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Why is Inventory Important?

Why is Inventory Important?. Inventory at Successive Stocking Points. Water Tank Analogy. Inventory Level. Demand Flow (Finished Goods). Flow of Receipts (Raw Materials & Parts). Scrap or Reject Flow. Outflow exceeds Inflow. Demand Flow (Finished Goods).

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Why is Inventory Important?

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  1. Why is Inventory Important?

  2. Inventory at Successive Stocking Points

  3. Water Tank Analogy Inventory Level Demand Flow (Finished Goods) Flow of Receipts (Raw Materials & Parts) Scrap or Reject Flow

  4. Outflow exceeds Inflow Demand Flow (Finished Goods) Flow of Receipts (Raw Materials & Parts) Scrap or Reject Flow

  5. Inflows exceed Outflows Demand Flow (Finished Goods) Flow of Receipts (Raw Materials & Parts) Scrap or Reject Flow

  6. Types of Demand Independent • Item’s demand is influenced ONLY by market conditions and is NOT related to production decisions for any other items. • Only end items • Demand must be forecast Examples • Cars, TVs, Bicycles, Number of Seats in a restaurant

  7. Types of Demand Dependent • Item’s demand derives from the production decisions of its parents. • All intermediate and purchased items in manufacturing • Demand should be derived Examples • Car doors, Tv remotes, Bicycle tires, Number of T-bones for a given night

  8. A Bill of Materials A B(3) D(3) G(1) C(1) C(2) E(2) F(2)

  9. Pressures for Small Inventories • Interest/Opportunity Cost • Storage and handling • Property Taxes • Insurance premiums • Shrinkage • Spoilage

  10. Pressures for Large Inventories • Customer Service • Order/Setup Cost • Labor/Equipment Utilization • Transportation Cost • Cost of Materials/Quantity Discounts

  11. The Gaming Co.

  12. How Much? When!

  13. Annual cost (dollars) Lot Size (Q) Economic Order Quantity

  14. Annual cost (dollars) Holding cost (HC) Lot Size (Q) Economic Order Quantity

  15. Annual cost (dollars) Holding cost (HC) Ordering cost (OC) Lot Size (Q) Economic Order Quantity

  16. Total cost = HC + OC Annual cost (dollars) Holding cost (HC) Ordering cost (OC) Lot Size (Q) Economic Order Quantity

  17. 3000 — 2000 — 1000 — 0 — Q 2 D Q Total cost = (H) + (S) Q 2 Annual cost (dollars) Holding cost = (H) D Q Ordering cost = (S) | | | | | | | | 50 100 150 200 250 300 350 400 Lot Size (Q) Economic Order Quantity

  18. 3000 — 2000 — 1000 — 0 — Q 2 D Q Total cost = (H) + (S) Birdfeeder costs(Current System) Q 2 Annual cost (dollars) Holding cost = (H) D = (18 /week)(52 weeks) = 936 units H = 0.25 ($60/unit) = $15 S = $45 Q = 390 units D Q Q 2 D Q Ordering cost = (S) C = (H) + (S) | | | | | | | | 50 100 150 200 250 300 350 400 Lot Size (Q) Economic Order Quantity

  19. 3000 — 2000 — 1000 — 0 — Q 2 D Q Total cost = (H) + (S) Birdfeeder costs (Current System) Q 2 Annual cost (dollars) Holding cost = (H) D = (18 /week)(52 weeks) = 936 units H = 0.25 ($60/unit) = $15 S = $45 Q = 390 units D Q Q 2 D Q Ordering cost = (S) C = (H) + (S) | | | | | | | | 50 100 150 200 250 300 350 400 C = $2925 + $108 = $3033 Lot Size (Q) Economic Order Quantity

  20. Current cost 3000 — 2000 — 1000 — 0 — Q 2 D Q Total cost = (H) + (S) Birdfeeder costs Q 2 Annual cost (dollars) Holding cost = (H) D = (18 /week)(52 weeks) = 936 units H = 0.25 ($60/unit) = $15 S = $45 Q = 390 units D Q Q 2 D Q Ordering cost = (S) C = (H) + (S) | | | | | | | | 50 100 150 200 250 300 350 400 C = $2925 + $108 = $3033 Current Q Lot Size (Q) Economic Order Quantity

  21. Current cost 3000 — 2000 — 1000 — 0 — Q 2 D Q Total cost = (H) + (S) Q 2 Annual cost (dollars) Holding cost = (H) D Q Ordering cost = (S) | | | | | | | | 50 100 150 200 250 300 350 400 Current Q Lot Size (Q) Economic Order Quantity

  22. Current cost 3000 — 2000 — 1000 — 0 — Birdfeeder costs (Optimal) Q 2 D Q D = (18 /week)(52 weeks) = 936 units H = 0.25 ($60/unit) = $15 S = $45 Q = EOQ Total cost = (H) + (S) Q 2 Annual cost (dollars) Holding cost = (H) Q 2 D Q 2DS H C = (H) + (S) EOQ = D Q Ordering cost = (S) | | | | | | | | 50 100 150 200 250 300 350 400 Current Q Lot Size (Q) Economic Order Quantity

  23. Current cost 3000 — 2000 — 1000 — 0 — Birdfeeder costs (Optimal) Q 2 D Q D = (18 /week)(52 weeks) = 936 units H = 0.25 ($60/unit) = $15 S = $45 Q = 75 units Total cost = (H) + (S) Q 2 Annual cost (dollars) Holding cost = (H) Q 2 D Q 2DS H C = (H) + (S) EOQ = D Q Ordering cost = (S) | | | | | | | | 50 100 150 200 250 300 350 400 Current Q Lot Size (Q) Economic Order Quantity

  24. Current cost 3000 — 2000 — 1000 — 0 — Birdfeeder costs (Optimal) Q 2 D Q D = (18 /week)(52 weeks) = 936 units H = 0.25 ($60/unit) = $15 S = $45 Q = 75 units Total cost = (H) + (S) Q 2 Annual cost (dollars) Holding cost = (H) Q 2 D Q 2DS H C = (H) + (S) EOQ = C = $562 + $562 = $1124 D Q Ordering cost = (S) | | | | | | | | 50 100 150 200 250 300 350 400 Current Q Lot Size (Q) Economic Order Quantity

  25. Current cost 3000 — 2000 — 1000 — 0 — Birdfeeder costs (Optimal) Q 2 D Q D = (18 /week)(52 weeks) = 936 units H = 0.25 ($60/unit) = $15 S = $45 Q = 75 units Total cost = (H) + (S) Q 2 Annual cost (dollars) Holding cost = (H) Q 2 D Q 2DS H C = (H) + (S) EOQ = C = $562 + $562 = $1124 D Q Ordering cost = (S) | | | | | | | | 50 100 150 200 250 300 350 400 Current Q Lot Size (Q) Economic Order Quantity

  26. Current cost 3000 — 2000 — 1000 — 0 — Birdfeeder costs (Optimal) Q 2 D Q D = (18 /week)(52 weeks) = 936 units H = 0.25 ($60/unit) = $15 S = $45 Q = 75 units Total cost = (H) + (S) Q 2 Annual cost (dollars) Holding cost = (H) Q 2 D Q 2DS H C = (H) + (S) EOQ = C = $562 + $562 = $1124 D Q Ordering cost = (S) Lowest cost | | | | | | | | 50 100 150 200 250 300 350 400 Current Q Best Q (EOQ) Lot Size (Q) Economic Order Quantity

  27. Current cost 3000 — 2000 — 1000 — 0 — Q 2 D Q Total cost = (H) + (S) Q 2 Annual cost (dollars) Holding cost = (H) D Q Ordering cost = (S) Lowest cost | | | | | | | | 50 100 150 200 250 300 350 400 Current Q Best Q (EOQ) Lot Size (Q) Economic Order Quantity

  28. Five Assumptions of the EOQ • CONSTANT demand rate • Two relevant COSTS • Item INDEPENDENCE • CERTAINTY in demand, lead time and supply • Whole LOTS

  29. Realistic? • No Way ...... • ................ BUT, since EOQ is relatively insensitive to errors, IT WORKS ANYWAY!

  30. How Much? When!

  31. Order received Q On-hand inventory OH R Time Reorder Point

  32. IP Order received Q On-hand inventory OH R Order placed L TBO Reorder Point

  33. IP IP Order received Order received Q Q On-hand inventory OH OH R Order placed Order placed Time L L L TBO TBO TBO Reorder Point

  34. IP IP Order received Order received Q OH On-hand inventory R Order placed Order placed Time L1 L2 L3 TBO1 TBO2 TBO3 Reorder Point

  35. Lower Florida Keys Health System Basic Surgery Cart Demand During Lead Time (units) 100 200 300 400 500 600 Probability 0.10 0.15 0.20 0.25 0.25 0.05 Reorder Point / Safety Stock

  36. Lower Florida Keys Health System Basic Surgery Cart Demand During Lead Time (units) 100 200 300 400 500 600 Probability 0.10 0.15 0.20 0.25 0.25 0.05 Cumulative Probability 0.10 0.25 .045 0.70 0.95 1.00 Reorder Point / Safety Stock

  37. Lower Florida Keys Health System Basic Surgery Cart Demand During Lead Time (units) 100 200 300 400 500 600 Probability 0.10 0.15 0.20 0.25 0.25 0.05 Cumulative Probability 0.10 0.25 .045 0.70 0.95 1.00 Desired Cycle-Service Level = 95% Reorder Point / Safety Stock

  38. Lower Florida Keys Health System Basic Surgery Cart Demand During Lead Time (units) 100 200 300 400 500 600 Probability 0.10 0.15 0.20 0.25 0.25 0.05 Cumulative Probability 0.10 0.25 .045 0.70 0.95 1.00 Desired Cycle-Service Level = 95% Reorder Point = 500 units Reorder Point / Safety Stock

  39. Lower Florida Keys Health System Basic Surgery Cart Demand During Lead Time (units) 100 200 300 400 500 600 Probability 0.10 0.15 0.20 0.25 0.25 0.05 Cumulative Probability 0.10 0.25 .045 0.70 0.95 1.00 Desired Cycle-Service Level = 95% Reorder Point = 500 units Reorder Point / Safety Stock

  40. Lower Florida Keys Health System Basic Surgery Cart Demand During Lead Time (units) 100 200 300 400 500 600 Probability 0.10 0.15 0.20 0.25 0.25 0.05 Cumulative Probability 0.10 0.25 .045 0.70 0.95 1.00 Safety stock = Reorder point - DDLT DDLT = 100(0.10) + 200(0.15) ... 600(0.05) = 355 units Safety stock = 500 - 355 = 145 units Desired Cycle-Service Level = 95% Reorder Point = 500 units Reorder Point / Safety Stock

  41. Cycle-service level = 85% Average demand during lead time R zL Reorder Point / Safety Stock Probability of stockout (1.0 - 0.85 = 0.15)

  42. Demand during lead time = 36 units L = 15 Cycle/service level = 90% On-hand inventory R Time Reorder Point / Safety Stock

  43. Demand during lead time = 36 units L = 15 Cycle/service level = 90% z = 1.28 Safety stock = zL = 19.2  20 Reorder point = 36 + 20 = 56 On-hand inventory R Time Reorder Point / Safety Stock

  44. Demand during lead time = 36 units L = 15 Cycle/service level = 90% z = 1.28 Safety stock = zL = 19.2  20 Reorder point = 36 + 20 = 56 On-hand inventory 56 Time Reorder Point / Safety Stock

  45. Demand during lead time = 36 units L = 15 Cycle/service level = 90% When L not given, but L and t are known: L = t L z = 1.28 Safety stock = zL = 19.2  19 Reorder point = 36 + 19 = 55 On-hand inventory 55 Time Reorder Point / Safety Stock

  46. Current Practice Papers

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