1. Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 14 C h a p t e r I NVENTORY S YSTEMS FOR I NDEPENDENT D EMAND Chapter Outline Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 14-1 Definition of Inventory Purposes of Inventory Inventory Costs Independent versus Dependent Demand Types of Inventory Systems Basic Inventory Models

2. Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 14 C h a p t e r I NVENTORY S YSTEMS FOR I NDEPENDENT D EMAND Chapter Outline continued Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 14-1 Economic Order Quantity Models in Relation to the Real World Perishable Inventory Inventory Management in Services Additional Issues in Inventory Management Current Trends in Inventory Management

3. Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 14 C h a p t e r I NVENTORY S YSTEMS FOR I NDEPENDENT D EMAND Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 14-2 Chapter Objectives Introduce the different types of inventories that exist in a company and provide a rationale for why inventories are kept. Identify the various costs associated with inventories. Define the classical inventory models and show how the EOQ is calculated.

4. Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 14 C h a p t e r I NVENTORY S YSTEMS FOR I NDEPENDENT D EMAND Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 14-3 Chapter Objectives continued Introduce yield management and demonstrate how services treat inventories. Present some of the current trends in inventory.

5. Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 Types of Inventories SupplierCustomer Manufacturing facility Step 1 Step 2 In-Transit Raw Material WIPFinished Goods 14-5

6. Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 Purposes of Inventory To protect against uncertainty · raw materials · lead times · WIP · finished goods To support a strategic plan · level strategy To take advantage of economies of scale · quantity discounts 14-6

7. Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 Types of Inventory Costs Holding or carrying costs · Cost of storage · Cost of capital · Cost of obsolescence/shrinkage Setup or order costs Shortage or stockout costs Purchased material costs 14-7

8. Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 Types of Inventory Systems Fixed-order quantity (Q-system) · Order quantity (Q) remains constant · Time interval varies Fixed-time period (P-system) · Time interval remains constant · Order quantity varies 14-8

9. Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 E XHIBIT 14.2 Basic Fixed-Order Quantity Model Number of Units on Hand Time Q 14-9

10. Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 Re-order Point (R) and Lead Time (L) Number of Units on Hand Time Q R L u = usage rate R = u L 14-10

11. Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 E XHIBIT 14.3 Annual Product Costs, Based on Size of the Order Cost Order quantity size DC (Q/2)H (D/Q)S EOQ TC 14-11

12. Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 E XHIBIT 14.4 Fixed-Order Quantity with Usage During Production Time Number of Units on Hand Time I max Build-up = (p-d) Usage rate = d 14-12

13. Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 E XHIBIT 14.6 Total Cost Curves for a Quantity-Discount Model Total Cost Order Size (Q) C 1 = $5.00 C 2 = $4.50 C 3 = $3.90 633 716 1,000 666 14-13