Inventory Management

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Inventory Management
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Inventories

• What items do you inventory in your everyday
  life?
• Why do you carry or hold such inventories?

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Inventories at Home
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Inventories at Home
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Inventories at Home
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Inventories at Home
Managing a home inventory raises profound,
philosophical questions such as.
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Inventories at Home Deep Thoughts
Why are we out of spaghetti??? Cant we just
keep an inventory at home?
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Inventories at Home Deep Thoughts

• Situation Analysis
• Expecting 16 people for dinner, forecast is for
  up to 3 ½ pounds of spaghetti needed.
• We are nearly out of spaghetti.

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Inventories at Home Deep Thoughts

• Product cost 0.90 / pound
• Special trip to grocery for out-of-stock
  spaghetti
• 4 mi x 0.35/mi
• 30 mins driving
• Re-order cost 6.40
• Stocking cost 0.02/month

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Inventories at Home Deep Thoughts

• Product cost 0.90 / pound
• Special trip to grocery for out-of-stock
  spaghetti
• 4 mi x 0.35/mi
• 30 mins driving
• Re-order cost 6.40
• Stocking cost 0.02/month

Does it make sense to spend 6.40 to buy 0.90
worth of spaghetti when we could just stock extra
for 0.02-per-month?
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Inventory

• Stock of items held to meet future demand
• Inventory management answers two questions
• How much to order
• When to order

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Food Inventory LG Refrigerator
microphone and camera
15 LCD touch screen Internet / TV / DVDs
Power cord network cable
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Types of Inventory

• Raw materials
• Component parts
• Purchased parts and supplies
• In-process (partially completed) products
• Labor
• Working capital
• Tools, machinery, and equipment

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Reasons to Hold Inventory

• Meet unexpected or variationsin customer demand
• Take advantage of price or quantity discounts
• Hedge against price increases

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Inventory Costs

• Carrying Cost
• Cost of holding an item in inventory
• Ordering Cost
• Cost of replenishing inventory
• Shortage Cost
• Temporary or permanent loss of sales when demand
  cannot be met

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Inventory Control Systems

• Continuous system(fixed-order-quantity)
• Constant amount ordered when inventory declines
  to predetermined level
• Periodic system(fixed-time-period)
• Order placed for variable amount after fixed
  passage of time

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How much to order?

• We want to balance the

against the
ordering cost
carrying cost
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How much to order?

• We can calculate the optimal order quantity using
  the Economic Order Quantity, also known as the.

EOQ
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Economic Order Quantity (EOQ) Models Assumptions

• Demand is known with certainty and is constant
  over time
• Lead time for the receipt of orders is constant
• The order quantity is received all at once

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The Inventory Order Cycle
Inventory Level
0
Time
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The Inventory Order Cycle
Order quantity, Q
Inventory Level
Reorder point, R
0
Time
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The Inventory Order Cycle
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EOQ Cost Model
Co - cost of placing order D - annual demand Cc -
annual per-unit carrying cost Q - order quantity
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EOQ Cost Model
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EOQ Cost Model
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EOQ Cost Model
Annual cost ()
Total Cost
Order Quantity, Q
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EOQ Cost Model
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EOQ Cost Model
Deriving Qopt
Co - cost of placing order D - annual demand Cc -
annual per-unit carrying cost Q - order quantity
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EOQ Cost Model
Co - cost of placing order Cc - annual per-unit
carrying cost D - annual demand Q - order
quantity
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EOQ Cost Model
Annual cost ()
Total Cost
Minimum total cost
Order Quantity, Q
Optimal order Qopt
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EOQ Spaghetti
Co - cost of placing order 6.40 Cc - annual
per-unit carrying cost 0.24/year D - annual
demand 52 pounds/year Q optimal order
quantity that balances ordering cost
against inventory (stocking) cost
If all we buy at the grocery store is spaghetti,
one trip/year is optimal
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EOQ What about buying more than spaghetti
Co - cost of placing order 6.40 Cc - annual
carrying cost 10/year D - annual demand
150/week 7,500/year Q optimal order
quantity that balances ordering cost
against inventory (stocking) cost
98 represents 5 days of food, suggesting
shopping a little more often than once every week
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Example Pizza-to-You

• Simple Business Model Buy from Costco, store,
  bake, and deliver as needed. Determine optimal
  inventory levels and costs.
• Demographic study shows local pizza demand is 160
  pizzas/week
• Co - cost of placing order 3.50 per order
• Cc - per-unit carrying cost 0.30 per pizza
• D - weekly demand 160
• Q - order quantity

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Pizza-to-You Case 1

• Co 3.50 per order
• Cc 0.30 per pizza
• D 160 pizzas/week
• Optimal Order Quantity

2CoD Cc
Qopt

61.1 pizzas
Order cycle time Q/D (61.1/160) 0.38 weeks
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Pizza-to-You Case 2Reduced Order Cost (3.50 ?
0.35)

• Co 0.35 per order
• Cc 0.30 per pizza
• D 160
• Optimal Order Quantity

2CoD Cc
Qopt

19.3 pizzas (down from 61.1)
Order cycle time Q/D (19.3/160) 0.12
weeks (down from 0.38 weeks)
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Card Shop
You manage a greeting card shop. It costs you
0.10/year to store a box of cards, and 15 to
place an order. If you sell 300 boxes/year, how
often should you order cards? Co - cost of
placing order Cc - annual per-unit carrying
cost D - annual demand Q - order quantity
Order once-per-year
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Card Shop
If the storage costs increase from 0.10/year to
1/year, what is the new optimal order
quantity? Co - cost of placing order Cc -
annual per-unit carrying cost D - annual demand Q
- order quantity
Order three time/year
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Gas Station
You manage a gas station. The 10,000 gallon
underground gas storage tank has an annualized
cost of 50,000. You normally sell about 1,000
gallons/day, and to place a re-order for gas
costs you 100. Is the tank larger than you
need? Co - cost of placing order Cc - annual
per-unit carrying cost D - annual demand Q -
order quantity
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Gas Station
At that same gas station, it costs you 10/year
to store a case of oil (24 quarts), and 20 to
place an order. If you sell 100 cases/year, how
often should you order oil? Co - cost of
placing order Cc - annual per-unit carrying
cost D - annual demand Q - order quantity
Order 5 times/year
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Gas Station
At that same gas station, it costs you 10/year
to store a case of oil (24 quarts), and 20 to
place an order. If you sell 100 cases/year, what
is the total inventory cost? Co - cost of
placing order Cc - annual per-unit carrying
cost D - annual demand Q - order quantity
Inventory cost
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EOQ Economic Order Quantity

• EOQ balances the cost of placing an order against
  the cost of storing product in inventory
• The cost of storing a product in inventory can
  include warehouse costs, shipping costs, and cost
  of capital tied up in inventory
• Notice that nowhere did the cost of the
  merchandise being sold enter into the equations
• EOQ is vitally important in any retail business
  and most businesses where stocked items are
  managed

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Safety Stocks

• Safety stock
• buffer added to on hand inventory during lead
  time
• Stockout
• an inventory shortage
• Service level
• probability that the inventory available during
  lead time will meet demand

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Variable Demand with a Reorder Point
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Variable Demand with a Reorder Point
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Variable Demand with a Reorder Point
stockout
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Reorder Point with a Safety Stock
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Informal feedback

• Write a 2 minute journal to be handed in
  immediately
• The journal should briefly summarize
• Major points learned
• Areas not understood or requiring clarification