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CHAPTERCHAPTER88
Inventory Inventory ManagementManagement
Independent DemandIndependent Demand
AA
B(4)B(4) C(2)C(2)
H(2)H(2) E(1)E(1) D(3)D(3) F(2)F(2)
Dependent DemandDependent Demand
Independent demand is uncertain. Independent demand is uncertain. Dependent demand is certain.Dependent demand is certain.
InventoryInventory: a stock or store of goods: a stock or store of goods
AA
B(4)B(4) C(2)C(2)
H(2)H(2) E(1)E(1) D(3)D(3) F(2)F(2)
How many items of C, D, and E should be requested if How many items of C, D, and E should be requested if Quantity of A = 100 unitsQuantity of A = 100 units
Answer Answer
Q of C = 100 x 2 = 200 unitsQ of C = 100 x 2 = 200 units
Q of D = 100 x 2 x 3 = 600 unitsQ of D = 100 x 2 x 3 = 600 units
Q of E = 100x 4 x 1 = 400 units Q of E = 100x 4 x 1 = 400 units
Types of Inventories
Raw materials Partially completed goods called
work in progress
Finished-goods inventories
Replacement supplies such as spare parts
Goods-in-transit to warehouses or customers
Functions of Inventory
To meet demand
To smooth production
To protect against stock-outs
To help hedge against price increases
To take advantage of quantity discounts
Economic Order Quantity
Cost Holding Annual
Cost)der Demand)(Or 2(Annual =
H
2DS = EOQ
EOQ Example 1When When Order cost = $ 2000 per orderOrder cost = $ 2000 per orderSemi-annual quantity = 8000 units Semi-annual quantity = 8000 units Holding cost = $ 400 per unitHolding cost = $ 400 per unitFind EOQFind EOQ
13-13-77
EOQEOQ = =22DSDS
HH
EOQEOQ = =2(16000)(2000)2(16000)(2000)
400400 = 400 units= 400 units
EOQ Example 2Based on the previous problemBased on the previous problemFind Find a)a) No. of orders No. of orders No. of orders = D/EOQ = 16000/400 = 40 orders No. of orders = D/EOQ = 16000/400 = 40 orders
b) Order costb) Order costOrder cost = No. of Orders x Order Cost Order cost = No. of Orders x Order Cost = 40 x $ 2000 = $ 80000= 40 x $ 2000 = $ 80000c) Holding costc) Holding costHolding cost = EOQ/2 x Holding costHolding cost = EOQ/2 x Holding cost 400/2 x $ 400 = $ 80000400/2 x $ 400 = $ 80000d)Total costd)Total costTotal cost = Order cost + Holding cost Total cost = Order cost + Holding cost = $ 80000 + $ 80000 = $160000 = $ 80000 + $ 80000 = $160000
Assumptions of Basic EOQ Model
Demand is known with certainty and is constant over time
No shortages are allowed Lead time for the receipt of orders is
constant Order quantity is received all at once
Inventory Order Cycle
13-13-1010
Demand Demand raterate
TimeTimeLead Lead timetime
Lead Lead timetime
Order Order placedplaced
Order Order placedplaced
Order Order receiptreceipt
Order Order receiptreceipt
Inve
nto
ry L
evel
Inve
nto
ry L
evel
Reorder point, Reorder point, RR
Order quantity, Order quantity, QQ
00
Average Average inventoryinventory
22
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