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Chapter Six: Inventory. Part Four “The Economic Ordering Quantity.”. How Much Inventory Should We Order?. We don’t want too much inventory because we don’t want to overpay inventory carrying costs.
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Chapter Six: Inventory Part Four “The Economic Ordering Quantity.”
How Much Inventory Should We Order? • We don’t want too much inventory because we don’t want to overpay inventory carrying costs. • We don’t want too little inventory because we don’t want to be stocked out when customers want our product. • We determine the optimal amount of inventory through the Economic Ordering Quantity (EOQ).
How Much Inventory Should We Order? • We don’t want too much inventory because we don’t want to overpay inventory carrying costs. • We don’t want too little inventory because we don’t want to be stocked out when customers want our product. • We determine the optimal amount of inventory through the Economic Ordering Quantity (EOQ). Manually advance to the next slide.
Assumptions Regarding the Economic Ordering Quantity • Technically, the economic ordering quantity only works when we have no change in demand. • Technically, the economic ordering quantity only works when we have no change in the amount of time it takes to fill our order.
Assumptions Regarding the Economic Ordering Quantity • Technically, the economic ordering quantity only works when we have no change in demand. • Technically, the economic ordering quantity only works when we have no change in the amount of time it takes to fill our order. Manually advance to the next slide.
A . O r d e r q u a n t i t y o f 4 0 0 u n i t s I n v e n t o r y O r d e r O r d e r a r r i v a l a r r i v a l 4 0 0 O r d e r O r d e r A v e r a g e p l a c e d p l a c e d c y c l e i n v e n t o r y 2 0 0 0 1 0 2 0 3 0 4 0 5 0 6 0 D a y s a 6-3 a The Effect of Reorder Quantity on Average Inventory Investment with Constant Demand and Lead Time Demand is always the same Delivery time is always the same. . From instructor’s material: “Strategic Logistics Management” by Stock and Lambert(2001).
Assumptions Regarding the Economic Ordering Quantity • Technically, the economic ordering quantity only works when we have no change in demand. • Technically, the economic ordering quantity only works when we have no change in the amount of time it takes to fill our order. To illustrate the concept of optimal inventory Average EOQ can be applied for varied demand and varied replenishment times. .
Economic Ordering Quantity 2CoD EOQ = CiU Where EOQ = Economic Ordering quantity. Co = ordering cost (dollars per order) Ci = Annual inventory carry costs (% product cost or value) D= Annual demand (number of units) U = Average cost or value of one unit of inventory
Economic Ordering Quantity 2CoD EOQ = CiU Manually advance to the next slide. Where EOQ = Economic Ordering quantity. Co = ordering cost (dollars per order) Ci = Annual inventory carry costs (% product cost or value) D= Annual demand (number of units) U = Average cost or value of one unit of inventory
From Text, Page139 • Ordering cost, Co = $19. • Annual inventory carrying costs, Ci = 20% or.20 • Annual demand in number of units, D = 2,400 • Cost per unit, U = $5.
From Text, Page139 • Ordering cost, Co = $19. • Annual inventory carrying costs, Ci = 20% or.20 • Annual demand in number of units, D = 2,400 • Cost per unit, U = $5.
From Text, Page139 • Co = $19. • Ci = 20% or.20. • D = 2,400 • U = $5. 2CoD CV
From Text, Page139 • Co = $19. • Ci = 20% or.20. • D = 2,400 • U = $5. 2CoD CV
From Text, Page139 • Co = $19. • Ci = 20% or.20. • D = 2,400 • U = $5. 2($19)(2400) (.20)($5)
From Text, Page139 • Co = $19. • Ci = 20% or.20. • D = 2,400 • U = $5. =302 2($19)(2400) (.20)($5)
From Text, Page139 • Co = $19. • Ci = 20% or.20. • D = 2,400 • U = $5. You can round to 300 =302 2($19)(2400) (.20)($5) When it is time to order (with constant demand, lead time, and price), this is how many units we should order.
But it is rare when all these conditions can be met. When it is time to order (with constant demand, lead time, and price), this is how many units we should order.
But it is rare when all these conditions can be met. When it is time to order (with constant demand, lead time, and price), this is how many units we should order. As a result we need safety stock…
But it is rare when all these Conditions can be met. When it is time to order (with constant demand, lead time, and price), this is how many units we should order. As a result we need safety stock, but how much?
But it is rare when all these Conditions can be met. When it is time to order (with constant demand, lead time, and price), this is how many units we should order. As a result we need safety stock, but how much? We’ll see later.
