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Inventory Management

Inventory Management. Bus 480 Management Science. Inventory Management. Objective A system to indicate how much to order and when to order to minimize inventory costs Inventory A stock of items kept on hand to meet demand Cyclical, seasonal. Inventory Demands. Dependent Demand

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Inventory Management

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  1. Inventory Management Bus 480 Management Science

  2. Inventory Management • Objective • A system to indicate how much to order and when to order to minimize inventory costs • Inventory • A stock of items kept on hand to meet demand • Cyclical, seasonal

  3. Inventory Demands • Dependent Demand • Internally used items used to produce a final product • eg. Parts of a computer- memory, hard drive, etc. • eg. Building a car – wheels, engine, windows, etc. • Independent Demand • Final product demanded by an external customer • eg. - the computer itself, the final car

  4. Inventory Costs • Carrying Cost • Costs of storing an item • eg. – rent, heating, cooling, etc. • Ordering Cost • Costs associated with replenishing inventory • eg. – transportation, shipping, handling, etc. • Shortage Costs • Cost of lack of inventory (surplus demand) • Subjective, estimated • eg. - Loss of sales, price discounts, rebates, etc.

  5. Inventory Systems • Continuous • Fixed-order quantity system • Constant amount is ordered when inventory declines to a pretermined level • Periodic • Fixed-time period system • Inventory reviewed after a fixed time period and orders are made based on the amount in stock

  6. Economic Order Quantity (EOC) • Function – To determine optimal order size that minimizes total inventory costs • Assumptions • Demand is known with certainty and is constant over time • No shortages are allowed • Lead time for the receipt of orders is constant • Orders are received at once

  7. Economic Order Quantity (EOC) Order Quantity Q Reorder Point R Lead Time Time Order Placed Order Received

  8. EOC Formulas • Average Inventory = Q/2 • Annual Carrying Cost = Cc * Q/2 • Cc = carrying cost per unit per time period • Annual Ordering Cost = Co * D/Q • Co = cost per order • D = demand • Total Cost (TC) = Annual carrying + annual ordering cost = Cc * Q/2 + Co * D/Q • How to determine Q?

  9. EOC Formulas • Optimal Quantity can be derived via calculus • TCmin = Cc * Qopt /2 + Co * D/Qopt • Minimized Total Cost • Number of orders per time period = D/Qopt • Order Cycle Time = Amount of time open / (D/Qopt) • Eg. Number of days open / number of orders per time period

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