3/7: Inventory Planning & Control • Roll call / collect homework / hand back hmwk • Go over homework (?) • Understanding inventory issues • The basic numbers involved – Holding cost, ordering cost, demand • Basic EOQ model • EOQ model with allowed shortages • Assign homework • Have a good Spring Break
3/7: Inventory Planning & Control. Roll call / collect homework / hand back hmwk Go over homework (?) Understanding inventory issues The basic numbers involved Holding cost, ordering cost, demand Basic EOQ model EOQ model with allowed shortages Assign homework Have a good Spring Break. - PowerPoint PPT Presentation
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3/7: Inventory Planning & Control• Roll call / collect homework / hand back hmwk
• Go over homework (?)
• Understanding inventory issues
• The basic numbers involved– Holding cost, ordering cost, demand
• Basic EOQ model
• EOQ model with allowed shortages
• Assign homework
• Have a good Spring Break
Holding Cost• Made of many things:
– Cost of capital (money tied up in inventory)• Expressed as a % of amount invested (% of purch. price)
– Insurance– Breakage– Pilferage (Theft)– Overhead, etc.
• Also expressed as a % of amount invested
Holding Cost• Made of many things:
– Cost of capital (money tied up in inventory)• Expressed as a % of amount invested (% of purch. price)
– Other holding costs• Also expressed as a % of amount invested
• EX: I have $10,000 worth of 100 comic books. I estimate my cost of capital to be 11% and other holding costs to be 4%. What is my total holding cost in dollars? What is my holding cost per unit?
Ordering Cost• A fixed cost
– Doesn’t change with quantity ordered– Is charged each time a order is placed
• Made of many things:– Salaries of purchasing department– Cost of preparation of the order documents– Cost of processing the order, etc.
Demand• How much is required of the product
• In the Economic Order Quantity (EOQ) model, we assume that demand is CONSTANT.
• EX: Each month, I sell 200 comic books.
EOQ: The Dilemma• We seek a balance while satisfying demand:
• Ordering costs must be kept as low as possible (over time), and
• Holding costs must be kept as low as possible.
• So how much do we order each time to minimize overall inventory costs?
EOQ: The Dilemma• So how much do we order each time to
minimize overall inventory costs?In
vent
ory
( Q
)
timeCycle time (T)Lead time ( L, l )
Reorder Point (r)
Daily demand(slope) (d)
The Basic EOQ Model• EOQ: Economic Order Quantity
• Assumptions of EOQ models:– Demand is constant (unvarying ), expressed as
annual demand (units per year (or other time unit) ).– 2 variable costs: setup cost and holding cost.– Lead time is constant & known.– Models use continuous review, not periodic review.– Quantity discounts are not possible.
EOQ: Symbols & Assumptions• Q: Maximum in inventory, as well as order
quantity. What is the average inventory?
timeCycle time (T)Lead time ( L, l )
Reorder Point (r)
Inve
ntor
y (
Q )
Daily demand(slope) (d)
EOQ: Symbols & Assumptions• Lead time (L or l ) is constant & known, so we
can order replenishment to be received when inventory hits zero. Measured in time units.
timeCycle time (T)Lead time ( L, l )
Reorder Point (r)
Inve
ntor
y (
Q )
Daily demand(slope) (d)
EOQ: Symbols & Assumptions• Reorder point (r) is the level of inventory at
which a replenishment order will be triggered. Measured in units of inventory (portion of Q).
timeCycle time (T)Lead time ( L, l )
Reorder Point (r)
Inve
ntor
y (
Q )
Daily demand(slope) (d)
EOQ: Symbols & Assumptions• Cycle time (T) is the length of time it takes to
use up the inventory (Q).
timeCycle time (T)Lead time ( L, l )
Reorder Point (r)
Inve
ntor
y (
Q )
Daily demand(slope) (d)
EOQ: Calculating it• EOQ = Annual holding cost of average inventory