2. inventory management stu
TRANSCRIPT
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Supply Chain ManagementSupply Chain Management
Dr.Dr. SomkiatSomkiat MansumitrchaiMansumitrchai
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Copyright: Dr. Somkiat Mansumitrchai
Inventory Management
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Copyright: Dr. Somkiat Mansumitrchai
1.2 Introduction
In many industries and supply chains,
inventory is one of the dominant costs.
For many managers, effective supply chain
management is synonymous with reducing
inventory levels in the supply chain.
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Copyright: Dr. Somkiat Mansumitrchai
1.2 Introduction
In fact, the goal of effective inventorymanagement in the supply chain is to have
the correct inventory at the right place at the
right time to minimize system costs while
satisfying customer service requirements.
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Copyright: Dr. Somkiat Mansumitrchai
1.2 Introduction
A typical supply chain consists of suppliers
and manufacturers, who convert raw
materials into finished products, and
distribution centers and warehouses, from
which finished products are distributed to
customers.
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Copyright: Dr. Somkiat Mansumitrchai
Supplier
Manufacturer
Warehouse&
DistributionCustomersFinished
product
Distribute
Raw material
Production
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Copyright: Dr. Somkiat Mansumitrchai
1.2 Introduction
Inventory can appear in many places in thesupply chain, and in several forms:
Raw material inventory
Work-in process (WIP) inventory
Finished product inventory
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Copyright: Dr. Somkiat Mansumitrchai
Supplier
Manufacturer
Warehouse&
DistributionCustomersFinished
product
Distribute
Raw material
Production
Raw material inventory
WIP Inventory
Finished product inventory
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Copyright: Dr. Somkiat Mansumitrchai
Inventory is held for a variety of reasons. It
is held due to
1. Unexpected changes in customer
demand. Customer demand has been always
hard to predict.
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1. Unexpected changes in customer
a. The short life cycle of an increasingnumber of products. This implies that
historical data about consumer demand may
not be available.
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PLC
TIME
Introduction
Maturity Decline
Growth
Short life cycle
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1. Unexpected changes in customer
b. The presence of many competing
products or product groups in the
marketplace. It is much more difficult to
estimate demand for individual products.
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2. The presence in many situations of a
significant uncertainty in the quantity andquality of the supply, supplier costs, and
delivery times.
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3. Economies of scales offered by
transportation companies that encourages
firms to transport large quantities of items,
and therefore hold large inventories.
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Techniques Using for
Inventory Management
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2.1 The Basic EconomicOrder Quantity (EOQ)
Model
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2.1 The Economic Lot Size Model
It is a simple model that illustrates the trade-
offs between ordering and storage costs.
Assumptions:
1. Demand is constant at a rate of D items
per day.
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Assumptions:
2. Order quantities are fixed at Q items per
order; that is, each time the warehouse
places an order, it is for Q items.
3. A fix cost (setup cost), S, is incurred
every time the warehouse places anorder.
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Assumptions:
4. An inventory carrying cost, h, alsoreferred to as a holding cost, is accrued
per unit held in inventory per day that
the unit is held.
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Assumptions:
5. The lead time, the time that elapses
between the placement of an order and
its receipt, is zero.
6. Initial inventory is zero.
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2.1 The Economic Lot Size Model
Objective:
It is to find the optimal order policy that
minimizes annual purchasing and carrying
costs while meeting all demand (that is,
without storage).
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0
InventoryLevel
Average inventory
On hand Q/2
Usage rate
Order quantity = Q
(maximum inventory level)
Minimum
Inventory
Time
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Formula: EOQ Model
Q = Number of pieces per order
Q* = Optimum number of pieces per order (EOQ)
D = Annual demand in units for the inventory item
S = Setup or ordering cost for each order
H = Holding or carrying cost per unit per year
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EOQ Model
1. Annual setup cost
= (Number of orders placed per year) x (Setup or order cost per
order)
= Annual Demand (Setup or order cost per order)
Number of units in each order
= D (S) = D S
Q Q
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EOQ Model
2. Annual holding cost= (Average inventory level) x (Holding cost per unit per year)
= Order quantity (Holding cost per unit per year)
2
= Q (H) = Q H
2 2
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EOQ Model
3. Optimal order quantity is found when annual setup cost equals
annual holding cost
D S = Q H
Q 2
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EOQ Model
4. To solve forQ*
2 DS = Q H
Q = 2 DS
H
Q = 2DS
H
2
2
*
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AnnualCost
Curve for total cost
of holding and setup
Minimum
total cost
Holding cost
curve
Setup (or order)
cost curve
Order quantityOptimal
Order
quantity
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EOQ Model
We can find the expected number of orders placed during the year
(N) and the expected time between orders (T) as follows:
Expected number of orders = N = Demand = D
Order Quantity Q*
2
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EOQ Model
We can find the expected number of orders placed during the year
(N) and the expected time between orders (T) as follows:
Expected time between orders ( T)
= Number of working days per year
N
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EOQ Model
We can also calculate the total annual inventory costs.
TC = D S + Q H
Q 2
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Example
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Sharp, Inc. a company that markets painless hypodermic needles to
hospitals, would like to reduce its inventory cost by
determining the optimal number of hypodermic needles to
obtain per order. The annual demand is 1,000 units; the setup
or ordering cost is $10 per order; and the holding cost per unit
per year is $.50. What is the optimal number of units per
order.
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Solution:
Q* = 2DSH
Q* = 2(1,000)(10)
0.50
= 40,000 = 200 units
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Solution
We can find the expected number of orders placed during the year
(N)
Expected number of orders = N = Demand = D
Order Quantity Q*
= 1,000 = 5 orders per year
200
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EOQ Model
Assume that there is 250 working days per year. The expected time
between orders (T) as follows:
Expected time between orders ( T)
= Number of working days per year
N= 250 working days per year = 50 days between order
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EOQ Model
We can also calculate the total annual inventory costs.
TC = D S + Q HQ 2
= 1,000 ($10) + 200 ($.50)200 2
= (5)($10) + (100)($.50)
= $50+$50 = $100
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Practice & Exercise