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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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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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INVENTORY SYSTEMS FOR INDEPENDENT DEMAND

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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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