1. Keller: Stats for Mgmt & Econ, 7th Ed
Inventory Management
May 23, 2018
Homework; 2, 3, 5, 7
Copyright © 2006 Brooks/Cole, a division of Thomson Learning, Inc.

2. Keller: Stats for Mgmt & Econ, 7th Ed
Inventory
May 23, 2018
Inventory is a stock of anything held to meet some future demand. It is created when the rate of receipts exceeds the rate of disbursements.
Copyright © 2006 Brooks/Cole, a division of Thomson Learning, Inc.

3. Keller: Stats for Mgmt & Econ, 7th Ed
ABC Analysis
May 23, 2018 10 20 30 40 50 60 70 80 90
100
Percentage of items
Percentage of dollar value
100 —
90 —
80 —
70 —
60 —
50 —
40 —
30 —
20 —
10 —
0 —
Class C
Class A
Class B
Figure 10.1
Copyright © 2006 Brooks/Cole, a division of Thomson Learning, Inc.

4. Keller: Stats for Mgmt & Econ, 7th Ed
Order Quantity, Q
May 23, 2018
On-hand inventory (units)
Time
Average
cycle
inventory Q — 2
1 cycle
Receive order
Inventory depletion (demand rate)
Figure 10.2
Copyright © 2006 Brooks/Cole, a division of Thomson Learning, Inc.

5. Keller: Stats for Mgmt & Econ, 7th Ed
Formulas and Notation
May 23, 2018
Copyright © 2006 Brooks/Cole, a division of Thomson Learning, Inc.

6. Keller: Stats for Mgmt & Econ, 7th Ed
Total Cost
May 23, 2018
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7. Find Q*, TBO, and make cost comparisons
Keller: Stats for Mgmt & Econ, 7th Ed
Find Q*, TBO, and make cost comparisons
May 23, 2018
Suppose that you are reviewing the inventory policies on an item stocked at a hardware store. The current policy is to replenish inventory by ordering in lots of 360 units. Additional information given:
D = 60 units per week, or 3120 units per year
S = $30 per order
H = 25% of selling price, or $20 per unit per year
Copyright © 2006 Brooks/Cole, a division of Thomson Learning, Inc.

8. Keller: Stats for Mgmt & Econ, 7th Ed
Lead Time
May 23, 2018
On-hand inventory (units) R
Time
Copyright © 2006 Brooks/Cole, a division of Thomson Learning, Inc.

9. Service Levels, Demand Varies During Lead Time
Keller: Stats for Mgmt & Econ, 7th Ed
Service Levels, Demand Varies During Lead Time
May 23, 2018
Probability of stockout
(1.0 – 0.85 = 0.15)
Cycle-service level = 85%
Average demand during lead time
zL R
Copyright © 2006 Brooks/Cole, a division of Thomson Learning, Inc.

10. Determine EOQ, Reorder Point
Keller: Stats for Mgmt & Econ, 7th Ed
Determine EOQ, Reorder Point
May 23, 2018
The Discount Appliance Store uses a continuous review system (Q system). One of the company’s items has the following characteristics:
Demand = 10 units/wk (assume 52 weeks per year)
Ordering and setup cost (S) = $45/order
Holding cost (H) = $12/unit/year
Lead time (L) = 3 weeks
Standard deviation in weekly demand = 8 units
Cycle-service level = 70%
Copyright © 2006 Brooks/Cole, a division of Thomson Learning, Inc.

11. Keller: Stats for Mgmt & Econ, 7th Ed
Other Notes
May 23, 2018
Inventory Position
IP = OH + SR – BO
Inventory position = on-hand inventory + scheduled receipts – units back ordered
Continuous Review System (Q)
The concepts discussed on the previous slides are for a continuous review system.
That is a system that tracks the remaining inventory of an item (or level) each time an order is made to determine whether it is time to replenish. Also called a reorder point system.
Copyright © 2006 Brooks/Cole, a division of Thomson Learning, Inc.

12. Periodic Review System (P)
Keller: Stats for Mgmt & Econ, 7th Ed
Periodic Review System (P)
May 23, 2018
Inventory position is reviewed periodically (rather than continuously). The time between orders is always fixed at P.
The lot size (order size), Q, may change from one order to the next.
Copyright © 2006 Brooks/Cole, a division of Thomson Learning, Inc.

13. Periodic Review System (P)
Keller: Stats for Mgmt & Econ, 7th Ed
Periodic Review System (P)
May 23, 2018 T IP IP
Order
received IP
Order
received
Order
received Q3 Q1 OH OH Q2
IP1
IP3
IP2
On-hand inventory
Order
placed
Order
placed L
Time P
Copyright © 2006 Brooks/Cole, a division of Thomson Learning, Inc.

14. Periodic Review System (P)
Keller: Stats for Mgmt & Econ, 7th Ed
Periodic Review System (P)
May 23, 2018
Copyright © 2006 Brooks/Cole, a division of Thomson Learning, Inc.