ba 301 operations management spring 2003 inventory management chapter 12
TRANSCRIPT
BA 301Operations Management
Spring 2003Inventory Management
Chapter 12
Determining the Order Size
for the A-61 Microprocessor We have 3 suppliers for the A-61
Microprocessor: Intel, Micron, and Minnesota Data Products.
All three suppliers have quoted a price of $20 per hard drive.
All three quote a 5-day delivery time. We want to determine the amount to order
each time we place an order. We also want to determine when to place an
order.
Types of Inventory
Raw material: The A-61 microprocessors and the A-60 motherboard.
Work-in-progress: The A-62 motherboard assembly. This is microprocessors (A-61) attached to a mother board (A-60)
Maintenance/repair/operating supplies
(tools needed to calibrate machinery, toilet paper, etc…)
Finished goods (laptop computers)
The Functions of Inventory To ”decouple” or separate various parts of the
production process To provide a stock of goods that will provide a
“selection” for customers To take advantage of quantity discounts To hedge against inflation and upward price
changes
Higher costs– Item cost (if purchased)– Ordering (or setup) cost
• Costs of forms, clerks’ wages etc.
– Holding (or carrying) cost• Building lease, insurance, taxes etc.
Difficult to control Hides production problems
Disadvantages of Inventory
Independent versus Dependent Demand
Independent demandIndependent demand - demand for item is independent of demand for any other item
Dependent demandDependent demand - demand for item is dependent upon the demand for some other item
Inventory Costs
Holding costsHolding costs - associated with holding or “carrying” inventory over time
Ordering costsOrdering costs - associated with costs of placing order and receiving goods
Setup costsSetup costs - cost to prepare a machine or process for manufacturing an order
Holding Costs
Obsolescence Insurance Extra staffing
Interest Pilferage Damage Warehousing Etc.
Table 12.1 – Determining Inventory Holding Costs
Category
Housing costs
Material handling costs
Labor cost from extra handling
Interest costs
Pilferage, scrap, and obsolesence
Average Holding Cost = 26%
Cost as a % of Inventory Value
6%(3 - 10%
3%(1 - 3.5%)
3%(3 - 5%)
11%(6 - 24%)
3%
(2 - 5%)
Ordering Costs
Supplies Forms Order processing Clerical support Etc.
Setup Costs
Clean-up costs Re-tooling costs Adjustment costs Etc.
The Two Basic Questions of Inventory Management
How much to order? (“Lot Size”)– When we place an order for raw materials
or component parts from a supplier, what amount should we order?
When should we place the order? (“Reorder Point”)– If we have already determined “How much
to order”, when should the order be placed to insure that we don’t “stock out”?
Fixed order-quantity models– Economic order quantity– Production order quantity– Quantity discount
Probabilistic models
Fixed order-period models
Help answer the inventory planning questions!
Help answer the inventory planning questions!
© 1984-1994 T/Maker Co.
Inventory Models
Known and constant demand Known and constant lead time Instantaneous receipt of material No quantity discounts Only order (setup) cost and holding cost No stockouts
EOQ Assumptions
Deriving an EOQ
Develop an expression for setup or ordering costs
Develop an expression for holding cost Set setup cost equal to holding cost Solve the resulting equation for the best
order quantity
More units must be stored if more are ordered. A larger $ value of inventory must be financed
and this creates a higher interest charge.
Purchase OrderDescription Qty.Microwave
Order quantityOrder quantity
Purchase OrderDescription Qty.Microwave 1000
Order quantityOrder quantity
Why Do Holding Costs Increase as Order Size Increases?
1
Costs are repeated for each order.
Example: You need 1000 microwave ovens
Purchase OrderDescription Qty.Microwave 1
Purchase OrderDescription Qty.Microwave 1
Purchase OrderDescription Qty.Microwave 1
Purchase OrderDescription Qty.Microwave 1
1 Order (Postage $ 0.33)1 Order (Postage $ 0.33) 1000 Orders (Postage $330)1000 Orders (Postage $330)
Order quantityOrder quantity
Purchase OrderDescription Qty.Microwave 1000
Why Order Costs Decrease as Order Size Increase?
Mathematical Expressions for Holding Costs and Ordering Costs
Annual Holding Costs = Average Inventory * Holding Cost per UnitAHC = (Order Size)/2 (Holding
Cost/Unit) = Q/2 *H
Annual Ordering Cost = Number of time and order is place * Cost per Order
AOC = Demand/Order Size * Order Cost = D/Q * S
Order QuantityOrder Quantity
Annual CostAnnual Cost
Holding Cost Curve
Holding Cost CurveTotal Cost Curve
Total Cost Curve
Order (Setup) Cost CurveOrder (Setup) Cost Curve
Optimal Optimal Order Quantity (Q*)Order Quantity (Q*)
EOQ ModelHow Much to Order?
Back to the A-61 Microprocessors
We forecast a demand for 2000 of A-61 during the coming year. (D = 2000)
Our ordering cost each time we place and order is $200. (S = 200)
Our inventory holding cost/year is 25% of the item cost. (H = 0.25 P)
All of the assumptions for the EOQ model hold.
Calculating the Order Sizeusing EOQ
EOQ = square root (2D*S/H)
EOQ = sq rt (2*2000*200/0.25*20)
EOQ = 400 To minimize the annual inventory costs
for the A-61 Microprocessors, we would buy in order quantities of 400.
Calculating the Total Annual Inventory Cost
TAIC = Annual Holding Cost +
Annual Ordering Cost TAIC = (Q/2)H + (D/Q)S TAIC = (400/2)*5 + (2000/400)*200 TAIC = $1000 + $1000 = $2000 Notice that the AHC and AOC are
almost the same.
Order QuantityOrder Quantity
Annual CostAnnual Cost
Holding Cost Curve
Holding Cost CurveTotal Cost Curve
Total Cost Curve
Order (Setup) Cost CurveOrder (Setup) Cost Curve
Optimal Optimal Order Quantity (Q*)Order Quantity (Q*)
At the Optimal Order Quantity,Annual Holding Costs=Annual Order Costs
Determining the Reorder Point
We want to place an order (aka “reorder”) with a supplier in enough time so that we don’t run out of the item before we receive the order.
Our “lead time” with the suppliers of the A-61 Microprocessor is 5 days.
How much inventory do we need to have when we reorder so that we won’t run out while the order is in process?
EOQ ModelWhen To Order
Reorder Reorder Point Point (ROP)(ROP)
TimeTime
Inventory LevelInventory Level
AverageAverageInventory Inventory
(Q*/2)(Q*/2)
Lead TimeLead Time
Optimal Optimal Order Order QuantityQuantity(Q*)(Q*)
Determining the Reorder Point
To calculate the Reorder Point, we have to calculate the demand during lead time (DDLT), i.e. the amount we will use during the five days that the shipment will take to receive after we have placed the order.
DDLT = Demand per Day * Lead Time D = 2000, WDPY = 250, Demand per Day = 8 DDLT = 8 * 5 = 40 = Reorder Point
Calculating Order Size with Quantity Discounts
Minnesota Data Products has sent us the following price information for the
A-61 Microprocessor
Order Quantity Price each
1 – 400 $20.00
401 – 1600 19.00
1601 & over 18.50
How does this change our Order Size?