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7/28/2019 Inventory Management Vipul
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Submitted by
vipul kanojiaabu bakerbupinder singh
Inventory Management
And models
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Types of Inventories
Raw materials & purchased parts
Partially completed goods calledwork in progress
Finished-goods inventories (manufacturingfirms)
or merchandise (retail stores)
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Functions of Inventory
To meet anticipated demand
To smooth productionrequirements
To protect against stock-outs
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Objective of Inventory Control
To achieve satisfactory levels of customer
service while keeping inventory costs within
reasonable bounds
Level of customer service
Costs of ordering and carrying inventory
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A system to keep track of inventoryA reliable forecast of demand
Knowledge of lead times
Reasonable estimates of
Holding costs
Ordering costs Shortage costs
A classification system
Effective Inventory Management
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Inventory Counting Systems
Periodic System
Physical count of items made at
periodic intervals
Perpetual Inventory SystemSystem that keeps track of removals
from inventory continuously, thusmonitoring current levels of each item
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Lead time: time interval between ordering andreceiving the order
Holding (carrying) costs: cost to carry anitem in inventory for a length of time, usually a year
Ordering costs: costs of ordering and receivinginventory
Shortage costs: costs when demand exceedssupply
Key Inventory Terms
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ABC Classification System
Classifying inventory according to somemeasure of importance and allocating
control efforts accordingly.A -very important
B- mod. important
C- least importantAnnual
$ valueof items
A
B
C
High
Low
Low High
Percentage of Items
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Economic order quantity (EOQ) model
The order size that minimizes totalannual cost
Economic production model
Quantity discount model
Economic Order Quantity Models
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Only one product is involved
Annual demand requirements known
Demand is even throughout the year
Lead time does not vary
Each order is received in a single delivery
Inventory Level = 0 when new order justarrived
There are no quantity discounts
Assumptions of EOQ Model
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Total Cost
Annualcarryingcost
Annualorderingcost
Total cost = +
TC =Q
2H
D
QS+
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Minimum Total Cost
The total cost curve reaches itsminimum where the
Carrying Cost = Ordering Cost
Q
2H
D
QS=
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Deriving the EOQ
Using calculus, we take the derivativeof the total cost function and set thederivative (slope) equal to zero andsolve for Q.
Q = 2DSH
= 2(Annual Demand )(Order or Setup Cost )Annual Holding Cost
OPT
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Economic Production Quantity(EPQ)
Assumptions
Only one product is involved
Annual demand requirements are known Usage rate is constant
Usage occurs continually, but production occursperiodically
The production rate is constant Lead time does not vary
There are no quantity discounts
12-14
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Quantity Discount Model
Quantity discount
Price reduction offered to customers for
placing large orders
priceUnit
where2
CostPurchasingCostOrderingCostCarryingCostTotal
P
PDS
Q
DH
Q
12-15
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When to Reorderwith EOQ Ordering
Reorder Point- When the quantity onhand of an item drops to lower amount,the item is reordered
Safety Stock -Stock that is held inexcess of expected demand due to
variable demand rate and/or lead time.
Service Level -Probability that demandwill not exceed supply during lead time.
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Determinants of the Reorder Point
The rate of demand
The lead time
Demand and/or lead time variability
Stockout risk (safety stock)
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Single period model: model for orderingof perishables and other items with
limited useful lives
Shortage cost: generally the unrealizedprofits per unit
Excess cost: difference betweenpurchase cost and salvage value ofitems left over at the end of a period
Single Period Model
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Too much inventory Tends to hide problems
Easier to live with problems than toeliminate them
Costly to maintain
Wise strategy
Reduce lot sizes
Reduce safety stock
Operations Strategy
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THANK YOU