant

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Types of Demand
  • Dependent
  • Items demand derives from the production
    decisions of its parents.
  • All intermediate and purchased items in
    manufacturing
  • Demand should be derived
  • Examples
  • Car doors, Tv remotes, Bicycle tires, Number of
    T-bones for a given night

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A Bill of Materials
A
B(3)
D(3)
G(1)
C(1)
C(2)
E(2)
F(2)
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Pressures for Small Inventories
  • Interest/Opportunity Cost
  • Storage and handling
  • Property Taxes
  • Insurance premiums
  • Shrinkage
  • Spoilage

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Pressures for Large Inventories
  • Customer Service
  • Order/Setup Cost
  • Labor/Equipment Utilization
  • Transportation Cost
  • Cost of Materials/Quantity Discounts

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The Gaming Co.
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Economic Order Quantity
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Economic Order Quantity
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Economic Order Quantity
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Economic Order Quantity
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Economic Order Quantity
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Economic Order Quantity
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Economic Order Quantity
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Economic Order Quantity
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Economic Order Quantity
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Economic Order Quantity
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Economic Order Quantity
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Economic Order Quantity
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Economic Order Quantity
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Economic Order Quantity
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Economic Order Quantity
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Five Assumptions of the EOQ
  • CONSTANT demand rate
  • Two relevant COSTS
  • Item INDEPENDENCE
  • CERTAINTY in demand, lead time and supply
  • Whole LOTS

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Realistic?
  • No Way ......
  • ................ BUT, since EOQ is relatively
    insensitive to errors, IT WORKS ANYWAY!

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Reorder Point
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Reorder Point
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Reorder Point
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Reorder Point
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Reorder Point / Safety Stock
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Reorder Point / Safety Stock
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Reorder Point / Safety Stock
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Reorder Point / Safety Stock
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Reorder Point / Safety Stock
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Reorder Point / Safety Stock
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Reorder Point / Safety Stock
Probability of stockout (1.0 - 0.85 0.15)
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Reorder Point / Safety Stock
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Reorder Point / Safety Stock
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Reorder Point / Safety Stock
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Reorder Point / Safety Stock
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