1. Chapter 10—Inventory Management Inventory Management

2. Chapter 14—Inventory Management1 Learning Objectives  Be Able To Apply Concepts Listed In Learning Goals  Be Able To Use Formulas Listed In The Equation Summary of Chapter

3. Chapter 10—Inventory Management Inventory Costs  Interest or Opportunity Costs  Storage and Handling Costs  Taxes, Insurance, and Shrinkage Costs  Ordering and Setup Costs  Transportation Costs

4. Chapter 10—Inventory Management Types of Inventory Cycle Inventory Average cycle inventory = Q + 0 2

5. Chapter 10—Inventory Management Types of Inventory Cycle Inventory Safety Stock Inventory Average cycle inventory = Q2Q2

6. Chapter 10—Inventory Management Types of Inventory Cycle Inventory Safety Stock Inventory Anticipation Inventory Average cycle inventory = Q2Q2

7. Chapter 10—Inventory Management Types of Inventory Cycle Inventory Safety Stock Inventory Anticipation Inventory Pipeline Inventory Average cycle inventory = Pipeline inventory = D L = dL Q2Q2

8. Chapter 14—Inventory Management7 ABC Classification  Start With Inventoried Items Ranked by Dollar Value in Inventory in Descending Order  Plot Cumulative Dollar Value in Inventory Versus Cumulative Items in Inventory ... more

9. Chapter 14—Inventory Management8 ABC Classification  Typical Observations  A Small Percentage of Items (Class A) Make up a Large Percentage of Inventory Value  A Large Percentage of Items (Class C) Make up a Small Percentage of Inventory Value  These Classifications Determine How Much Attention Should Be Given to Controlling Inventory of Different Items

10. Chapter 10—Inventory Management ABC Analysis 102030405060708090100 Percentage of items Percentage of dollar value 100 — 90 — 80 — 70 — 60 — 50 — 40 — 30 — 20 — 10 — 0 —

11. Chapter 10—Inventory Management ABC Analysis 102030405060708090100 Percentage of items Percentage of dollar value 100 — 90 — 80 — 70 — 60 — 50 — 40 — 30 — 20 — 10 — 0 — Class C Class A Class B

12. Chapter 10—Inventory Management ABC Analysis 102030405060708090100 Percentage of items Percentage of dollar value 100 — 90 — 80 — 70 — 60 — 50 — 40 — 30 — 20 — 10 — 0 — Class C Class A Class B

13. Chapter 10—Inventory Management How Much? When! When!

14. Chapter 10—Inventory Management Economic Order Quantity

15. Chapter 10—Inventory Management Economic Order Quantity 1.Demand rate is constant 2.No constraints on lot size 3.Only relevant costs are holding and ordering/setup 4.Decisions for items are independent from other items 5.No uncertainty in lead time or supply Assumptions

16. Chapter 10—Inventory Management Economic Order Quantity On-hand inventory (units) Time

17. Chapter 10—Inventory Management Economic Order Quantity On-hand inventory (units) Time Receive order Q

18. Chapter 10—Inventory Management Economic Order Quantity On-hand inventory (units) Time Receive order Q 1 cycle

19. Chapter 10—Inventory Management Economic Order Quantity On-hand inventory (units) Time Receive order Q 1 cycle

20. Chapter 10—Inventory Management Economic Order Quantity On-hand inventory (units) Time Receive order Inventory depletion (demand rate) Q 1 cycle

21. Chapter 10—Inventory Management Economic Order Quantity On-hand inventory (units) Time Receive order Inventory depletion (demand rate) Q 1 cycle

22. Chapter 10—Inventory Management Economic Order Quantity On-hand inventory (units) Time Average cycle inventory QQ—2QQ—2 1 cycle Receive order Inventory depletion (demand rate)

23. Chapter 10—Inventory Management Economic Order Quantity Annual cost (dollars) Lot Size (Q) Holding cost (HC)

24. Chapter 10—Inventory Management Economic Order Quantity Annual cost (dollars) Lot Size (Q) Holding cost (HC) Ordering cost (OC)

25. Chapter 10—Inventory Management Economic Order Quantity Annual cost (dollars) Lot Size (Q) Ordering cost (OC) Holding cost (HC) Total cost = HC + OC

26. Chapter 10—Inventory Management Economic Order Quantity |||||||| 50100150200250300350400 Lot Size (Q) 3000 — 2000 — 1000 — 0 — Current cost Current Q Total cost = (H) + (S) DQDQ Q2Q2 Holding cost = (H) Q2Q2 Ordering cost = (S) DQDQ Annual cost (dollars)

27. Chapter 10—Inventory Management Economic Order Quantity |||||||| 50100150200250300350400 Lot Size (Q) 3000 — 2000 — 1000 — 0 — Current cost Current Q Total cost = (H) + (S) DQDQ Q2Q2 Holding cost = (H) Q2Q2 Ordering cost = (S) DQDQ Bird feeder costs D = (18 /week)(52 weeks) = 936 units H = 0.25 ($60/unit) = $15 S = $45 Q = EOQ C = (H) + (S) Q2Q2 DQDQ EOQ = 2DS H Annual cost (dollars)

28. Chapter 10—Inventory Management Economic Order Quantity |||||||| 50100150200250300350400 Lot Size (Q) 3000 — 2000 — 1000 — 0 — Current cost Current Q Total cost = (H) + (S) DQDQ Q2Q2 Holding cost = (H) Q2Q2 Ordering cost = (S) DQDQ Bird feeder costs D = (18 /week)(52 weeks) = 936 units H = 0.25 ($60/unit) = $15 S = $45 Q = 75 units C = (H) + (S) Q2Q2 DQDQ EOQ = 2DS H Annual cost (dollars)

29. Chapter 10—Inventory Management Economic Order Quantity |||||||| 50100150200250300350400 Lot Size (Q) 3000 — 2000 — 1000 — 0 — Current cost Current Q Total cost = (H) + (S) DQDQ Q2Q2 Holding cost = (H) Q2Q2 Ordering cost = (S) DQDQ Bird feeder costs D = (18 /week)(52 weeks) = 936 units H = 0.25 ($60/unit) = $15 S = $45 Q = 75 units C = $562 + $562 = $1124 C = (H) + (S) Q2Q2 DQDQ EOQ = 2DS H Annual cost (dollars)

30. Chapter 10—Inventory Management Economic Order Quantity |||||||| 50100150200250300350400 Lot Size (Q) 3000 — 2000 — 1000 — 0 — Current cost Current Q Total cost = (H) + (S) DQDQ Q2Q2 Holding cost = (H) Q2Q2 Ordering cost = (S) DQDQ Bird feeder costs D = (18 /week)(52 weeks) = 936 units H = 0.25 ($60/unit) = $15 S = $45 Q = 75 units C = $562 + $562 = $1124 C = (H) + (S) Q2Q2 DQDQ EOQ = 2DS H Annual cost (dollars)

31. Chapter 10—Inventory Management Economic Order Quantity |||||||| 50100150200250300350400 Lot Size (Q) 3000 — 2000 — 1000 — 0 — Current cost Current Q Total cost = (H) + (S) DQDQ Q2Q2 Holding cost = (H) Q2Q2 Ordering cost = (S) DQDQ Bird feeder costs D = (18 /week)(52 weeks) = 936 units H = 0.25 ($60/unit) = $15 S = $45 Q = 75 units C = $562 + $562 = $1124 C = (H) + (S) Q2Q2 DQDQ EOQ = 2DS H Lowest cost Best Q (EOQ) Annual cost (dollars)

32. Chapter 10—Inventory Management Economic Order Quantity |||||||| 50100150200250300350400 Lot Size (Q) 3000 — 2000 — 1000 — 0 — Current cost Current Q Total cost = (H) + (S) DQDQ Q2Q2 Lowest cost Best Q (EOQ) Annual cost (dollars) Bird feeder costs D = (18 /week)(52 weeks) = 936 units H = 0.25 ($60/unit) = $15 S = $45 Q = 75 units C = $562 + $562 = $1124 C = (H) + (S) DQDQ Q2Q2 EOQ = 2DS H

33. Chapter 10—Inventory Management Economic Order Quantity |||||||| 50100150200250300350400 Lot Size (Q) 3000 — 2000 — 1000 — 0 — Current cost Current Q Total cost = (H) + (S) DQDQ Q2Q2 Birdfeeder costs D = (18 /week)(52 weeks) = 936 units H = 0.25 ($60/unit) = $15 S = $45 Q = 75 units C = $562 + $562 = $1124 C = (H) + (S) DQDQ Q2Q2 EOQ = 2DS H Lowest cost Best Q (EOQ) DQDQ Time between orders TBO EOQ = = 75/936 = 0.080 year EOQ D Annual cost (dollars)

34. Chapter 10—Inventory Management Economic Order Quantity |||||||| 50100150200250300350400 Lot Size (Q) 3000 — 2000 — 1000 — 0 — Current cost Current Q Total cost = (H) + (S) DQDQ Q2Q2 Birdfeeder costs D = (18 /week)(52 weeks) = 936 units H = 0.25 ($60/unit) = $15 S = $45 Q = 75 units Lowest cost Best Q (EOQ) Time between orders TBO EOQ = = 75/936 = 0.080 year TBO EOQ = (75/936)(12) = 0.96 months TBO EOQ = (75/936)(52) = 4.17 weeks TBO EOQ = (75/936)(365) = 29.25 days EOQ D Annual cost (dollars)

35. Chapter 10—Inventory Management Economic Order Quantity |||||||| 50100150200250300350400 Lot Size (Q) 3000 — 2000 — 1000 — 0 — Current cost Lowest cost Best Q (EOQ) Current Q Total cost = (H) + (S) DQDQ Q2Q2 Holding cost = (H) Q2Q2 Ordering cost = (S) DQDQ Annual cost (dollars)

36. Chapter 10—Inventory Management How Much? When! When!

37. Chapter 10—Inventory Management Continuous Review Soup Time R Order received Q OH On-hand inventory

38. Chapter 10—Inventory Management Continuous Review Soup Order received Q OH Order placed IP TBO L R On-hand inventory

39. Chapter 10—Inventory Management Continuous Review Soup Time Order received Order received QQ OH Order placed Order placed IP TBO L L L R Order received Q OH Order placed IP Order received On-hand inventory

40. Chapter 10—Inventory Management Uncertain Demand Time R On-hand inventory

41. Chapter 10—Inventory Management Uncertain Demand Time On-hand inventory Order received Q OH Order placed Order placed Order received IP R TBO 1 TBO 2 TBO 3 L1L1 L2L2 L3L3 Q Order placed Q Order received Order received

42. Chapter 10—Inventory Management Reorder Point / Safety Stock Average demand during lead time

43. Chapter 10—Inventory Management Reorder Point / Safety Stock Probability of stockout (1.0 – 0.99 = 0.01) Cycle-service level = 99% Average demand during lead time zLzL R

44. Chapter 10—Inventory Management Probability of stockout (1.0 – 0.99 = 0.015) Cycle-service level = 99% Average demand during lead time zLzL R Reorder Point / Safety Stock Safety Stock/R dL = 250  L = 22 SL = 99% z = 2.33

45. Chapter 10—Inventory Management Probability of stockout (1.0 – 0.99 = 0.01) Cycle-service level = 99% Average demand during lead time zLzL R Reorder Point / Safety Stock Safety Stock/R Safety stock= z  L = 2.33(22) = 51.3 = 51 boxes

46. Chapter 10—Inventory Management Probability of stockout (1.0 – 0.99 = 0.01) Cycle-service level = 99% Average demand during lead time zLzL R Reorder Point / Safety Stock Safety Stock/R Safety stock= z  L = 2.33(22) = 51.3 = 51 boxes Reorder point= dL + SS = 250 + 51 = 301 boxes

47. Chapter 10—Inventory Management Lead Time Distributions  t = 15 + 75 Demand for week 1

48. Chapter 10—Inventory Management Lead Time Distributions  t = 15 + + 75 Demand for week 1 75 Demand for week 2  t = 15

49. Chapter 10—Inventory Management Lead Time Distributions  t = 15 = + + 75 Demand for week 1 75 Demand for week 2 75 Demand for week 3  t = 15

50. Chapter 10—Inventory Management Lead Time Distributions  t = 15 = + + 75 Demand for week 1 75 Demand for week 2 75 Demand for week 3  L = 26 225 Demand for three-week lead time  t = 15

51. Chapter 10—Inventory Management Lead Time Distributions  t = 15 = + + 75 Demand for week 1 75 Demand for week 2 75 Demand for week 3  t = 26 225 Demand for three-week lead time  t = 15 Bird feeder Lead Time Distribution t = 1 week d = 18 L = 2  t = 5SL = 90%

52. Chapter 10—Inventory Management Lead Time Distributions  t = 15 = + + 75 Demand for week 1 75 Demand for week 2 75 Demand for week 3  t = 26 225 Demand for three-week lead time  t = 15 Bird feeder Lead Time Distribution t = 1 week d = 18 L = 2  L =  t L = 5 2 = 7.1 t = 1 week d = 18 L = 2  t = 5SL = 90%

53. Chapter 10—Inventory Management Lead Time Distributions  t = 15 = + + 75 Demand for week 1 75 Demand for week 2 75 Demand for week 3  t = 26 225 Demand for three-week lead time  t = 15 Bird feeder Lead Time Distribution t = 1 week d = 18 L = 2  L =  t L = 5 2 = 7.1 Safety stock= z  L = 1.28(7.1) = 9.1 or 9 units Reorder point= dL + SS = 2(18) + 9 = 45 units t = 1 week d = 18 L = 2  t = 5SL = 90%

54. Chapter 10—Inventory Management Lead Time Distributions  t = 15 = + + 75 Demand for week 1 75 Demand for week 2 75 Demand for week 3  t = 26 225 Demand for three-week lead time  t = 15 Bird feeder Lead Time Distribution t = 1 week d = 18 L = 2 Reorder point= 2(18) + 9 = 45 units

55. Chapter 10—Inventory Management Lead Time Distributions  t = 15 = + + 75 Demand for week 1 75 Demand for week 2 75 Demand for week 3  t = 26 225 Demand for three-week lead time  t = 15 Bird feeder Lead Time Distribution t = 1 week d = 18 L = 2 Reorder point= 2(18) + 9 = 45 units When stock drops to 45, order 75 C = ($15) + ($45) + 9($15) 75 2 936 75 C = $562.50 + $561.60 + $135 = $1259.10

56. Chapter 10—Inventory Management Periodic Review Systems Time PP T On-hand inventory

57. Chapter 10—Inventory Management Periodic Review Systems Time On-hand inventory PP T Q1Q1 Order placed

58. Chapter 10—Inventory Management Periodic Review Systems Time On-hand inventory PP T Q1Q1 L Order placed

59. Chapter 10—Inventory Management Periodic Review Systems Time On-hand inventory PP T Q1Q1 L Order placed Order received

60. Chapter 10—Inventory Management Periodic Review Systems Time On-hand inventory Order received Order received Order placed Order placed Q1Q1 Q2Q2 Q3Q3 LLL PP T Order received

61. Chapter 10—Inventory Management Periodic Review Systems Time On-hand inventory IP 1 IP 3 IP 2 Order received Order received IP OH Order placed Order placed Q1Q1 Q2Q2 Q3Q3 LLL PP Protection interval T Order received IP

62. Chapter 10—Inventory Management Time On-hand inventory IP 1 IP 3 IP 2 Order received Order received IP OH Order placed Order placed Q1Q1 Q2Q2 Q3Q3 LLL PP Protection interval T Order received IP Periodic Review Systems Bird feeder— Calculating P and T

63. Chapter 10—Inventory Management Time On-hand inventory IP 1 IP 3 IP 2 Order received Order received IP OH Order placed Order placed Q1Q1 Q2Q2 Q3Q3 LLL PP Protection interval T Order received IP Periodic Review Systems EOQ = 75 units D = (18 units/week)(52 weeks) = 936 units  t = 5 units d = 18 L = 2 weeks cycle/service level = 90% Bird feeder—Calculating P and T

64. Chapter 10—Inventory Management Time On-hand inventory IP 1 IP 3 IP 2 Order received Order received IP OH Order placed Order placed Q1Q1 Q2Q2 Q3Q3 LLL PP Protection interval T Order received IP Periodic Review Systems EOQ = 75 units D = (18 units/week)(52 weeks) = 936 units  t = 5 units d = 18 L = 2 weeks cycle/service level = 90% Bird feeder—Calculating P and T P = (52) = (52) = 4.2 or 4 weeks EOQ D 75 936  P+L =    P + L = 5 6 = 12 units

65. Chapter 10—Inventory Management Time On-hand inventory IP 1 IP 3 IP 2 Order received Order received IP OH Order placed Order placed Q1Q1 Q2Q2 Q3Q3 LLL PP Protection interval T Order received IP Periodic Review Systems T= Average demand during the protection interval + Safety stock = d (P + L) + z  P + L = (18 units/week)(6 weeks) + 1.28(12 units) = 123 units EOQ = 75 units D = (18 units/week)(52 weeks) = 936 units  t = 5 units d = 18 L = 2 weeks cycle/service level = 90% Bird feeder—Calculating P and T P = (52) = (52) = 4.2 or 4 weeks EOQ D 75 936  P+L =    P + L = 5 6 = 12 units

66. Chapter 10—Inventory Management Time On-hand inventory IP 1 IP 3 IP 2 Order received Order received IP OH Order placed Order placed Q1Q1 Q2Q2 Q3Q3 LLL PP Protection interval T Order received IP Periodic Review Systems EOQ = 75 units D = (18 units/week)(52 weeks) = 936 units  t = 5 units d = 18 L = 2 weeks cycle/service level = 90% Bird feeder—Calculating P and T P = 4 weeks T = 123 units

67. Chapter 10—Inventory Management Time On-hand inventory IP 1 IP 3 IP 2 Order received Order received IP OH Order placed Order placed Q1Q1 Q2Q2 Q3Q3 LLL PP Protection interval T Order received IP Periodic Review Systems EOQ = 75 units D = (18 units/week)(52 weeks) = 936 units  t = 5 units d = 18 L = 2 weeks cycle/service level = 90% Bird feeder—Calculating P and T C = ($15) + ($45) + 15($15) 4(18) 2 936 4(18) C = $540 + $585 + $225 = $1350 P = 4 weeks T = 123 units

68. Chapter 10—Inventory Management Comparison of Q and P Systems P Systems Q Systems  Convenient to administer  Orders may be combined  IP only required at review  Individual review frequencies  Possible quantity discounts  Lower, less-expensive safety stocks