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PPT5 - Inventory Management Problem
- 1. Supply Chain : Logistics Week 5 Inventory Management Problem
- 2. Introduction • Inventory is an idle resources (idle resources) whose existence is awaiting further processing. • further processing here can be found in production activities such as manufacturing activities, marketing activities were found in the distribution system, or consumption activities such as found in household systems, offices, and so on.
- 3. Introduction Two Problems on the Inventory System: • Policy Issues Inventory (inventory policy) is a problem in the system supplies related to how to ensure that every user requests can be met with minimal costs. • Operational issues, more qualitative and principally related to the issue smoothness and efficiency mechanisms and operating procedures inventory system
- 4. Basic EOQ model • Receive an order • Use the inventory at a constant rate • Reorder same amount • Instantaneously receive the order
- 10. Economic Order Quantity On-hand inventory (units) Time Receive order Inventory depletion (demand rate) Q 1 cycle
- 11. Economic Order Quantity On-hand inventory (units) Time Receive order Inventory depletion (demand rate) Q 1 cycle
- 12. Economic Order Quantity On-hand inventory (units) Time Average cycle inventory Q Q — 2 1 cycle Receive order Inventory depletion (demand rate)
- 13. Total Cost = Holding Cost + Order Cost
- 14. Total Cost = Holding Cost + Order Cost Annual cost (dollars) Lot Size (Q)
- 15. Annual cost (dollars) Lot Size (Q) Holding cost (HC) Total Cost = Holding Cost + Order Cost
- 16. • More units must be stored if more are ordered Purchase Order Description Qty. Microwave 1 Order quantity Purchase Order Description Qty. Microwave 1000 Order quantity Why Holding Costs Increase
- 17. Annual cost (dollars) Lot Size (Q) Holding cost (HC) Ordering cost (OC) Total Cost = Holding Cost + Order Cost
- 18. • If we order more when we place an order, then we order fewer times over the year. • Example: You expect to order 10 microwave ovens over a year for a retail store like Sears. It cost $10 to place an order. Why Order Costs Decrease Order Cost $10 Purchase Order Description Qty. Microwave 10 Order cost $10 Purchase Order Description Qty. 1 Microwave If you order 1 microwave, how many orders will you place over the year? what is the ordering cost? What is the ordering cost per microwave? If you order 10 microwaves, how many orders will you place over the year? What is the ordering cost? What is the ordering cost per microwave?
- 19. Annual cost (dollars) Lot Size (Q) Ordering cost (OC) Holding cost (HC) Total cost = HC + OC Total Cost = Holding Cost + Order Cost
- 20. Gift Shop • A museum of natural history is having problems managing their inventories. Low inventory turnover is squeezing profit margins and causing cash-flow problems. • A Class A item, a birdfeeder is also a top- selling item. – Sales: 18 units/week – Purchase cost: $60 – Order cost: $45 – Annual holding cost: 25% of purchase cost – 52-week year • Management has been ordering in lots of 390 units.
- 21. • Q – order quantity • TC – Total cost – Annual – Monthly – ?? What is the annual cost of the current policy? Time Q
- 22. Holding Cost H Q Cost Holding Annual 2 ) / / )( ( year unit Cost Holding Inventory Ave Cost Holding Annual
- 23. Holding cost | | | | | | | | 50 100 150 200 250 300 350 400 Lot Size (Q) 3000 — 2000 — 1000 — 0 — Holding cost = (H) Q 2 Annual cost (dollars)
- 24. Ordering cost ) (OrderCost ity OrderQuant nd AnnualDema rCost AnnualOrde S Q D rCost AnnualOrde
- 25. Holding & Ordering Cost | | | | | | | | 50 100 150 200 250 300 350 400 Lot Size (Q) 3000 — 2000 — 1000 — 0 — Holding cost = (H) Q 2 Ordering cost = (S) D Q Annual cost (dollars)
- 26. Total Cost | | | | | | | | 50 100 150 200 250 300 350 400 Lot Size (Q) 3000 — 2000 — 1000 — 0 — Total cost = (H) + (S) D Q Q 2 Holding cost = (H) Q 2 Ordering cost = (S) D Q Annual cost (dollars)
- 28. What is the annual cost of the current policy? H Q S Q D TC 2 D – Total demand Q – Order quantity S – Setup/order cost H – Holding cost
- 29. What is the annual cost of the current policy? H Q S Q D TC 2 D – Total demand 936/year Q – Order quantity 390/order S – Setup/order cost $45/order H – Holding cost = 0.25*60 = $15/unit/year 15 2 390 45 390 936 TC 2925 108 TC 3033 TC
- 30. Total Cost for Q = 390 Annual cost (dollars) | | | | | | | | 50 100 150 200 250 300 350 400 Lot Size (Q) 3000 — 2000 — 1000 — 0 — Current cost Current Q Total cost = (H) + (S) D Q Q 2 Holding cost = (H) Q 2 Ordering cost = (S) D Q
- 31. Can the gift shop do better? Annual cost (dollars) | | | | | | | | 50 100 150 200 250 300 350 400 Lot Size (Q) 3000 — 2000 — 1000 — 0 — Current cost Current Q Total cost = (H) + (S) D Q Q 2 Holding cost = (H) Q 2 Ordering cost = (S) D Q
- 32. Economic Order Quantity – Q* Annual cost (dollars) | | | | | | | | 50 100 150 200 250 300 350 400 Lot Size (Q) 3000 — 2000 — 1000 — 0 — Q* Setup cost = Holding Cost
- 33. Economic Order Quantity (EOQ) – Q* H DS Q 2 * 15 ) 45 )( 936 ( 2 * Q order units/ 75 94 . 74
- 34. Total Cost of Economic Order Quantity (EOQ) – Q* 15 2 75 45 75 936 TC H Q S Q D TC 2 * * 10 . 1124 TC 3033 TC When Q = 390
- 35. When to order? • Reorder point (ROP) – Lead time – amount of time from order placement to receipt of goods – Lead time demand – the demand the occurs during the lead time
- 40. Gift shop reorder point • Demand: 18 birdfeeders/week • Lead time: 2 weeks • Lead time demand: 36 birdfeeders • ROP: 36 birdfeeders
- 41. Gift shop order policy • Place order when the on-hand inventory is 36 birdfeeders. • Order 75 birdfeeders • Order received in 2 weeks • Place next order when the on-hand inventory is 36 birdfeeders
- 42. Gift shop order policy Order received OH Order placed 2 wks 36 On-hand inventory 75
- 43. Distribution Game • What is the EOQ for the central warehouse in the distribution game? – Order cost: S = – Holding cost: H = – Demand: D = $200 $14.70/unit/year 2190
- 44. Distribution Game H DS Q 2 * 7 . 14 ) 200 )( 2190 ( 2 * Q units Q 244 1 . 244 *
- 48. Production quantity On-hand inventory Q Time Demand during production interval p – d Production Order Quantity
- 49. Production quantity Demand during production interval On-hand inventory Q Time p – d Production Order Quantity
- 50. Production quantity Demand during production interval On-hand inventory Q Time p – d Production and demand Demand only TBO Production Order Quantity
- 51. Production quantity Demand during production interval Production and demand Demand only TBO On-hand inventory Q Time p – d Production Order Quantity
- 52. Production quantity Demand during production interval Maximum inventory Production and demand Demand only On-hand inventory Q Time p – d Production Order Quantity (POQ Model)
- 53. POQ model • Assumptions – Known and constant demand – Known and constant lead time – Partial receipt of material – No quantity discounts – Only order (setup) cost and holding cost – No stockouts
- 54. POQ model • Producing and shipping product simultaneously until production quantity is reached. • Ship the inventory at a constant rate (no production) • Reorder same amount • Begin production and shipping product simultaneously
- 55. POQ Model ) / 1 ( 2 * p d H DS Qp D – annual demand S – Setup cost H – Holding cost d – daily demand rate p – daily production rate
- 56. Chemical Plant A plant manager of a chemical plant must determine the lot size for a particular chemical that has a steady demand of 30 barrels/day. The production rate is 190 barrels/day, annual demand is 10,500 barrels, setup cost is $200, annual holding cost is $0.21/barrel, and the plant operates 350 days/year. Determine the production order quantity.
- 57. Chemical Plant Demand: Setup cost: Holding cost: Production: d = 30 barrels/day D = 10,500 barrels/year $200/setup $0.21/barrel/year 190 barrels/day
- 59. Thank You Thank You Thank You