Inventory is the buffer between two processes

1

• Inventory is the buffer between two processes
• or supply and demand. Inventory is because of
• the difference in time and rate between demand
• and supply. Inventory is a waste process.
• Factors affecting inventory
• Economies of scale
• Operation smoothing
• Customer service
• Uncertainty

2

• Inventory Costs
• Purchasing or manufacturing costs
• Ordering or set-up costs
• Holding costs
• Shortage costs (backlog, backorder, stock-out)
• Measures of inventory effectiveness
• Cost minimization
• Months of supply, or annual turnover
• Try reduce inventory rather than optimizing it.

3

• Assumption for Developing EOQ Model
• A single item inventory system
• Uniform and deterministic demand
• No shortages
• No order lead time
• Infinite replenishment rate

4
Heuristic Methods A heuristic method is an
approach that takes advantage of the structure
of the problem. By using a set of sensible
rules, it gets a solution that is good -
i.e., close to optimal or sometimes even optimal
5

• Continuous Review Systems
• Relax no lead time
• Relax known and constant demand
• Relax known and constant lead time
• Two simplifications
• Successive lead times are independent
• random variables
• No order crossing
• Safety Stock
• It is an inventory to absorb uncertainties in
• demand and lead time. It depends on desired
• service level and investment costs.

6
Service level policies 1) Probability of not
running out of stock during a lead time (Cycle
service level) 2) Proportion of annual demand
that is instantaneously filled from stock (Fill
rate)
7
Pareto Theory, ABC Curve A management tool to
separate important from unimportant. Allows
trade-off between low cost and high service. 1)
Rank inventory items in descending order of
annual dollar usage.(distribution by value) 2)
Plot percentage of ranked items to total items
against the cumulative percentage of total
dollars values A high dollar usage
items B medium dollar usage items C low
dollar usage items
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Inventory Control System Real world
multi-item, stochastic demand and lead
time Objective minimize cost, maximize service
level Decision What to order, how much,
when Rationale to control inventory Group A
reduce safety stock, tighten control using
periodic review, L4L Group C invest in safety
stock, relax control using continuous review,
fixed period requirement
Group B
invest in safety stock, relax control using
continuous review, EOQ