Inventory Management Ross L. Fink

EOQ Models For continuous replenishment systems Family of models using cost minimization approach Will look at only the simplest model, but approach can be applied to a variety of situations

Simple Model

Holding Cost Let Q = order size Average inventory size = (max.-min.)/2 =(Q-0)/2 = Q/2 Let H = cost to hold one unit for one year Average annual inventory cost =(Q/2)H

Ordering Cost Let D = annual demand Let S = cost per order Average number of orders per year = D/Q Average annual ordering cost = (D/Q)S

Shortage Cost In simple model = 0

Purchase Cost Let P = price per unit Average annual purchase cost = PD

Assumptions Constant known demand Constant known lead time Instantaneous replenishment Fixed known cost per order Constant fixed price per unit--no quantity discounts

Total Cost

Total Cost Curve

Solution Methods Spreadsheet Calculus

EOQ

Reorder Point Method

Fixed Time Period

ROP v. Fixed Time Period ROP Fixed Time Period Perpetual inventory system Each item has different order interval Uses less safety stock Fixed Time Period Periodic inventory count Can group ordering periods--order multiple items Uses more safety stock

Safety Stock Requirements Variability of demand during lead time for ROP. Variability of demand during lead time and order interval for fixed time period. Lead time Variability of lead time Service level

ABC Inventory Analysis Classifies inventory items to determine level of control needed Rank items by annual dollar volume (annual purchase cost) A = top 15% -- substantial control B = next 35% -- some control C = bottom 50% -- little control (generally)

Problem 2

Problem 2