07. inventory
DESCRIPTION
operations managementTRANSCRIPT
Inventory ManagementInventory is stock or store of goods
• Raw material• Work-in-process• Finished goods
• To meet anticipated demand• To smooth production requirements – seasonal• To protect against stockouts• To take advantages of quantity discounts• To permit operations – about WIP
Function of Inventory
Inventory Costs
• Holding cost• Ordering cost• Shortage cost
Material Classification
Class A: 10-15% contributes 60-70% value
Class B: 20-30% contributes 20-30% value
Class C: 60-70% contributes 5-10% value
Quantity
Co
st
A
B
C
Inventory Management
Inventory ordering & usage occur in cycles
Inventory Management
ROP
LTTime
Qu
anti
ty
Economic Order Quantity (EOQ)
EOQ is the order size that minimizes total cost
• Only one product is involved • Annual demand requirements are known• Demand is spread evenly• Lead time does not vary• No quantity discount
Inventory Management
Assumptions
Order Quantity
An
nu
al C
os
t
Holding cost
Ordering cost
Total cost
EOQ
Inventory Management
Material cost
Cost Curves
Annual holding cost = HQ
2
Annual ordering cost = SQ
D
Total cost = SQ
DH
QTC
2
H
DSQ
2
Inventory Management
Total cost (including material) = PDSQ
DH
QTC *
2
For minimum cost,
Cost Calculations
Order Quantity
An
nu
al C
os
t
Holding cost
Ordering cost
Total cost
EOQ
Inventory Management
Material cost
Quantity Discount TC is affected by the price discount on order size