2. WHY HOLDING INVENTORY IS IMPORTANT?
Inventory can be a strategic tool
Helps level capacity
Uncouples production stages
Increases flexibility
Provides cheaper ordering policies
3. TWO TYPES OF INVENTORY SYSTEMS
Fixed Order Quantity System
When the Order Point (OP) is reached, we
put an order. Also known as the 2 bin
system.
Fixed Order Period System
Reviews the inventory level at “fixed time
intervals.” Order enough materials to bring
the inventory to a predetermined level.
4. INVENTORY MODELS
FOR THE FIXED ORDER QUANTITY SYSTEM
Economic Order Quantity Model (EOQ)
EOQ for Production Lots
EOQ with Quantity Discounts
Models with uncertain demand during lead
time.
5. ECONOMIC ORDER QUANTITY (EOQ)
Let D - annual demand (units/year)
Q - order quantity (units)
C - carrying cost ($/unit/year)
S - ordering cost ($/order)
TSC =Total Annual Stocking cost ($)
LT = lead time (days)
8. ECONOMIC ORDER QUANTITY
The Greenmore Lawn Products Company produces lawn
fertilizer. One raw material--ammonium nitrate--is purchased
in large quantities in the making of fertilizer. 2,500,000 tons
of ammonium nitrate are forecast to be required next year to
support production. If ammonium nitrate costs $122.50 per
ton, carrying cost is 35 percent of acquisition cost, and
ordering cost is $1,595 per order:
a. In what quantities should Greenmore buy ammonium
nitrate?
b. What annual stocking costs will be incurred if
ammonium nitrate is ordered at the EOQ?
c. How many orders per year must Greenmore place
for ammonium nitrate?
d. How much time will elapse between orders.
11. EOQ FOR PRODUCTION LOTS
The production rate of final assembly is 800 compact
discs per day. After the compact discs are assembled,
they go directly to finished-goods inventory.
Customer demand averages 400 compact discs per
day and about 50,000 compact discs per year. If it
costs $500 to set up the assembly line for the compact
disks and $1.00 per compact disc per year to carry
them in inventory:
a. How many compact discs should be in a
production lot at final assembly?
b. What is the TSC at the EOQ?
13. EOQ WITH QUANTITY DISCOUNT
Steps:
1. Compute EOQ of each sales price
2. Determine which EOQ is within the quantity
range
for its price
3. Compute the TMC for the feasible EOQ and
the TMCs
of quantities with lower sales prices
4. The quantity with the lowest TMC is the order
quantity
