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McGraw-Hill/Irwin
Chapter 15
Inventory Control
McGraw-Hill/Irwin
OBJECTIVES
McGraw-Hill/Irwin
Inventory System
McGraw-Hill/Irwin
Purposes of Inventory
1. To maintain independence of operations
2. To meet variation in product demand
3. To allow flexibility in production
scheduling
4. To provide a safeguard for variation in
raw material delivery time
5. To take advantage of economic
purchase-order size
McGraw-Hill/Irwin
Inventory Costs
McGraw-Hill/Irwin
Independent Demand (Demand for the final endproduct or demand not related to other items)
Finished
product
E(1
)
Component parts
McGraw-Hill/Irwin
Dependent
Demand
(Derived demand
items for
component
parts,
subassemblies,
raw materials,
etc)
2006 The McGraw-Hill Companies, Inc., All
Inventory Systems
McGraw-Hill/Irwin
C
Cuu
P
P
C
Coo C
Cuu
This
Thismodel
modelstates
statesthat
thatwe
we
should
shouldcontinue
continueto
toincrease
increase
the
thesize
sizeof
ofthe
theinventory
inventoryso
so
long
longas
asthe
theprobability
probabilityof
of
selling
sellingthe
thelast
lastunit
unitadded
addedisis
equal
equalto
toor
orgreater
greaterthan
thanthe
the
ratio
ratioof:
of:Cu/Co+Cu
Cu/Co+Cu
Where :
Co Cost per unit of demand over estimated
Cu Cost per unit of demand under estimated
P Probability that the unit will be sold
McGraw-Hill/Irwin
10
McGraw-Hill/Irwin
Multi-Period Models:
Fixed-Order Quantity Model
Model Assumptions (Part 1)
McGraw-Hill/Irwin
11
12
Multi-Period Models:
Fixed-Order Quantity Model Model
Assumptions (Part 2)
McGraw-Hill/Irwin
13
R = Reorder point
Q = Economic order quantity
L = Lead time
McGraw-Hill/Irwin
Time
L
3. When you reach down to
a level of inventory of R,
you place your next Q
sized order.
14
Holding
Costs
Annual Cost of
Items (DC)
Ordering Costs
QOPT
Order Quantity (Q)
McGraw-Hill/Irwin
15
Annual
Annual
Annual
Purchase + Ordering + Holding
Cost
Cost
Cost
D
Q
D
Q
TC
TC == DC
DC ++ SS++ H
H
Q
22
Q
McGraw-Hill/Irwin
TC=Total
TC=Totalannual
annual
cost
cost
DD=Demand
=Demand
CC=Cost
=Costper
perunit
unit
QQ=Order
=Orderquantity
quantity
SS=Cost
=Costof
ofplacing
placing
an
anorder
orderor
orsetup
setup
cost
cost
RR=Reorder
=Reorderpoint
point
LL=Lead
=Leadtime
time
H=Annual
H=Annualholding
holding
and
andstorage
storagecost
cost
per
perunit
unitof
ofinventory
inventory
16
2DS
2DS =
=
HH
We
Wealso
alsoneed
needaa
reorder
reorderpoint
pointto
to
tell
tellus
uswhen
whento
to
place
placean
anorder
order
McGraw-Hill/Irwin
2(Annual
2(AnnualDemand)(Order
Demand)(Orderor
orSetup
SetupCost)
Cost)
Annual
AnnualHolding
HoldingCost
Cost
__
Reorder
Reorder point,
point, R
R == ddLL
17
McGraw-Hill/Irwin
18
2DS
2DS =
=
H
H
2(1,000
2(1,000)(10)
)(10) = 89.443 units or 90 units
= 89.443 units or 90 units
2.50
2.50
1,000
units
//year
1,000
units
year = 2.74 units / day
dd ==
= 2.74 units / day
365
days
/
year
365 days / year
__
Reorder
Reorderpoint,
point, RR==dd LL==2.74units
2.74units//day
day(7days)
(7days)==19.18
19.18or
or 20
20units
units
In
Insummary,
summary,you
youplace
placean
anoptimal
optimalorder
orderof
of90
90units.
units. In
In
the
thecourse
courseof
ofusing
usingthe
theunits
unitsto
tomeet
meetdemand,
demand,when
when
you
youonly
onlyhave
have20
20units
unitsleft,
left,place
placethe
thenext
nextorder
orderof
of90
90
units.
units.
McGraw-Hill/Irwin
19
20
10,000
units
//year
10,000
units
year = 27.397 units / day
dd==
= 27.397 units / day
365
days
/
year
365 days / year
__
R
R ==dd LL==27.397
27.397units
units//day
day(10
(10days)
days)==273.97
273.97or
or 274
274units
units
Place
Placean
anorder
orderfor
for366
366units.
units. When
Whenin
in the
thecourse
courseof
of
using
usingthe
theinventory
inventoryyou
you are
areleft
left with
with only
only274
274units,
units,
place
placethe
thenext
next order
orderof
of366
366units.
units.
McGraw-Hill/Irwin
qq==Average
Averagedemand
demand++Safety
Safetystock
stockInventory
Inventorycurrently
currentlyon
onhand
hand
qq==dd(T
(T++L)
L)++ZZTT++LL--II
Where
Where::
qq==quantitiy
quantitiyto
tobe
beordered
ordered
TT==the
thenumber
numberof
ofdays
daysbetween
betweenreviews
reviews
LL==lead
leadtime
timein
indays
days
dd==forecast
forecast average
averagedaily
dailydemand
demand
zz==the
thenumber
numberof
ofstandard
standarddeviations
deviationsfor
foraaspecified
specifiedservice
serviceprobabilit
probabilityy
T + L ==standard
standarddeviation
deviationof
ofdemand
demandover
overthe
thereview
reviewand
andlead
leadtime
time
T+L
II==current
currentinventory
inventorylevel
level(includes
(includesitems
itemson
onorder)
order)
McGraw-Hill/Irwin
21
T+T+LL ==
T+
L
T+L
i i 11
22
ddi
i
Since
Sinceeach
eachday
dayisisindependent
independentand
anddd isisconstant,
constant,
22
T+T+LL == (T
+
L)
(T + L)dd
McGraw-Hill/Irwin
22
Given
Given the
the information
information below,
below, how
how many
many units
units
should
should be
be ordered?
ordered?
Average daily demand for a product is
20 units. The review period is 30 days,
and lead time is 10 days. Management
has set a policy of satisfying 96 percent
of demand from items in stock. At the
beginning of the review period there are
200 units in inventory. The daily
demand standard deviation is 4 units.
McGraw-Hill/Irwin
23
24
25
So,
So, to
to satisfy
satisfy 96
96 percent
percent of
of the
the demand,
demand,
you
you should
should place
place an
an order
order of
of 645
645 units
units at
at
this
this review
review period
period
McGraw-Hill/Irwin
26
Q OPT
2DS
2(Annual Demand)(Order or Setup Cost)
=
=
iC
Annual Holding Cost
27
28
Q OPT =
2DS
=
iC
2(10,000)(4)
= 1,826 units
0.02(1.20)
Q OPT =
2DS
=
iC
2(10,000)(4)
= 2,000 units
0.02(1.00)
2DS
=
iC
2(10,000)(4)
= 2,020 units
0.02(0.98)
McGraw-Hill/Irwin
Total
annual
costs
So
So the
thecandidates
candidates
for
forthe
thepricepricebreaks
breaks are
are1826,
1826,
2500,
2500,and
and4000
4000
units
units
0
McGraw-Hill/Irwin
1826
2500
4000
Order Quantity
29
30
D
Q
D
Q iC
TC
=
DC
+
S
+
TC = DC +
S+
iC
Q
2
Q
2
TC(0-2499)=(10000*1.20)+(10000/1826)*4+(1826/2)(0.02*1.20)
TC(0-2499)=(10000*1.20)+(10000/1826)*4+(1826/2)(0.02*1.20)
==$12,043.82
$12,043.82
TC(2500-3999)=
TC(2500-3999)=$10,041
$10,041
TC(4000&more)=
TC(4000&more)=$9,949.20
$9,949.20
Finally,
, which is this
Finally,we
weselect
select the
theleast
least costly
costlyQ
Qopt
opt, which is this
problem
problem occurs
occursin
in the
the4000
4000 &&more
more interval.
interval. In
In summary,
summary,
our
ouroptimal
optimal order
orderquantity
quantityis
is4000
4000units
units
McGraw-Hill/Irwin
31
Miscellaneous Systems:
Optional Replenishment System
Maximum Inventory Level, M
q=M-I
Actual Inventory Level, I
M
I
32
Miscellaneous Systems:
Bin Systems
Two-Bin System
Empty
One-Bin System
Order Enough to
Refill Bin
Periodic Check
McGraw-Hill/Irwin
33
dollars invested
60
% of
$ Value 30
profit potential
Use
30
A
B
60
stock-out penalties
34
McGraw-Hill/Irwin
35
End of Chapter 15
McGraw-Hill/Irwin