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INDEPENDENT DEMAND INVENTORY SYSTEMS
Reported by: Maria Theresa A. VelascoMaster in Business Administration
WHY HOLDING INVENTORY IS IMPORTANT? Inventory can be a strategic tool Helps level capacity Uncouples production stages Increases flexibility Provides cheaper ordering policies
TWO TYPES OF INVENTORY SYSTEMS
Fixed Order Quantity System When the Order Point (OP) is reached, we
put an order. Also known as the 2 bin system. Fixed Order Period System
Reviews the inventory level at “fixed time
intervals.” Order enough materials to bring
the inventory to a predetermined level.
INVENTORY MODELS FOR THE FIXED ORDER QUANTITY SYSTEM
Economic Order Quantity Model (EOQ) EOQ for Production Lots EOQ with Quantity Discounts Models with uncertain demand during
lead time.
ECONOMIC ORDER QUANTITY (EOQ)
Let D - annual demand (units/year)Q - order quantity (units)C - carrying cost ($/unit/year)S - ordering cost ($/order)TSC =Total Annual Stocking cost
($)LT = lead time (days)
ECONOMIC ORDER QUANTITYThe Greenmore Lawn Products Company produces lawn
fertilizer. One raw material--ammonium nitrate--is purchasedin large quantities in the making of fertilizer. 2,500,000 tons of ammonium nitrate are forecast to be required next year tosupport production. If ammonium nitrate costs $122.50 per ton, carrying cost is 35 percent of acquisition cost, and ordering cost is $1,595 per order:
a. In what quantities should Greenmore buy ammoniumnitrate?
b. What annual stocking costs will be incurred if ammonium nitrate is ordered at the EOQ?
c. How many orders per year must Greenmore placefor ammonium nitrate?
d. How much time will elapse between orders.
EOQ FOR PRODUCTION LOTSThe production rate of final assembly is 800 compact
discs per day. After the compact discs are assembled,they go directly to finished-goods inventory. Customer demand averages 400 compact discs perday and about 50,000 compact discs per year. If itcosts $500 to set up the assembly line for the compactdisks and $1.00 per compact disc per year to carry them in inventory:
a. How many compact discs should be in a production lot at final assembly?
b. What is the TSC at the EOQ?
EOQ WITH QUANTITY DISCOUNT
Steps:1. Compute EOQ of each sales price2. Determine which EOQ is within the quantity range
for its price3. Compute the TMC for the feasible EOQ and the TMCs
of quantities with lower sales prices4. The quantity with the lowest TMC is the order
quantity