Inventory Planning COB 300 C – Fall 2002 Dr. Michael Busing

Purposes of Inventory Meet expected demand Absorb demand fluctuations Protect against unexpected increases in demand Decouple stages in the production process Take advantage of quantity discounts Hedge against possible price increases Protect against disruption in delivery from suppliers

Types of Inventory Raw materials Work-in-process (WIP) Finished goods Replacement parts Supplies Transportation

Dependent and Independent Demand Dependent Demand = usually generated by a company’s own production process Independent Demand = usually from outside sources such as customers

Types of Inventory Systems Perpetual (Continuous Review) Inventory level continuously monitored Transactions recorded as they occur Maintain specific level of inventory Periodic Inventory counted only at regular intervals Inventory depends upon demand

ABC Classification of Inventory Items Cumulative Annual Unit Annual Dollar % Annual % Annual Item Demand Cost Usage Dollar Usage Dollar Usage Classification 1 2 3 4 5 6 7 8 9 10 5,000 200 2,000 800 1,000 1,200 1,300 2,500 3,500 500 $ 30 450 10 20 5 4 2 1 $ 150,000 90,000 20,000 16,000 10,000 6,000 5,200 5,000 3,500 1,000 306,700 48.91 29.34 6.52 5.22 3.26 1.96 1.69 1.63 1.14 .33 48.91 78.25 84.77 89.99 93.25 95.21 96.90 98.53 99.67 100.00 A B C

Aggregate Performance Measures -Average inventory investment -Turnover ratio - Days of inventory Annual cost of goods sold Average inventory investment Days per year Turnover ratio

Costs of Inventory Inventory Ordering Costs Inventory Holding Costs Fixed Staffing Office and equipment Variable Shipping Order placing Setup cost Lost materials Receiving and inspection Inventory Holding Costs Fixed Warehouse-capital Property taxes Warehouse-operating Personnel Variable Cost of capital Insurance Losses Inventory taxes Rental costs

EOQ Model Assumptions 1. Constant known demand rate 2. Cost per unit fixed 3. Instantaneous replenishment 4. Ordering and carrying cost known and independent

Basic EOQ Inventory Pattern

Total Annual Variable Costs

EOQ Model D = Annual Demand rate S = Variable ordering cost H = Variable holding cost

EOQ Model D = Annual Demand rate S = Variable ordering cost H = Variable holding cost D = 1,000 units/year S = $50 per order H = $5 per unit per year

Total Annual Variable Cost (Slide 1 of 2) Annual variable ordering cost = S Annual variable holding cost = H Total annual variable cost = H + S Q Q 2 Q D 2 Q

Total Annual Variable Cost (Slide 2 of 2) D = 1,000 S = $50 H = $5 EOQ = 141.42 Total annual variable costs 141.42 1,000 2 141.42 140 1,000 2 140 145 1,000 2 145 200 1,000 2 200 EOQ: (5) + (50) = $707.11 140: (5) + (50) = $707.14 145: (5) + (50) = $707.33 200: (50) = $750.00 (5) +

Quantity Produced During Replenishment Period vs. Maximum Inventory

Economic Run Size (Finite Replenishment Rate Model) D = annual demand rate S = Variable ordering cost H = variable holding cost u = dally demand (usage) rate p = daily production rate Total annual variable costs D = 1,000; S = $50; H = $5; u = 4; p = 10

Class Examples Class Examples

ABC Inventory Problem # 6

Homework Problems 1,5,6,7,10 (ch. 10 – pp. 191-192)