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Inventory Control

Model

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Inventory as an Important Asset

Inventory can be the most expensive andthe most important asset for an

organization

Other Assets60%

Inventory40%

Inventory as a

percentage of total assets

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The Inventory Process

Suppliers Customers

Finished

Goods

Raw

Materials

Work in

Process

Fabrication

and

Assembly

Inventory Storage

Inventory Processing

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Importance of Inventory Control

Five Functions of Inventory Decoupling

Storing resources

Adapting to irregular supply and demand

Enabling the company to take advantage

of quantity discounts

Avoiding stockouts and shortages

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Inventory Decisions

How much to order

When to order

w ish to m inim ize total inventory cos t

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Inventory Costs

Cost of the items

Cost of ordering

Cost of carrying, or holding inventory

Cost of safety stock

Cost of stockouts

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Ordering Costs Developing and sending purchase orders

Processing and inspecting incoming inventory

Bill paying

Inventory inquiries

Utilities, phone bills, etc., - purchasing

department.

Salaries/wages - purchasing department

employees

Supplies (e.g., forms and paper) - purchasing

department

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Carrying Costs Cost of capital

Taxes

Insurance

Spoilage

Theft

Obsolescence

Salaries/wages - warehouse employees

Utilities/building costs - warehouse

Supplies (e.g., forms, paper) - warehouse

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Inventory Usage Over Time

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Costs as Functions of OrderQuantity

Annual

Cost

Order QuantityQ*

Total Cost Curve

Carrying (holding)

Cost Curve

Ordering (set-up)

Cost Curve

Minimum

Cost

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os s as unc ons o r er Quantity

Order Cost

Minimum Cost

Inventory Cost versus Order Quantity

Quantity

$Cost

Optimal Quantity

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Steps in Finding the Optimum

Inventory Develop an expression for the ordering

cost.

Develop and expression for the

carrying cost.

Set the ordering cost equal to the

carrying cost.

Solve this equation for the optimum

desired.

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EOQ : Basic Assumptions Demand is known and constant

Lead time is known and constant

Receipt of inventory is instantaneous

Quantity discounts are not possible

The only variable costs are the cost of setting

up or placing an order, and the cost of holding

or storing inventory over time

Stockouts can be completely avoided if orders

are placed at the appropriate time

D l i th EOQ

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Annual ordering cost:

Annual holding or carrying cost:

Material Cost: DC Total inventory cost:

Developing the EOQ

oCQ

D

orderperunitsofNumber

demandAnnual

hC2

Q

YearPerCostCarrying*InventoryAverage

hot C

2

QC

Q

DTC DC

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Inputs and Outputs of the

EOQ Model

EOQ

Models

Input Values Output Values

Annual Demand

(D)

Ordering Cost(Co)

Carrying Cost

(Ch)

Lead Time(L)

Demand Per Day

(d)

Economic

Order

Quantity(EOQ)

Reorder

Point

(ROP)

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The Reorder Point (ROP) Curve

ROP = (Demand per day) x (Lead time for a new order, in days)= d x L

Inven

toryLevel

(Units)

Q*

ROP

(Units)

Slope = Units/Day = d

Lead Time (Days) L

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Inventory Control and theProduction Process

InventoryL

evel

DemandPortionof Cycle

DemandPortionof Cycle

Maximum

Inventory

Level

Time

ProductionPortion of

Cycle

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Production Quantity EOQ Annual Carrying Cost:

Annual Ordering Cost:

~ Setup Cost:

~ Ordering Costs:

hCp

dQ)1(

2

sC

Q

D

oC

Q

D

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Production Quantity EOQ

pd1C

2DCQ

h

o*

p

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Quantity Discount Models

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Quantity Discount Steps

1. Calculate Q for each discount

2. Adjust Q upward if quantity is too low

for discount

3. Compute total cost for each discount

4. Select Q with the the lowest total cost

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The Use of Safety Stock

Inventoryo

n

Hand

Inventoryon

Hand

StockoutTime

Stockoutis avoided

Time

Safety Stock

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The Use of Safety Stock

Known stockout costs:

Given probability of demand, find total

cost for each safety stock alternative

Unknown stockout costs:

Set service level; use normal distribution

S i L l C i

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Service Level versus Carrying

Costs

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