1. The document discusses operations management concepts related to inventory management, including classifications, functions, and assumptions of inventory models. 2. Key inventory models are described, including the basic economic order quantity model, production order quantity model, and quantity discount model. 3. The assumptions of the basic economic order quantity model are outlined, with the objective being to determine how much to order and when to reorder to minimize costs.

1. Operations Management II
Juan Ignacio Camino Moya
Álvaro Fernández-Novel Rodríguez

2.  Objective: strike a balance between inventory
investment and customer service.
 Functions:
1. To separate various parts of the production process.
2. To decouple the firm from fluctuations in demand and
provide a stock of goods that will provide a selection
for customers.
3. To take advantage of quantity discounts.
4. To hedge against inflation.

3. Raw materials
Work in process
Maintenance/repair/operating
materials (MRO)
Finished goods

4. Inventories
Classification
Inventory
Records
Maintenance

5. Pareto
Principle
•Many trivial goods
•Few crucial ones
Measurement
•Annual demand of each product
•Cost per unit
Classes
•Class A: 15% of total inventory, but 70% of dollar usage.
•Class B: 30% of total inventory, but 25% of dollar usage
•Class C: 55% of total inventory, but 5% of dollar usage

7. IMPORTANT: Know what you have and what you
need.
Precise decisions about ordering, scheduling and
shipping
Correct incoming and outgoing record keeping,
stock- room security…

8. A Items:
Frequent
C Items:
Least
B Items:
Medium

9. Service sector needs
inventory control
•Inventory in transit is lost
value
•Inventory damaged or
stolen prior to sale is a
lost
Retail business
•Shrinkage: Retail
inventory unaccounted
between receipt and sale
•Pilferage: Inventory theft.
Applicable measures
•Good personnel selection,
training and discipline
•Control of incoming
shipments
•Effective control of all
goods leaving the facility

12. Basic Economy Order Quantity Model
Production Order Quantity Model
Quantity Discount Model

14. Demand for an item is known, constant and independent
from other items
Lead time is known and consistent
Receipt of inventory instantaneous and complete
Quantity discounts not possible
The only variable costs are the ones previously explained
Shortages can be completely avoided

15. Significant costs are holding
and ordering costs.

20.  Assumptions
1. Demand for an item is known, constant and
independent.
2. Lead time is known and consistent.
3. Receipt of inventory is instantaneous and
complete. The inventory from an order arrives in
one batch at one time.
4. No quantity discounts
5. Holding, ordering and set up costs are variable.
6. Shortages can be avoided if orders are placed at
the right time

21.  Objective:
 How much to order (Q*p) and when to order (ROP)
so that we minimize costs

23. 1. Demand for an item is known, constant and
independent.
2. Lead time is known and consistent.
3. Receipt of inventory is instantaneous and
complete. The inventory from an order
arrives in one batch at one time.
4. No quantity discounts
5. Holding, ordering and set up costs are
variable.
6. Shortages can be avoided if orders are
placed at the right time

24.  A quantity discount is a reduced price per
unit of item when we purchase it in larger
quantities.
Discount
number
Discount
quantity
Discount
(%)
Discount price
1 0 to 999 0 $5.00
2 1000 to 1999 4 $4.80
3 2000 and over 5 $4.75

25.  Objective: How much to order to minimize
costs?
Ordering
quantities with
the highest
discount?

26.  Step 1: calculate Q* for each discount
 Step 2: Adjust Q* to the lowest quantity that will qualify
for the discount
 Step 3: Apply the total cost equation for each order
quantity and pick the one with the lowest cost.
D = Annual demand
S = Set up cost per
order
I = holding cost as %
of unit price
P = price per unit

27. Discount
Category
Unit Cost
Order
Quantity
Annual cost
Holding Ordering Purchase Total
1
2
3
$5.00
4.85
4.75
700
1000
2500
$350
485
1188
$350
245
98
$25,000
24,500
23,750
$25,700
24,980
25,036

28. 1. Demand for an item is known, constant and
independent.
2. Lead time is known and consistent.
3. Receipt of inventory is instantaneous and
complete. The inventory from an order
arrives in one batch at one time.
4. No quantity discounts
5. Holding, ordering and set up costs are
variable.
6. Shortages can be avoided if orders are
placed at the right time

29.  Key issue : maintaining an adequate service
level in the face of uncertain demand.
 Service level: 1-probability of stockout
 Stockout is reduced with safety stock.
 Therefore:

30.  Objective: find such safety stock level that
satisfies the given service level and minimizes total
costs

31. One order is placed for each product
Remaining products have little or no value after sales period
Exact demand is never known, so we consider a probability
distribution
Consider probability of stock out and have left overs

32. Cs: Cost of shortage
Sales Price/Unit – Cost/Unit
Co: Cost of overage
Cost/Unit – Residual Value/Unit

33. Same order
amount
each time
•Inventory decreases
to reorder point
•New order is placed
Perpetual
monitoring
system
•Every movement of
inventory must be
recorded
Fixed
period
system
•Inventory is ordered
at the end of a
giving period
•Always same
amount per interval

34. Thank you for your attention