inventory control
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Chapter 4Chapter 4
Inventory ControlInventory Control
Known DemandKnown Demand
IntroductionIntroduction
Importance of inventoryImportance of inventory Types of inventoriesTypes of inventories Motivation for holding inventoriesMotivation for holding inventories Characteristics of inventory systemsCharacteristics of inventory systems Relevant costsRelevant costs
Importance of inventoryImportance of inventory
Investment in inventories is enormousInvestment in inventories is enormous
Companies that use scientific inventory Companies that use scientific inventory control methods have a significant control methods have a significant competitive advantagecompetitive advantage in the in the marketplacemarketplace
Breakdown of the Total Breakdown of the Total Investment in Inventories Investment in Inventories
in the U.S. Economy (1999)in the U.S. Economy (1999)
Fig. 4-1
Types of inventoriesTypes of inventories
Raw materialsRaw materials ComponentsComponents WIPWIP Finished goodsFinished goods Other (spare parts…)Other (spare parts…)
Motivation for holding inventoriesMotivation for holding inventories
Economies of scale (Economies of scale (setup costsetup cost)) Uncertainties: Uncertainties: (demand, lead time, supply)(demand, lead time, supply)
Speculation Speculation (price increase)(price increase)
Transportation Transportation (pipeline inventories)(pipeline inventories)
Smoothing Smoothing (seasonality)(seasonality)
Logistics Logistics (supply, production, distribution)(supply, production, distribution)
Control costs Control costs (large inv. Of inexpensive items)(large inv. Of inexpensive items)
Characteristics of inventory systemsCharacteristics of inventory systems DemandDemand
• Constant versus variableConstant versus variable• Known versus randomKnown versus random
Lead timeLead time Review time Review time (continuous review, periodic review)(continuous review, periodic review)
Excess demandExcess demand• BackorderedBackordered• lostlost
Changing inventory Changing inventory (perishability, obsolescence(perishability, obsolescence
Relevant costsRelevant costs
Holding costHolding cost• Warehousing Warehousing (Providing space, Material handling, Labor)(Providing space, Material handling, Labor)
• Taxes and insuranceTaxes and insurance• Spoilage, deterioration, and obsolescenceSpoilage, deterioration, and obsolescence• Opportunity cost of alternative Opportunity cost of alternative
investmentinvestment Ordering cost (setup cost)Ordering cost (setup cost)
Inventory as a Inventory as a Function of TimeFunction of Time
Fig. 4-2
Relevant costs (cont’d)Relevant costs (cont’d)
Order costOrder cost Penalty cost (shortage cost)Penalty cost (shortage cost)
Order Cost FunctionOrder Cost FunctionFig. 4-3
Inventory ControlInventory Control
The EOQ ModelThe EOQ Model
AssumptionsAssumptions
Demand rate Demand rate λλ (units per unit time) (units per unit time) is known and constantis known and constant
Shortages are not permittedShortages are not permitted No lead timeNo lead time
Inventory Levels Inventory Levels for the EOQ Modelfor the EOQ Model
Fig. 4-4
Choose Choose QQ to minimize the average cost per unit to minimize the average cost per unit
timetime
fixed+proportional order cost per cycle: fixed+proportional order cost per cycle: K+cQK+cQ
Cycle length: Cycle length: T=Q / T=Q / λλ
Average inventory level per cycle: Average inventory level per cycle: Q/2Q/2
Average cost per unit time:Average cost per unit time:
G(Q) = (K+cQ)/T + hQ/2G(Q) = (K+cQ)/T + hQ/2
= K = K λλ/Q+ /Q+ λλc+hQ/2c+hQ/2
The Average Annual The Average Annual Cost Function G(Q)Cost Function G(Q)
Fig. 4-5
Reorder Point Calculation Reorder Point Calculation for Example 4.1for Example 4.1
Fig. 4-6
Reorder Point Calculation forReorder Point Calculation forLead Times Exceeding One CycleLead Times Exceeding One Cycle
Fig. 4-7
All-Units Discount All-Units Discount Order Cost FunctionOrder Cost Function
Fig. 4-9
Incremental Discount Incremental Discount Order Cost FunctionOrder Cost Function
Fig. 4-10
Average Annual Cost Function Average Annual Cost Function for Incremental Discount for Incremental Discount
ScheduleSchedule
Fig. 4-12
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