Professional Documents
Culture Documents
Dr Prashant Gupta
Inventory
Inventory can be broadly defined as the stock of
goods, commodities or other economic
resources that are stored or reserved at any
given period for future production or for meeting
future demand.
Inventory may also be defined as usable but
idle resource having economic value. If
resource is some physical and tangible object
such as materials, then it is generally termed as
stock.
Importance of Inventory
Inventory - Double-Edged Sword
Types of Inventory
Raw materials, Component parts (Production
Inventories)
Spares and other indirect materials ( MRO
Inventories))
In-process (partially completed) products
Finished goods
Tools, machinery, and equipment
Labor
Working capital
Inventory
Where do we hold inventory?
Suppliers and manufacturers
warehouses and distribution centers
retailers
Types of Inventory
WIP( Work in process)
raw materials
finished goods
Economies of Scale
Supply / Demand
Variability
Seasonal
Variability
Cycle Inventory
Safety Inventory
Seasonal Inventory
Inventory Costs
Holding (or carrying) costs
Costs for storage, handling, insurance, etc
Setup (or production change) costs
Costs for arranging specific equipment setups, etc
Ordering costs
Costs of placing an order,replenishing inventory, etc (Fixed
& Variable)
Shortage costs
Costs of canceling an order, temporary or permanent loss
of sales when demand cannot be met, etc
Inventory
carrying
costs
Capital
costs
Inventory investment
Inventory
service
costs
Insurance
Taxes
Plant warehouses
Storage
space costs
Public warehouses
Rented warehouses
Company-owned
warehouses
Obsolescence
Inventory
risk costs
Damage
Pilferage
Relocation costs
Inventory Systems
Single-Period Inventory Model:
One time purchasing decision (Example: vendor selling t-shirts
at a football game).
Seeks to balance the costs of inventory over-stock and
inventory under - stock.
Multi-Period Inventory Models:
Fixed-Order Quantity Model
Constant amount ordered when inventory declines to
predetermined level
Event triggered (Example: Below Pre-determined Level, running
out of stock)
Fixed-Time Period Model
Order placed for variable amount after fixed passage of time
Time triggered (Example: Monthly sales call by sales
representative)
Cuu
P
Coo Cuu
This
Thismodel
modelstates
statesthat
thatwe
we
should
shouldcontinue
continueto
toincrease
increase
the
thesize
sizeof
ofthe
theinventory
inventoryso
so
long
longas
asthe
theprobability
probabilityof
of
selling
sellingthe
thelast
lastunit
unitadded
addedisis
equal
equalto
toor
orless
lessthan
thanthe
theratio
ratio
of:
of:Cu
Cu//(Co
(Co++Cu)
Cu)
PCo
Where :
PCo(1-P)
(1-P)Cu
Cu
Co Cost per unit of demand over estimated
(Q)
Fixed-Order
Quantity System
Idle State
Waiting for demand
Idle State
Waiting for demand
Demand Occurs
Units withdrawn from
inventory or back ordered
Compute inventory position
Position = on hand +
On order back order
No
Demand Occurs
Units withdrawn from
inventory or back ordered
No
Is position___
Reorder position?
Yes
Issue an order for
exactly Q units
Multi-Period Models:
Fixed-Order Quantity Model Assumptions
Demand for the product is constant and uniform
throughout the period.
Lead time (time from ordering to receipt) is constant.
Price per unit of product is constant.
Multi-Period Models:
Fixed-Order Quantity Model Assumptions(Contd.)
Inventory holding cost is based on average inventory.
Ordering or setup costs are constant.
All demands for the product will be satisfied (No back
orders are allowed).
R = Reorder point
Q = Economic order quantity
L = Lead time
Time
L
3. When you reach down to
a level of inventory of R,
you place your next Q
sized order.
Holding
Costs
Annual Cost of
Items (DC)
Ordering Costs
QOPT
Order Quantity (Q)
Annual
Annual
Annual
Purchase + Ordering + Holding
Cost
Cost
Cost
D
Q
D
Q
TC
TC == DC
DC ++ SS++ H
H
Q
22
Q
TC=Total
TC=Totalannual
annual
cost
cost
DD=Demand
=Demand
CC=Cost
=Costper
perunit
unit
QQ=Order
=Orderquantity
quantity
S(Co)
S(Co)=Cost
=Costof
of
placing
placingan
anorder
orderor
or
setup
setupcost
cost
RR=Reorder
=Reorderpoint
point
LL=Lead
=Leadtime
time
HH(Cc)=Annual
(Cc)=Annual
holding
holdingand
andstorage
storage
cost
costper
perunit
unitof
of
inventory
inventory
2DS
2DS =
=
HH
We
Wealso
alsoneed
needaa
reorder
reorderpoint
pointto
to
tell
tellus
uswhen
whento
to
place
placean
anorder
order
2(Annual
2(AnnualDemand)(Order
Demand)(Orderor
orSetup
SetupCost)
Cost)
Annual
AnnualHolding
HoldingCost
Cost
__
Reorder
Reorder point,
point, R
R == ddLL
D - annual demand
Q - order quantity
Co D
Cc Q
Q
2
2Co D
Q2
Cc
Qopt
TC min
2Co D
Cc
Cc Qopt
Co D
Qopt
2
CoD
CcQ
TC
Q
2
TC
CoD
Cc
2
Q
2
Q
0
C oD
Cc
2
Q2
Q opt
2CoD
Cc
0
Order
receipt period
Maximum
inventory level
Begin
Order
receipt
End
Order
receipt
Average
inventory level
Time
Q
d
Max inv level = Q - d Q 1 -
p
p
p = production rate
d = demand rate
1
d
Q
d
Avg inv level = Q 1 - 1 -
2
p
2
p
Cc Q
d
1 -
Total carrying cost =
2
p
C o D CcQ
d
TC
1 -
Q
2
p
Qopt
2C o D
d
C c 1 -
p
Q OPT
2DS
2(Annual Demand)(Order or Setup Cost)
=
=
iC
Annual Holding Cost
Q OPT =
2DS
=
iC
2(10,000)(4)
= 1,826 units
0.02(1.20)
Q OPT =
2DS
=
iC
2(10,000)(4)
= 2,000 units
0.02(1.00)
2DS
=
iC
2(10,000)(4)
= 2,020 units
0.02(0.98)
Total
annual
costs
So
So the
thecandidates
candidates
for
forthe
thepricepricebreaks
breaks are
are1826,
1826,
2500,
2500,and
and4000
4000
units
units
0
1826
2500
4000
Order Quantity
D
Q
D
Q iC
TC
=
DC
+
S
+
TC = DC +
S+
iC
Q
2
Q
2
TC(0-2499)=(10000*1.20)+(10000/1826)*4+(1826/2)(0.02*1.20)
TC(0-2499)=(10000*1.20)+(10000/1826)*4+(1826/2)(0.02*1.20)
==$12,043.82
$12,043.82
TC(2500-3999)=
TC(2500-3999)=$10,041
$10,041
TC(4000&more)=
TC(4000&more)=$9,949.20
$9,949.20
Finally,
, which is this
Finally,we
weselect
select the
theleast
least costly
costlyQ
Qopt
opt, which is this
problem
problem occurs
occursin
in the
the4000
4000 &&more
more interval.
interval. In
In summary,
summary,
our
ouroptimal
optimal order
orderquantity
quantityis
is4000
4000units
units
When to Order
Reorder Point : level of inventory at which to place
a new order
R=dL
where
d = demand rate per period
L = lead time
Safety Stocks
Safety Stock
Buffer added to on hand inventory during lead time
Stock - Out
An inventory shortage
Service Level
Probability that the inventory available during lead
time will meet demand
Inventory level
Reorder
point, R
Safety stock
LT
Time
LT
Safety stock
dL
Demand
d = 30 m per day
L = 10 days
d 5 m per day
R d L z d
..
.
Z
1.6
0.00
..
.
0.4452
0.01
..
.
0.4463
...
Service level =
area to left of Z value or 95%
0.5000
0.4505
0.05
..
.
0.4505
Probability of
a stockout = 5%
Z = 1.65
d 5 m per day
R d L z d L
(30)(10) (1.65)(5)( 10 ) 300 26.1 326.1m
Safetystock z d L (1.65)(5)( 10 ) 26.1m
+
Lead Time
LT = 10
LT = 2.00
Demand
D=5
DD = 2.54
Combined Uncertainty
C =
LT * DD2 + D2 * LT2
C =
10 * 2.542 + 52 * 2.002
C = 12.83
tb L I
where
d = average demand rate
t b fixed time between orders
L = lead time
t b L safety stock
I = inventory in stock
Lead Time
Average demand
Demand variability
Service level
Inventory Level
Inventory Position
Lead
Time
s
0
Time
Q=S-I
Actual Inventory Level, I
S
I
S. NO. TITLE
BASIS
MAIN USES
A-B-C
Value of consumption
H-M-L
F-S-N-D
To control obsolescence
4
5
S-D-E
G-O-L-F
Source of material
Procurement strategies
V-E-D
S-OS
Nature of suppliers
(Seasonal, Off-seasonal)
X-Y-Z
V-I-R
Money invested
profit potential
60
% of
Rs Value 30
0
% of
Use
30
A
B
60
% of Units
% of Dollars
5 - 15 70 - 80
30 15
50 - 60 5 - 10
Anual
Usage
90
40
130
60
100
180
170
50
60
120
Total
% of Total % of Total
%
Part
Value
%Value %QuantityCumulative %
9
30,600
35.8
6.0
6.0
8
16,000
18.7
5.0
11.0
2
14,000
16.4
4.0
15.0
1
5,400
6.3
9.0
24.0
4
4,800
5.6
6.0
30.0
3
3,900
4.6
13.0
43.0
6
3,600
4.2
18.0
61.0
5
3,000
3.5
10.0
71.0
10
2,400
2.8
12.0
83.0
7
1,700
2.0
17.0
100.0
Rs 85,400
Class
A
B
C
Items
9,8,2
1, 4, 3
6, 5, 10, 7
% Value % Units
71
15
16.5
28
12.5
57
Risk Pooling
Consider these two systems:
Warehouse One
Market One
Warehouse Two
Market Two
Supplier
Market One
Supplier
Warehouse
Market Two
Centralized
2++
2
Relative Reduction = 1 - 1 / N
(under certain conditions)
++
2
N = 25
80%
two products
maintain 97% service level
$60 order cost
$0.27 weekly holding cost
$1.05 transportation cost per unit in decentralized
system, $1.10 in centralized system
1 week lead time
Product
Average
Demand
during Lead
Time
Standard
Deviation of
Demand
Safety
Stock
Reorder
Point (s)
Order
Quantity
(Q)
Market 1
39.3
13.2
25.08
65
132
Market 2
38.6
12.0
22.8
62
131
Market 1
1.125
1.36
2.58
24
Market 2
1.25
1.58
24
Total
77.9
20.71
39.35
118
186
Total
2.375
1.9
3.61
33
Safety Stock?
Service Level?
Overhead Costs?
Customer Lead Time?
Transportation Costs?