Chap 006
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CHAPTER 6 Inventory Management
Purposes of Inventory
6-2
• Enables the firm to achieve economics of scale • Balances supply and demand • Enables specialization in manufacturing • Provides protection from uncertainties in demand and order cycle • Acts as a buffer between critical interfaces within the supply chain McGraw-Hill/Irwin
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
6-3aa 6-3 The Effect of Reorder Quantity on Average Inventory Investment with Constant Demand and Lead Time
A. Order quantity of 400 units Inventory
Order arrival
400
Order placed
Order arrival Order placed
Average cycle inventory
200
0 Days
McGraw-Hill/Irwin
10
20
30
40
50
60
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
The Effect of Reorder Quantity on Average Inventory Investment with Constant Demand and Lead Time
6-4bb 6-3
B. Order quantity of 200 units
Inventory
Order placed
200
Average cycle inventory
Order arrival
100 0 Days
McGraw-Hill/Irwin
10
20
30
40
50
60
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
The Effect of Reorder Quantity on Average Inventory Investment with Constant Demand and Lead Time C. Order quantity of 600 units
Inventory 600
Order arrival
Average cycle inventory
Order placed 300
0 Days McGraw-Hill/Irwin
6-5cc 6-3
10
20
30
40
50
60
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Average Inventory Investment Under Conditions of Uncertainty
6-6aa 6-4
A. With variable demand Inve ntory 200
{{
Average cycle inventory
100
Ave ra ge inve nto ry (150)
McGraw-Hill/Irwin
S afe ty s tock (50)
8
10
20
30
40
Days
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Average Inventory Investment Under Conditions of Uncertainty
6-7bb 6-4
B. With variable lead time Inventory 200
{{
Average cycle inventory
100
Ave ra ge inve ntory (140)
McGraw-Hill/Irwin
S afety s tock (40)
10
12
20
30
40
Days
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Average Inventory Investment Under Conditions of Uncertainty
6-8cc 6-4
C. With variable demand and lead time Inve ntory 200
{{
Average cycle inventory
100
Ave ra ge inve nto ry (200)
McGraw-Hill/Irwin
S afe ty s tock (10 0)
8
10
12
20
30
40
Days
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
The EOQ Model EOQ =
6-9 6-5
2PD CV
where: P = The ordering cost (dollars per order) D = Annual demand or usage of the product (number of units) C = Annual inventory carrying cost (as a percentage of product cost or value) V = Average cost or value of one unit of inventory
McGraw-Hill/Irwin
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Cost Trade-offs to Determine the Most Economic Order Quantity
6-10 6-6
Total cost
Annual cost (dollars) Lowest total cost (EOQ)
Inventory carrying cost
Ordering cost
Size of order McGraw-Hill/Irwin
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Cost Trade-offs Required to Determine the Most Economic Order Quantity Order Quantity
40 60 80 100 120 140 160 200 300 400 McGraw-Hill/Irwin
Number of Orders (D/Q)
120 80 60 48 40 35 30 24 18 12
Ordering Cost PX (D/Q)
$ 4,800 3,200 2,400 1,920 1,600 1,400 1,200 960 720 480
Inventory Carrying Cost 1/2 Q X C X V
$ 500 750 1,000 1,250 1,500 1,750 2,000 2,500 3,750 5,000
6-11 6-7
Total Cost
$ 5,300 3,950 3,400 3,170 3,100 3,150 3,200 4,460 4,470 5,480
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Symptoms of Poor Inventory
6-12 6-8
• Increasing numbers of back orders • Increasing dollar investment in inventory with back orders remaining constant. • High customer turnover rate. • Increasing number of orders being canceled. • Periodic lack of sufficient storage space. • Wide variance in inventory turnover among distribution centers and major inventory items. McGraw-Hill/Irwin
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Purposes of Inventory
6-2
• Enables the firm to achieve economics of scale • Balances supply and demand • Enables specialization in manufacturing • Provides protection from uncertainties in demand and order cycle • Acts as a buffer between critical interfaces within the supply chain McGraw-Hill/Irwin
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
6-3aa 6-3 The Effect of Reorder Quantity on Average Inventory Investment with Constant Demand and Lead Time
A. Order quantity of 400 units Inventory
Order arrival
400
Order placed
Order arrival Order placed
Average cycle inventory
200
0 Days
McGraw-Hill/Irwin
10
20
30
40
50
60
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
The Effect of Reorder Quantity on Average Inventory Investment with Constant Demand and Lead Time
6-4bb 6-3
B. Order quantity of 200 units
Inventory
Order placed
200
Average cycle inventory
Order arrival
100 0 Days
McGraw-Hill/Irwin
10
20
30
40
50
60
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
The Effect of Reorder Quantity on Average Inventory Investment with Constant Demand and Lead Time C. Order quantity of 600 units
Inventory 600
Order arrival
Average cycle inventory
Order placed 300
0 Days McGraw-Hill/Irwin
6-5cc 6-3
10
20
30
40
50
60
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Average Inventory Investment Under Conditions of Uncertainty
6-6aa 6-4
A. With variable demand Inve ntory 200
{{
Average cycle inventory
100
Ave ra ge inve nto ry (150)
McGraw-Hill/Irwin
S afe ty s tock (50)
8
10
20
30
40
Days
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Average Inventory Investment Under Conditions of Uncertainty
6-7bb 6-4
B. With variable lead time Inventory 200
{{
Average cycle inventory
100
Ave ra ge inve ntory (140)
McGraw-Hill/Irwin
S afety s tock (40)
10
12
20
30
40
Days
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Average Inventory Investment Under Conditions of Uncertainty
6-8cc 6-4
C. With variable demand and lead time Inve ntory 200
{{
Average cycle inventory
100
Ave ra ge inve nto ry (200)
McGraw-Hill/Irwin
S afe ty s tock (10 0)
8
10
12
20
30
40
Days
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
The EOQ Model EOQ =
6-9 6-5
2PD CV
where: P = The ordering cost (dollars per order) D = Annual demand or usage of the product (number of units) C = Annual inventory carrying cost (as a percentage of product cost or value) V = Average cost or value of one unit of inventory
McGraw-Hill/Irwin
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Cost Trade-offs to Determine the Most Economic Order Quantity
6-10 6-6
Total cost
Annual cost (dollars) Lowest total cost (EOQ)
Inventory carrying cost
Ordering cost
Size of order McGraw-Hill/Irwin
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Cost Trade-offs Required to Determine the Most Economic Order Quantity Order Quantity
40 60 80 100 120 140 160 200 300 400 McGraw-Hill/Irwin
Number of Orders (D/Q)
120 80 60 48 40 35 30 24 18 12
Ordering Cost PX (D/Q)
$ 4,800 3,200 2,400 1,920 1,600 1,400 1,200 960 720 480
Inventory Carrying Cost 1/2 Q X C X V
$ 500 750 1,000 1,250 1,500 1,750 2,000 2,500 3,750 5,000
6-11 6-7
Total Cost
$ 5,300 3,950 3,400 3,170 3,100 3,150 3,200 4,460 4,470 5,480
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Symptoms of Poor Inventory
6-12 6-8
• Increasing numbers of back orders • Increasing dollar investment in inventory with back orders remaining constant. • High customer turnover rate. • Increasing number of orders being canceled. • Periodic lack of sufficient storage space. • Wide variance in inventory turnover among distribution centers and major inventory items. McGraw-Hill/Irwin
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
