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Economic order quantity and inventory management
This document discusses inventory management, economic order quantity (EOQ), and safety stock. It begins with definitions of inventory and inventory management. It then covers the EOQ formula and assumptions, including how to calculate EOQ. The document also discusses safety stock and how it is determined based on lead time. It provides an example of calculating safety stock. Finally, it discusses how quantity discounts can impact the EOQ calculation.
Economic order quantity and inventory management
- 2. PREPARED BY BILALAHMED INVENTORY MANAGEMENT EOCONOMIC ORDER QUANTIT SAFETY STOCK QUESTION 3. SAFETY STOCK 2. ECONOMIC ORDER QUANTITY 1. INVENTORY MANAGEMENT
- 3. PREVIEW OF TOPIC INVENTORYMANAGEMENT DEFINATION OF INVENTORY INVENTORY MANAGEMEN T ASSUMPTION OF EOQ DIAGRAM SAFETY STOCK EXAMPLES QUESTIONS EOQ SAFETY STOCK QUESTIONS
- 4. DEFINITION OF INVENTORY “Theterm 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 MANAGEMENTEOQ 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 MANAGEMENTEOQ SAFETY STOCK QUESTIONS
- 7. INVENTORY COST INVENTORY MANAGEMENTEOQ SAFETY STOCK QUESTIONS
- 8. INVENTORY COST INVENTORY MANAGEMENT EOQSAFETY STOCK QUESTIONS
- 9. DEFINITION OF EOQ INVENTORYMANAGEMENT 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 INVENTORYMANAGEMENT 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 INVENTORYMANAGEMENT EOQ SAFETY STOCK QUESTION Annual Cost EOQ Ordering Cost Holding Cost Re-order quantity Total cost
- 12. EOQ FORMULA INVENTORY MANAGEMENTEOQ SAFETY STOCK QUESTIONS
- 13. EOQ EXAMPLE INVENTORY MANAGEMENTEOQ 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 EOQSAFETY 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 INVENTORYMANAGEMENT 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 INVENTORYMANAGEMENT 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 QUANTITYDISCOUNT 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 $4.75
- 19. SOLUTION INVENTORY MANAGEMENT EOQSAFETY STOCK QUESTION Step 1 FeasibleQP 700 00.52.0 49000,52 00.5$ 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 EOQSAFETY 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 MANAGEMENTEOQ SAFETY STOCK QUESTION
- 22. SAFETY STOCK INVENTORY MANAGEMENTEOQ 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 MANAGEMENTEOQ 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 calculatesafety stock INVENTORY MANAGEMENT EOQ SAFETY STOCK QUESTIONS Safety Stock = (Maximum Daily Usage − Average Daily Usage) × Lead Time
- 25. INVENTORY MANAGEMENT EOQSAFETY STOCK QUESTIONS
- 26. INVENTORY MANAGEMENT EOQSAFETY STOCK QUESTIONS