final opc ppt

8/6/2019 Final Opc Ppt

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By Subhrajyoti ParidaPGDIE 40,Sec.B, Roll No.124.


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Def. - A physical resource which a firm stocks with the intent of

selling it or meeting unexpected rise in demand or

transforming it into a more valuable state.

Classification of Inventory

Raw Materials

Works-in-Process

Finished Goods

Maintenance, Repair and Overhaul (MRO) ,

eg. spare parts, extra accessories etc.


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Continuous Review System.

Also called as Fixed Quantity /Order Point Model.

The inventory status is reviewed almost on daily basis.

The order is placed when the inventory level comes down to are-order level and is the same is expected to arrive when

inventory level is equal to safety stock level.

Stock qty. to be ordered remains fixed.

This is applicable to markets where demand and lead time is

highly dynamic and fluctuating.


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L

Q

R

Safety Stock

Inventorylevel

Time

lead time to get

a new order in

Re-order point


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Periodic Review System.

Also called as Fixed Order Interval/Period Model.

Stock qty. ordered is not fixed , but the ordering period/interval

remains fixed.

Optimum Ordering period is decided based on the customers

demand.

Ordering qty. is determined such that certain optimum level ofstock is achieved called as Base Stock Level.


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Inventorylevel

Time2 4 6


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The model is suitable when

the demand is quite predictive and stable.

the suppliers are few/knownLead time variability is minimum

Base stock level = (Avg. Demand during r+L days) +

(Safety Stock Level) ,

= [(r + L) x AVGD] + [z x STD x (r + L)]L= supply lead time

r = review period

Total stock level after receipt of the order = (r x AVGD) +

z x STD x (r + L)

Avg. inventory level = [r x AVGD]/2 + [z x STD x (r + L)]

after order receipt


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B) Calculation ofBuffer/Safety Stock

Buffer/Safety Stock refers to the minimum qty. of stock whichshould be maintained to absorb deviations in demand.

Optimum safety stock prevents stock out cases and hence

improves service level of a warehouse.

It also economizes the inventory carrying cost of the stocks.

Safety Stock =z x [STL2 x mean. D 2 + STD2 x mean. L] -- 1

z= value corresponding to req. Service Level

Eqn. 1 applicable to both demand and lead time variability.

Only lead time variability , Safety Stock =z x STD x (mean. L) --2


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C) Service Level Concept

Service Level : In inventory management, this refers to theprobability of success in making the stock available to meet the

customers demand , as against the case of stock out.

Service level = Probability of NOT stocking out.

It is expressed in percentage .


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5% chance

of stock

out

95% service level means 95

times out of 100 no.s of orders

, the order is fulfilled, and 5

times stock out took place.

Service level gives the value

of z (safety factor) which is

used to determine Safety Stock

Safety Stock =z x [STL2 x

mean. D 2 + STD2 x mean. L].

95% chance

of orderfulfillment


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D)Price Break and Discounts

Reduction in per-unit price if an order exceeds a specified quantityset by the supplier.

Supplier enjoys economy of scale is terms of quantity /truck loads.

A temporary reduction/discount in the price of a product during

certain period when the demand is expected to increase , i.e duringweekends, festive seasons etc.

This leads to expected higher sales for a certain period.


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Application of Price Break/Discounts in EOQ Model

Ideal EOQ model doesnt consider price reduction due

to quantity or freight discounts

Revised EOQ model with price break consideration :

Q (rev.) = 2(rD/C0 ) + (1-r)Q0

where r = red. In price in %,

D= annual avg. demand in units,

Co = Inventory carrying cost in %,

Q0 = EOQ under ideal condition.


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Consider:

D = Total demand for the year

S = Cost to place a single order

H =

Cost to hold one unit in inventory for a year

Q = Order quantity

Then:

Total Cost = Annual Holding Cost + Annual

Ordering Cost

= [(Q/2) H] + [(D/Q) S]


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$

Q

Holding cost increases

as Q increases . . .

(Q/2)H


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0

500

1000

1500

2000

10 50 90 130

170

210

250

290

330

370

410

Order Qua Q

InventoryCost($)

Holding Cos O de ing Cos o al Cos

EOQ at m nimum totalcost


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E) Economic Order Quantity (EOQ)

EOQ: This refers to the minimum quantity which should beordered such that ordering cost and inventory carrying cost is

minimized.

EOQ (without shortage) : [(2SD)/H],

S Ordering cost per unit order

D-Annual demand

H-Inventory carrying cost


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Assumptions in traditional EOQ model:

No shortage in any of the echelons, i.e demand is always

met.

Constant purchase and transportation price with respect

to time or quantity

No fluctuation in demand or lead time

No inventory in transit

Only one type of product ordered.

No limitation to capital investments.


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EOQ (with shortage) :

M/2 -Avg. inventory in units

(q-M)/2 Avg. shortage

h( M/2)(M/q) - Annual inventory carrying costs* ( q-M)/2 * (q-M)/q : Annual Shortage cost

P Ordering cost per unit order

D-Annual demand

C-Cost of the item


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Total cost (with shortage) = Inv. Carrying cost + Shortage cost +

Cost of the stock + Ordering cost

=PD/q + CD+ M 2 h/2q + s( q-M) 2/2q

From above equation,

The optimal qty. to order ,q= [(2PD)/h] x [(h+s)/s](1/2)

= EOQ x[(h+s)/s](1/2)

The actual order obtained , M = [(2PD)/h] x [(s)/(h+s](1/2)

= EOQ x [(s)/(h+s](1/2)


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References

Fundamentals of Logistics Management by Lambert & Stock

EOQ Model with Backlogging Allowed by Siqian Shen, Dept.

of Industrial And Systems Engg.,University of Florida

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