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C h a p t e r
INVENTORY SYSTEMS FOR INDEPENDENT DEMAND
Chapter Outline
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• Definition of Inventory• Purposes of Inventory• Inventory Costs• Independent versus
Dependent Demand• Types of Inventory
Systems• Basic Inventory Models
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C h a p t e r
INVENTORY SYSTEMS FOR INDEPENDENT DEMAND
Chapter Outline continued
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• Economic Order Quantity Models in Relation to the Real World
• Perishable Inventory• Inventory Management in
Services• Additional Issues in Inventory
Management• Current Trends in Inventory
Management
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INVENTORY SYSTEMS FOR INDEPENDENT DEMAND
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Chapter Objectives
• Introduce the different types of inventories that exist in a company and provide a rationale for why inventories are kept.
• Identify the various costs associated with inventories.
• Define the classical inventory models and show how the EOQ is calculated.
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Chapter Objectives continued
• Introduce yield management and demonstrate how services treat inventories.
• Present some of the current trends in inventory.
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Types of Inventories
Supplier Customer
Manufacturing facility
Step 1 Step 2
In-Transit RawMaterial
WIP Finished Goods
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Purposes of Inventory
• To protect against uncertainty· raw materials· lead times· WIP· finished goods
• To support a strategic plan· level strategy
• To take advantage of economies of scale· quantity discounts
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Types of Inventory Costs
• Holding or carrying costs· Cost of storage· Cost of capital· Cost of
obsolescence/shrinkage• Setup or order costs• Shortage or stockout costs• Purchased material costs
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Types of Inventory Systems
• Fixed-order quantity (Q-system)· Order quantity (Q) remains
constant· Time interval varies
• Fixed-time period (P-system)· Time interval remains
constant· Order quantity varies
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EXHIBIT 14.2 Basic Fixed-Order Quantity Model
Number ofUnits on Hand
Time
Q
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Re-order Point (R) and Lead Time (L)
Number ofUnits on Hand
Time
Q
R
L
u = usage rate
R = u L
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EXHIBIT 14.3 Annual Product Costs, Based on Size of the Order
Cos
t
Order quantity size
DC
(Q/2)H
(D/Q)S
EOQ
TC
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EXHIBIT 14.4 Fixed-Order Quantity with Usage During Production Time
N
umbe
r of
Uni
ts o
n H
and
Time
Imax
Build-up = (p-d)Usage rate = d
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EXHIBIT 14.6 Total Cost Curves for a Quantity-Discount Model
T
otal
Cos
t
Order Size (Q)
C1 = $5.00
C2 = $4.50
C3 = $3.90
633 716 1,000 666
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