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Inventory Management Vipul

This document discusses inventory management models. It describes different types of inventories including raw materials, work in progress, and finished goods. The functions and objectives of inventory control are to meet demand while keeping costs low. Effective inventory management requires systems to track inventory levels, forecast demand, and estimate costs. Common inventory models include economic order quantity, economic production quantity, and quantity discount models which aim to minimize total costs. Key considerations for inventory management include lead times, holding costs, ordering costs, and classification systems.

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Vipul Kanojia
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156 views20 pages

Inventory Management Vipul

This document discusses inventory management models. It describes different types of inventories including raw materials, work in progress, and finished goods. The functions and objectives of inventory control are to meet demand while keeping costs low. Effective inventory management requires systems to track inventory levels, forecast demand, and estimate costs. Common inventory models include economic order quantity, economic production quantity, and quantity discount models which aim to minimize total costs. Key considerations for inventory management include lead times, holding costs, ordering costs, and classification systems.

Uploaded by

Vipul Kanojia
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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Inventory Management And models

Submitted by vipul kanojia abu baker bupinder singh

Types of Inventories

Raw materials & purchased parts Partially completed goods called

work in progress

Finished-goods inventories
(manufacturing firms) or merchandise (retail stores)

Functions of Inventory

To meet anticipated demand To smooth production requirements To protect against stock-outs

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

Effective Inventory Management

A system to keep track of inventory


A reliable forecast of demand Knowledge of lead times Reasonable estimates of

Holding costs

Ordering costs
Shortage costs

A classification system

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

Key Inventory Terms

Lead time:

time interval between ordering and receiving the order

Holding (carrying) costs: cost to carry an


inventory

item in inventory for a length of time, usually a year

Ordering costs: costs of ordering and receiving


Shortage costs: costs when demand exceeds
supply

ABC Classification System


Classifying inventory according to some measure of importance and allocating control efforts accordingly.

A - very important B - mod. important C - least important

High

A B C
Low High

Annual $ value of items Low

Percentage of Items

Economic Order Quantity Models


Economic order quantity (EOQ) model

The order size that minimizes total annual cost

Economic production model

Quantity discount model

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 Inventory Level = 0 when new order just arrived There are no quantity discounts

Total Cost
Annual Annual Total cost = carrying + ordering cost cost TC =

Q H 2

DS Q

Minimum Total Cost


The total cost curve reaches its minimum where the Carrying Cost = Ordering Cost Q H 2 = DS Q

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.
Q OPT = 2DS = H 2( Annual Demand )(Order or Setup Cost ) Annual Holding Cost

Economic Production Quantity (EPQ)

Assumptions

Only one product is involved Annual demand requirements are known Usage rate is constant Usage occurs continually, but production occurs periodically The production rate is constant Lead time does not vary There are no quantity discounts
12-14

Quantity Discount Model

Quantity discount

Price reduction offered to customers for placing large orders

Total Cost Carrying Cost Ordering Cost PurchasingCost Q D H S PD 2 Q where P Unit price

12-15

When to Reorder
with EOQ Ordering

Reorder Point - When the quantity on Safety Stock - Stock that is held in

hand of an item drops to lower amount, the item is reordered 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.

Determinants of the Reorder Point


The rate of demand The lead time Demand and/or lead time variability Stockout risk (safety stock)

Single Period Model


Single period model: model for ordering
of perishables and other items with limited useful lives profits per unit

Shortage cost: generally the unrealized Excess cost: difference between


purchase cost and salvage value of items left over at the end of a period

Operations Strategy

Too much inventory


Tends to hide problems Easier to live with problems than to eliminate them Costly to maintain Reduce lot sizes Reduce safety stock

Wise strategy

THANK YOU

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