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Inventory Management
Homework (page 602): 13.5, 13.6, 13.19, 13.22, 13.34, 13.41
Littles Law:
Average Inventory=average flow rate * average flow time
Types of Inventories
Raw materials & purchased parts Partially completed goods called work in process
Inventory Turnover
Flow Time = Inventory Flow rate Inventory turnover = 1 Flow time
(WIP)
Finished-goods inventories (manufacturing firms) or merchandise (retail stores) Replacement parts, tools, & supplies Goods-in-transit to warehouses or customers (Pipeline inventory)
Inventory turnover is the ratio of annual cost of goods sold to average inventory investment. The turnover ratio indicates how many times a year the inventory is sold. The higher the ratio, the better.
Inventory Costs
Lead time: time interval between ordering and receiving the order Holding (carrying) costs: cost to carry an item in inventory for a length of time, usually a year.
Interest, insurance, depreciation, warehousing cost, deterioration, etc.
Form of Pareto analysis (80/20 rule) Classifying inventory according to some measure of importance, usually annual dollar usage, and allocating control efforts accordingly.
A B C
Few Many
Number of Items
Inventory Models
Fixed order quantity models Economic order quantity Production order quantity Quantity discount Probabilistic models Fixed order interval models
Help Help answer answerthe the inventory inventory planning planning questions! questions!
An EOQ System
Inventory Level
Order Quantity (Q) (Q=350)
15
left
Time
1 year
Low Q Average Inventory (Q/2)
Holding (Carrying) Cost Order (Setup) Cost Optimal Order Quantity (Q*) Order Quantity
Time
Carrying costs are linearly related to order size Ordering costs are inversely and nonlinearly related to order size
Q D = S 2 Q
2 DS H
Q* =
D= Demand rate (e.g., per year) S= Setup (ordering) cost per order H= Holding (carrying) cost
EOQ Solution
Optimal Order Quantity:
Q* = 2 DS = H
d=
Reorder Point: ROP = d .LT = (2.74 )(5 ) = 13.7 units Total Cost: =(Q*/2)*H+(D/Q*)*S =80/2*31.2+13*100=$2548 Inventory Turnover: =1000/40=25
D=1000/year
S=$100/order
H=0.4*78=$31.2/unit/year
T (Q) 1 Q Q * = ( * + ) T (Q ) 2 Q Q
Order Quantity50% 80% 90% 100% 110% 120% 150% 200% Cost Increase 125% 103% 101% 100% 101% 102% 108% 125%
= 2 SD Q h
EOQ Zone
Annual Cost Total Cost Curve
Q*
Order Quantity
Service Level (SL)- Probability that demand will not exceed supply during lead time.
EOQ Zone
Safety Stock
Inventory Level
Maximum probable demand during lead time Expected demand during lead time
Risk of a stockout
ROP
Safety Stock LT Place Receive order order
ROP
Safety stock z
Quantity
z-scale
Time
ROP=Expected demand during lead time+ Safety Stock =Expected demand during lead time+ z dLT
ROP Example 1
Suppose that the manager of a construction supply house determined from historical record that demand for sand during lead time average 50 tons. In addition, suppose the manager determined that demand during lead time could be described by a normal distribution that has a mean of 50 tons and a standard deviation of 5 tons. Assuming that the manager is willing to accept a stockout risk of no more than 3%.
3% 5 50 0 What value of z is appropriate? z z Z=1.88
EXCEL: =NORMSINV(0.97)
Uniform Distribution
A random variable (X) between some minimum (a) and maximum (b) value are equally likely.
X ~ u ( a, b)
1 b a
SL
ROP
Newsboy Problem
Newsboy Model
Example: On consecutive Sunday, Mac, the owner of a local newsstand, purchases a number of copies of the The Computer Journal. He pays 25 cents for each copy and sell each for 75 cents. Copies he has not sold during the week can be returned to his supplier for 10 cents each. The supplier is able to salvage the paper for printing future issues. Mac has kept careful records of the demand each week for the Journal. (This includes the number of copies actually sold plus the number of customer requests that could not be satisfied.)
Cu =
Co =
Example
Sweet cider is delivered weekly to Cindys Cider Bar. Demand varies uniformly between 300 and 500 liters per week. Cindy pays 20 cents per liter for the cider and charges 80 cents per liter for it. Unsold cider has no salvage value and can not be carried over into the next week due to spoilage. Find the optimal stocking level and its stockout risks for that quantity.
SL =
300
So
500
So
=300+0.75(500-300)=450 liters
If demand is normal distribution with a mean of 200 liters per week and a standard deviation of 10 liters per week.
S o = + z
75% 200
Example
Demand for long-stemmed red roses at a small flower shop can be approximated using a Poisson distribution that has a mean of four dozen per day. Profit on the roses is $3 per dozen. Leftover flowers are marked down and sold the next day at a loss of $2 per dozen. Assume that all marked-down flowers are sold. What is the optimal stocking level? What is the expected profit?
Demand(dozen/ day) 0 1 2 3 4 5
Cumulative Frequency
0.018 0.092 0.238 0.434 0.629 0.785
SL =
Cu 3 = = 0.6 Cu + Co 3 + 2
S o =4 dozens
Cu = $3
Co = $2
Example
A hotel near the university always fills up on the evening before football games. History has shown that when the hotel is fully booked, the number of last minute cancellations(no shows) is as follows.The average room rate is $80. When the hotel is overbooked, policy is to find a room in a near hotel and to pay for the room for the customer. This usually costs the hotel approximately $200 since rooms booked on such late notice are expensive. How many rooms should the hotel overbooked?
N umber of No-Shows 0 1 2 3 4 5 6 7 8 9 10
Probability 0.05 0.08 0.1 0.15 0.2 0.15 0.11 0.06 0.05 0.04 0.01
Cumulative Probability 0.05 0.13 0.23 0.38 0.58 0.73 0.84 0.9 0.95 0.99 1
Cu = $80
Co = $200
SL =
80 Cu = = 0.2857 Cu + Co 200 + 80
S o =3 rooms