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Inventory System For Independent Demand

The document discusses inventory systems for items with independent demand. It defines inventory and describes the purposes and costs of holding inventory. It then differentiates between independent and dependent demand and introduces basic fixed order quantity and fixed time period inventory models. The economic order quantity model is explained in detail, including deriving the optimal order quantity formula and working through an example. Other inventory systems like bin systems and ABC classification are also briefly covered.

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Tawsif R Choudhury
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208 views21 pages

Inventory System For Independent Demand

The document discusses inventory systems for items with independent demand. It defines inventory and describes the purposes and costs of holding inventory. It then differentiates between independent and dependent demand and introduces basic fixed order quantity and fixed time period inventory models. The economic order quantity model is explained in detail, including deriving the optimal order quantity formula and working through an example. Other inventory systems like bin systems and ABC classification are also briefly covered.

Uploaded by

Tawsif R Choudhury
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPT, PDF, TXT or read online on Scribd
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Chapter 15

Inventory Systems for Independent


Demand
• The Definition and Purpose of Inventory
• Inventory Costs
• Independent vs. Dependent Demand
• Basic Fixed Order Quantity Model
• Basic Fixed Time Period Model
• Miscellaneous Systems and Issues
2
Inventory
• Definition--The stock of any item or
resource used in an organization
– Raw materials
– Finished products
– Component parts
– Supplies
– Work in process

3
Purposes of Inventory
1. To maintain independence of operations
2. To meet variation in product demand
3. To allow flexibility in production scheduling
4. To provide a safeguard for variation in raw
material delivery time
5. To take advantage of economic purchase-
order size
4
Inventory Costs
• Holding (or carrying) costs

• Setup (or production change) costs

• Ordering costs

• Shortage costs
5
Independent vs. Dependent
Demand
Independent Demand
(Demand not related to other items)

Dependent Demand
(Derived)

E(1)

6
Classifying Inventory Models
• Fixed-Order Quantity Models
– Event triggered

• Fixed-Time Period Models


– Time triggered

7
Fixed-Order Quantity Models
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

8
Fixed-Order Quantity Models
Assumptions
• 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)

9
EOQ Model--Basic Fixed- Exhibit
Exhibit15.3
15.3
Order Quantity Model

Number
of units
on hand Q Q Q

R
L L

Time
R = Reorder point
Q = Economic order quantity
L = Lead time
10
Cost Minimization Goal
Total Cost

C
O
S
T Holding
Costs
Annual Cost of
Items (DC)

Ordering Costs

QOPT
Order Quantity (Q)

11
Basic Fixed-Order
Quantity Model
Annual Annual Annual
Total Annual Cost = Purchase + Ordering + Holding
Cost Cost Cost
TC Total annual cost
D Demand
C Cost per unit
D Q Q Order quantity
TC = DC + S + H
Q 2 S Cost of placing an order
or setup cost
R Reorder point
L Lead time
H Annual holding and storage
cost
per unit of inventory 12
Deriving the EOQ
• Using calculus, we take the derivative of
the total cost function and set the
derivative (slope) equal to zero
2D S 2(A nnual D em and)(O rder or Setup C ost)
Q O PT = =
H A nnual H olding C ost

_
R eorder p oint, R = d L
_
d = average daily demand (constant)
L = Lead time (constant)
13
EOQ Example
Annual Demand = 1,000 units
Days per year considered in average daily demand = 365
Cost to place an order = $10
Holding cost per unit per year = $2.50
Lead time = 7 days
Cost per unit = $15

Determine the economic order quantity and the reorder point.


Solution
2DS 2(1,000 )(10)
Q OPT = = = 89.443 units or 90 units
H 2.50

Why do we round up?

1,000 units / year


d = = 2.74 units / day
365 days / year

_
R eorder point, R = d L = 2.74units / day (7days) = 19.18 or 20 units

When the inventory level reaches 20, order 90


units.
In-Class Exercise
Annual Demand = 10,000 units
Days per year considered in average daily demand = 365
Cost to place an order = $10
Holding cost per unit per year = 10% of cost per unit
Lead time = 10 days
Cost per unit = $15

Determine the economic order quantity and the reorder point.


Solution
2D S 2(10,000 )(10)
Q O PT = = = 365.148 units, or 366 u n its
H 1.50

10,000 units / year


d= = 27.397 units / day
365 days / year
_
R = d L = 27.397 units / day (10 days) = 273.97 or 274 units

When the inventory level reaches 274, order 366 units.


17
Miscellaneous Systems
Bin Systems
Two-Bin System

Order One Bin of


Inventory
Full Empty
One-Bin System

Order Enough to
Refill Bin
Periodic Check
ABC Inventory Planning
ABC classification scheme divides inventory
items into three groupings:

 High dollar volume (A)
 Moderate dollar volume (B)
 Low dollar volume (C)
ABC Inventory Planning
ABC Classification
A items constitute roughly the top 15
percent of the items
B items the next 35 percent
C items the last 50 percent

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