1. Inventory Management
Ross L. Fink

2. 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

3. Simple Model

4. 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

5. 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

6. Shortage Cost
In simple model = 0

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

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

9. Total Cost

10. Total Cost Curve

11. Solution Methods
Spreadsheet
Calculus

12. EOQ

13. Reorder Point Method

14. Fixed Time Period

15. 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

16. 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

17. 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)

18. Problem 2

19. Problem 2