1. This chapter presents the concepts and knowledge base for effective inventory management, including:
What types of inventories business carry, and why they carry them.
The cost related to inventory management
Why it is essential to be able to keep track of inventory items, both within the organization and throughout the supply chain
How the A-B-C approach to inventory increases the effectiveness of inventory management.
The model most retail business use to determine how much to order
What models are available to answer the question of when to order.

2. Independent demand is uncertain. Dependent demand is certain.
Inventory
Independent Demand A
B(4)
C(2)
D(2)
E(1)
D(3)
F(2)
Dependent Demand
Independent demand is uncertain. Dependent demand is certain.
Inventory: a stock or store of goods

3. Inventory Models
Independent demand – finished goods, items that are ready to be sold
E.g. a computer
Dependent demand – components of finished products
E.g. parts that make up the computer

4. Types of Inventories Raw materials & purchased parts
Partially completed goods called work in progress
Finished-goods inventories
(manufacturing firms) or merchandise (retail stores)

5. Types of Inventories(Cont’d)
Tools, & supplies
Maintenance and repair (MRO) inventory
Goods-in-transit to warehouses or customers

6. Functions of Inventory
To meet anticipated demand
To smooth production requirements
To decouple operations
To protect against stock-outs

7. Functions of Inventory (Cont’d)
To take advantage of order cycles
To help hedge against price increases
To take advantage of quantity discounts

8. Objective of Inventory Control
To achieve satisfactory levels of customer service while keeping inventory costs within reasonable bounds
Level of customer service
Costs of ordering and carrying inventory
Inventory turnover is the ratio of average cost of goods sold to average inventory investment.

9. Inventory Counting Systems
Periodic System
Physical count of items made at periodic intervals
Perpetual Inventory System System that keeps track of removals from inventory continuously, thus monitoring current levels of each item

10. Inventory Counting Systems (Cont’d)
Two-Bin System - Two containers of inventory; reorder when the first is empty
Universal Bar Code - Bar code printed on a label that has information about the item to which it is attached

11. Key Inventory Terms
Lead time: time interval between ordering and receiving the order
Holding (carrying) costs: cost to carry an item in inventory for a length of time, usually a year （interest, insurance, breakage, warehousing costs， opportunity costs）
Ordering costs: costs of ordering and receiving inventory （shipping costs, inspecting goods, moving the goods to temporary storage）
Shortage costs: costs when demand exceeds supply

12. ABC Classification System
Figure 12.1
Classifying inventory according to some measure of importance and allocating control efforts accordingly.
A - very important
B - mod. important
C - least important
Annual
$ value
of items A B C
High
Low
Percentage of Items

13. A items generally account for about 10 to 20 percent of the number of items in inventory but about 60 to 70 percent of the annual dollar value
C items might account for about percent of the number of items buy only about 10 to 15 percent of the annual dollar value.

14. To solve the A-B-C problem, follow these steps:
For each item, multiply annual volume by unit price to get the annual dollar value.
Arrange annual dollar values in descending order
The few (10 to 15 percent) with the highest annual dollar value are A items. The most ( about 50 percent) with the lowest annual dollar value are C items. Those in between (about 35 percent) are B items.

15. Material code
Annual volume
Unit price
001
10000
4.8
002
1.4
003
14000 28
004
7000 8
005
8000
3205
006
3.4
007
1.5
008
2000
4.5
009
1000 3
010
3.2

16. Economic Order Quantity Models
Economic order quantity (EOQ) model
The order size that minimizes total annual cost
Economic production quantity (EPQ) model
Quantity discount model

17. Assumptions of EOQ Model
Only one product is involved
Annual demand requirements known
Demand is even throughout the year
Lead time does not vary
Each order is received in a single delivery
There are no quantity discounts

18. Profile of Inventory Level Over Time
The Inventory Cycle
Figure 12.2
Profile of Inventory Level Over Time
Quantity
on hand Q
Receive
order
Place
Lead time
Reorder
point
Usage
rate
Time

19. Total Cost Annual carrying cost Annual ordering cost Total cost = + Q2 H D S +
TC =

20. Cost Minimization Goal
Figure 12.4C
The Total-Cost Curve is U-Shaped
Annual Cost
Ordering Costs
Order Quantity (Q) QO
(optimal order quantity)

21. Deriving the EOQ
Using calculus, we take the derivative of the total cost function and set the derivative (slope) equal to zero and solve for Q.

22. Minimum Total Cost
The total cost curve reaches its minimum where the carrying and ordering costs are equal. Q 2 H D S =

23. Piddling manufacturing assembles security monitors
Piddling manufacturing assembles security monitors. It purchases 3600 black- and- white cathode ray tubes a year at￥ 60 each. Ordering cost are ￥30, and annual carrying costs are 20 percent of the purchase price. Compute the optimal quantity and the total annual cost of ordering and carrying the inventory.

24. Exercise in class
A large law firm uses an average of 40 boxes of copier paper a day. The firm operates 260 days a year. Storage and holding costs for the paper are $ 30 year per box, and it costs approximately $60 to order the receive a shipment of paper.
a. what order size would minimize the sum of the annual ordering and carrying cost?
b. Compute the total annual cost using your order size from part a
c. the officer manager is currently using an order size of 200 boxes. Would you recommended the optimal order size instead of 200 boxes? Justify your answer

25. Economic Production Quantity (EPQ)
Production done in batches or lots
Capacity to produce a part exceeds the part’s usage or demand rate

26. Economic Production Quantity Assumptions
Only one item is involved
Annual demand is known
Usage rate is constant
Usage occurs continually
Production rate is constant
Lead time does not vary
No quantity discounts

27. Figure 12.6 EPQ with incremental inventory buildup
Production and usage
Production and usage
Usage only
Production and usage
Usage only
Usage only
Run size
Imax
Amount on hand

28. TC=Carry cost + Setup cost
=(Imax/2)H+(D/Q)S
Imax????
We can find the minimum point of total cost curve by differentiating TC with respect to Q setting the result equal to zero, and solve for Q

29. Economic Run Size

30. A toy manufacturer uses rubber wheels per year for its popular dump truck series. The firm makes its own wheels, which it can produce at a rate of 800 per day. The toy trucks are assembled uniformly over the entire year. Carrying cost is $1 per wheel per year. Setup cost for a production run of wheels is $45. the firm operates 240 days
per year. Determine the
Optimal run size
Minimum total annual cost for carrying and setup
Cycle time for the optimal run size
Run time

31. Total Costs with Purchasing Cost
Annual
carrying
cost
Purchasing
TC = + Q 2 H D S
ordering PD

32. Total Costs with PD Figure 12.7 Cost
EOQ
TC with PD
TC without PD PD
Quantity
Adding Purchasing cost doesn’t change EOQ

33. Total Cost with Constant Carrying Costs
Figure 12.9 OC
EOQ
Quantity
Total Cost
TCa
TCc
TCb
Decreasing
Price
CC a,b,c
PD $2.00 each
PD $1.70 each
PD $1.40each

34. The maintenance department of a large hospital uses about 816 cases of liquid cleanser annually. Ordering costs are $ 12, carrying cost are $ 4 per case a year, and the new price schedule indicates that orders of less than 50 cases will cost $ 20 per case, 50 to 79 cases will cost $ 18 per case, 80 to 99 cases will cost $ 17 per case, and larger will cost $ 16 per case. Determine the optimal order quantity and the total cost.

35. When to Reorder with EOQ Ordering
Reorder Point - When the quantity on hand of an item drops to this amount, the item is reordered
Safety Stock - Stock that is held in excess of expected demand due to variable demand rate and/or lead time.
Service Level - Probability that demand will not exceed supply during lead time.

36. Determinants of the Reorder Point
The rate of demand
The lead time
Demand and/or lead time variability
Stockout risk (safety stock)

37. Safety Stock Figure 12.12 Quantity Maximum probable demandLT
Time
Expected demand
during lead time
Maximum probable demand
ROP
Quantity
Safety stock
Safety stock reduces risk of
stockout during lead time

38.  Wish you success in the examination!