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Inventory Management
Inventory Management
Inventory Management
Inventory Management
Inventory Management
Inventory Management
Inventory Management
Inventory Management
Inventory Management
Inventory Management
Inventory Management
Inventory Management
Inventory Management
Inventory Management
Inventory Management
Inventory Management
Inventory Management
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Inventory Management


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  • 1. CHAPTER 11 Inventory Management Er.Sartaj Singh Bajwa
  • 2. Types of Inventories
    • Raw materials & purchased parts
    • Partially completed goods called work in progress
    • Finished-goods inventories
    Er.Sartaj Singh Bajwa
  • 3. Functions of Inventory
    • To meet anticipated demand
    • To smooth production requirements
    • To protect against stock-outs
    • To take advantage of order cycles
    • To hedge against price increases
    • To take advantage of quantity discounts
    Er.Sartaj Singh Bajwa
  • 4.
    • Lead time : time interval between ordering and receiving the order
    • Holding (carrying) costs : cost to carry an item in inventory for a length of time
    • Ordering costs : costs of ordering and receiving inventory
    • Shortage costs : costs when demand exceeds supply
    Key Inventory Terms Er.Sartaj Singh Bajwa
  • 5. Inventory Counting Systems
    • Periodic System
      • Physical count of items made at periodic intervals
    • Perpetual Inventory System System that keeps track of removals from inventory continuously, thus monitoring current levels of each item
    Er.Sartaj Singh Bajwa
  • 6. Inventory Counting Systems
    • Two-Bin System - Two containers of inventory; reorder when the first is empty
    • Universal Bar Code - Bar code printed on a label that has information about the item to which it is attached
    Er.Sartaj Singh Bajwa 0 214800 232087768
  • 7. ABC Classification System
    • Classifying inventory according to some measure of importance and allocating control efforts accordingly.
      • A - very important
      • B - mod. important
      • C - least important
    Er.Sartaj Singh Bajwa Annual $ value of items A B C High Low Few Many Number of Items
  • 8. ABC Item Classification
    • Class A Items: 20% of items which account for approximately 60-80% of the total inventory cost
      • Tight control, keep inventories as low as possible;
      • Monitor continuously (continuous review);
      • Purchase/manufacture in small, frequent batches.
    • Class B Items: 30% of items which account for approximately 20-30% of the total inventory cost
      • Moderate control;
      • Good records, monitor periodically (periodic review);
      • Purchase/manufacture in medium size batches.
    • Class C Items: 50 % of items which account for remaining 5-15% of total inventory cost
      • Minimal control;
      • Simple manual records, occasional review;
      • Purchase/manufacture in large, infrequent batches.
    Er.Sartaj Singh Bajwa
  • 9. Economic Order Quantity Er.Sartaj Singh Bajwa
  • 10.
    • Only one product is involved
    • Annual demand requirements known
    • Demand is even throughout the year
    • Lead time does not vary
    • Each order is received in a single delivery
    • There are no quantity discounts
    Assumptions of EOQ Model Er.Sartaj Singh Bajwa
  • 11. The Inventory Cycle Er.Sartaj Singh Bajwa Profile of Inventory Level Over Time Quantity on hand Q Receive order Place order Receive order Place order Receive order Lead time Reorder point Usage rate Time
  • 12. Total Cost ACC = average number of units * carrying cost per unit per year AOC = (number of orders per year) * (ordering cost) Number Of Orders per year = annual demand(D) ordered quantity(Q) Average number of Units = Q/2 Er.Sartaj Singh Bajwa Annual carrying cost Annual ordering cost Total cost = + Q 2 H D Q S TC = +
  • 13. Cost Minimization Goal Order Quantity (Q) The Total-Cost Curve is U-Shaped Ordering Costs Q O Annual Cost ( optimal order quantity) Er.Sartaj Singh Bajwa
  • 14. Deriving the EOQ
    • Using calculus, we take the derivative of the total cost function and set the derivative (slope) equal to zero and solve for Q.
    Er.Sartaj Singh Bajwa
  • 15. Example
    • A toy manufacturer uses approximately 32,000 silicon chips annually. The chips are used at a steady rate during the 240 days a year that the plant operates. Annual holding cost is $3 per chip, and ordering cost is $120. Determine
      • The optimal order quantity.
      • Holding cost, ordering cost, and the total cost.
      • The number of workdays in an order cycle.
    Er.Sartaj Singh Bajwa
  • 16. When to Reorder with EOQ Ordering
    • Reorder Point - When the quantity on hand of an item drops to this amount, the item is reordered
    • Safety Stock - Stock that is held in excess of expected demand due to variable demand rate and/or lead time.
    • Service Level - Probability that demand will not exceed supply during lead time.
    Er.Sartaj Singh Bajwa
  • 17. Reorder Point
    • ROP = Expected demand during lead time + safety stocks
    • We discuss several models:
      • An estimate of expected demand during lead time and its standard deviation are available.
      • Data on lead time demand is not available: we consider three cases:
        • Demand is variable, lead time is constant
        • Lead time is variable, demand is constant
        • Both demand and lead time are variable
    Er.Sartaj Singh Bajwa