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Ch 12 - Inventory Management

  1. Introduction
    1. Def - Inventory - any resource held for future use
    2. Functions of inventory (p484)
      1. *Decoupling - when two processes cannot be synchronized, inventory can smooth fluctuations. Example, firm with high seasonal demand, produces some products in off-season.
      2. Quantity discounts
      3. Hedge against inflation
    3. Types of Demand (p489)
      1. Independent demand - typical finished product - demand from many small independent customers
      2. Dependent demand - typical component of a finished product - demand for lawn mower wheels is dependent on demand for lawn mowers. (Ch 14 - Material Requirements Planning)
  2. Basic Economic Order Quantity (EOQ) Model  (p490)
    1. Def - EOQ - the order quantity which minimizes total ordering and holding costs.
    2. Assumptions
      1. Uniform demand
      2. Replenishment of Q units arrives as last unit is used
            These assumptions imply (see Fig 12.3)
            Avg inventory level = Q/2
    3. Costs
      1. Annual ordering (set-up) cost - preparing order, (setting up process), receiving shipment, placing in inventory.
            = S (D / Q)
                S - ordering (set-up) cost for each order
                D - annual demand
                Q - order quantity
      2. Annual holding cost - storage, taxes, investment, insurance, obsolescence (see Table 12.1, p490)
            = H (Q / 2)
                H - holding (carrying) cost per unit per year
                Q/2 - average inventory level
    4. Fact: EOQ occurs when ordering cost = holding cost.
                 
             
          Implies
         
    5. *EOQ
         
    6. See Example 3 - page 493
                  Do assigned HW
  3. Probabilistic Models
    1. Definitions
      1. Safety stock - extra stock carried to reduce the probability of stockout due to:
            · unexpectedly high demand during lead time and/or
            · unexpectedly long lead time
      2. DL - random variable denoting demand during lead time
      3. ROP - reorder point - inventory level (point), at which order is placed
        ROP = mean(DL) + safety stock
      4. *Service level - probability of supplying stock during lead time
              service level = Prob( DL £ ROP )
    2. Memphis Regional Hospital - page 504
      1. Determine the safety stock, if the desired service level is 95%.
      2. DL is normally distributed with a mean, µ, of 350 and a standard deviation, s, of 10.
      3. Let SS denote safety stock and Z = ( DL - µ ) / s.
      4. Then, service level = Prob( DL £ ROP ) = Prob( Z £ SS/s )
      5. From Appendix I, page A2, Z1 = 1.65 satisfies Prob(Z £ Z1) = 0.95
      6. Therefore, safety stock = Z1 s = 1.65 (10) = 16.5
                ROP = mean(DL) + safety stock = 350 + 16.5 rounded up to 367 units
                Do assigned HW
  4. Independent Demand Inventory Systems
    1. *Fixed-quantity System
      1. Procedure
        Establish order quantity, Q, and reorder point, ROP
        Review inventory level, I, with each transaction
        If  I £ ROP
        then order Q.
      2. Advantage (compared to fixed-period system)
            Lower probability of stockout
      3. Disadvantages
            Requires perpetual record keeping
            Numerous independent orders
    2. *Fixed-period System (p507)
      1. Procedure (Fig 12.9)
        Establish max inventory level S
        Review inventory level, I, at intervals of T (every week or month or . . . )
        Order S-I units on each occasion.
      2. Advantage (compared to fixed-quantity system)
            Consolidation of individual orders
      3. Disadvantage
            Possible small individual order size
  5. *ABC Analysis (p485)
    1. Procedure
      1. List inventory items by decreasing value (annual dollar usage, investment, profit, . . .)
      2. Group items into classes (slightly different than textbook)
        1. Class A contains items in top 70% of value
              Typically Class A contains 10-20% of inventory items
        2. Class B contains items in middle 20% of value
              Typically Class B contains 20-35% of inventory items
        3. Class C contains items in bottom 10% of value.
    2. See Example 1 - Silicon Chips
    3. Worksheet for Client ABC Analysis - click here to download my worksheet, ABCAnalysis.xls.
    4. Typical use
      Establish: Possible Inventory System:
        Tight control on A items   Fixed-quantity
        Moderate control on B items     Fixed-period (computerized)  
        Loose control on C items   Fixed-period (manual)

            (This page was last edited on October 22, 2009 .)