Detail view of inventory management EOQ or safety stock

2. PREPARED BY BILAL AHMED
INVENTORY MANAGEMENT EOCONOMIC ORDER QUANTIT SAFETY STOCK QUESTION
3. SAFETY STOCK
2. ECONOMIC ORDER QUANTITY
1. INVENTORY MANAGEMENT

3. PREVIEW OF TOPIC
INVENTORY MANAGEMENT
DEFINATION
OF INVENTORY
INVENTORY
MANAGEMEN
T
ASSUMPTION
OF EOQ DIAGRAM
SAFETY
STOCK
EXAMPLES QUESTIONS
EOQ SAFETY STOCK QUESTIONS

4. DEFINITION OF INVENTORY
“The term inventory include materials-
raw, in progress, finished packaging,
spares, and other stock in order to
meet an un expected demand or
distribution in the future.”
INVENTORY MANAGEMENT EOQ SAFETY STOCK QUESTIONS

5. INVENTORY MANAGEMENT
INVENTORY MANAGEMENT EOQ SAFETY STOCK QUESTIONS
Inventory management involves the:
“Development and administration of policies
systems and procedures, which will minimize total
cost related to inventory decisions and related
functions such as production scheduling,
purchasing and traffic”.

6. INVENTORY COST
INVENTORY MANAGEMENT EOQ SAFETY STOCK QUESTIONS

7. INVENTORY COST
INVENTORY MANAGEMENT EOQ SAFETY STOCK QUESTIONS

8. INVENTORY COST
INVENTORY MANAGEMENT
EOQ SAFETY STOCK QUESTIONS

9. DEFINITION OF EOQ
INVENTORY MANAGEMENT EOQ SAFETY STOCK QUESTION
“ EOQ is essentially an accounting formula that
determines at which the combination of order, costs and
inventory carrying cost are the least. The result is the
most cost effective quality to order. In purchasing this
is known as order quantity, in manufacturing it is known
as the production lot size.”
- Dave Piasecki

10. ASSUMPTION OF EOQ
INVENTORY MANAGEMENT EOQ SAFETY STOCK QUESTION
Demand is known and is deterministic, i.e. constant;
The lead time, i.e. the time between placement of
the order and the receipt of the order is known
and constant;
The receipt of inventory is instantaneous. In other
words the inventory from an order arrives in one
batch at one point in time;
That only costs pertinent to inventory model are
the cost of placing an order and cost of holding or
storing inventory over time.

11. INVENTORY COST DIGRAM
INVENTORY MANAGEMENT EOQ SAFETY STOCK QUESTION
Annual
Cost
EOQ
Ordering Cost
Holding Cost
Re-order quantity
Total cost

12. EOQ FORMULA
INVENTORY MANAGEMENT EOQ SAFETY STOCK QUESTIONS

13. EOQ EXAMPLE
INVENTORY MANAGEMENT EOQ SAFETY STOCK QUESTION
 Weekly demand = 240 units
 No. of weeks per year = 52
 Ordering cost = $50
 Unit cost = $15
 Annual carrying charge = 20%

14. SOLUTION
INVENTORY MANAGEMENT EOQ SAFETY STOCK QUESTION
yearperunitperH 3$152.0 
units
H
DS
Q 64598.644
3
50480,1222



yearunitsD /480,1224052 
H
Q
S
Q
D
TC
$1,934.945.96744.967
3
2
645
50
645
480,12
2
+






+











+







15. QUANTITY DISCOUNT ASSUMPTIONS
INVENTORY MANAGEMENT EOQ SAFETY STOCK QUESTION
 Same as the EOQ, except:
 Unit price depends upon the quantity ordered
 Adjusted total cost equation:
PDH
Q
S
Q
D
TCQD +





+






2

16. QUANTITY DISCOUNT PROCEDURE
INVENTORY MANAGEMENT EOQ SAFETY STOCK QUESTION
 Calculate the EOQ at the lowest price
 Determine whether the EOQ is feasible at that
price
 Will the vendor sell that quantity at that price?
 If yes, stop – if no, continue
 Check the feasibility of EOQ at the next higher
price
 Continue to the next slide ...

17. QUANTITY DISCOUNT PROCEDURE (cont.)
INVENTORY MANAGEMENT EOQ SAFETY STOCK QUESTION
 Continue until you identify a feasible EOQ
 Calculate the total costs (including total item cost)
for the feasible EOQ model
 Calculate the total costs of buying at the
minimum quantity required for each of the
cheaper unit prices
 Compare the total cost of each option & choose
the lowest cost alternative
 Any other issues to consider?

18. EXAMPLE OF QUANTITY DISCOUNT
INVENTORY MANAGEMENT EOQ SAFETY STOCK QUESTION
 Annual Demand = 5000 units
 Ordering cost = $49
 Annual carrying charge = 20%
 Unit price schedule:
Quantity Unit Price
0 to 999 $5.00
1000 to 1999 $4.80
2000 and over $4.75

19. SOLUTION
INVENTORY MANAGEMENT EOQ SAFETY STOCK QUESTION
 Step 1
FeasibleQP 700
00.52.0
49000,52
00.5$




QP 714
80.42.0
49000,52
80.4$




QP 718
75.42.0
49000,52
75.4$




Not Feasible
Not Feasible
2000--minimum
1000--minimum

20. SOLUTION(cont.)
INVENTORY MANAGEMENT EOQ SAFETY STOCK QUESTION
 Step 2
700,25$500000.500.52.0
2
700
49
700
000,5
700 ++QTC
50.822,24$500075.475.42.0
2
2000
49
2000
000,5
2000 ++QTC
725, 24$500080.480.42.0
2
1000
49
1000
000,5
1000
++QTC

21. SAFETY STOCK
INVENTORY MANAGEMENT EOQ SAFETY STOCK QUESTION

22. SAFETY STOCK
INVENTORY MANAGEMENT EOQ SAFETY STOCK QUESTIONS
Safety stock is the stock held by a company
in excess of its requirement for the lead
time. Companies hold safety stock to guard
against stock-out.

23. LEAD TIME
INVENTORY MANAGEMENT EOQ
SAFETY STOCK
QUESTION
Number of minutes, hours, or days that must be allowed for
the completion of an operation or process, or must elapse
before a desired action takes place.
Source: http://www.businessdictionary.com/definition/lead-
time.html#ixzz3soV8Sdj0

24. How to calculate safety stock
INVENTORY MANAGEMENT EOQ SAFETY STOCK QUESTIONS
Safety Stock = (Maximum
Daily Usage − Average Daily
Usage) × Lead Time

25. INVENTORY MANAGEMENT EOQ SAFETY STOCK
QUESTIONS

26. INVENTORY MANAGEMENT EOQ SAFETY STOCK QUESTIONS