Inventory management
Part 2
By
Anita Lee-Post
© 2003 Anita Lee-Post
Inventory management
• Provide the desired level of customer
service
• Enable cost-efficient operations
• Minimize the inventory investment
Establish a system for managing inventory
Make decisions about how much and
when to order
© 2003 Anita Lee-Post
Inventory control systems
• Keep track of items in inventory
– Inventory accuracy
• Keep track of items ordered and received
– Inventory model
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Inventory control systems continued
• Keep track of items in inventory
– Periodic counting: physical inventory is taken
periodically
– Cycle counting: physical inventory is taken
continuously
© 2003 Anita Lee-Post
Inventory control systems continued
• Keep track of items ordered and received
– Single-period inventory models
• Perishable products: order exactly what is needed – balance
the risk of lost sales with zero inventory costs
– Multi-period inventory models
• Fixed-time period models: an order is placed when the
review period arrives – balance a large inventory with
minimum inventory ordering and monitoring costs
• Fixed-order quantity models: order a predetermined amount
each time an order is placed – balance the holding costs of
inventory with its ordering costs
© 2003 Anita Lee-Post
Fixed-order quantity models
• Determine order quantity to minimize
inventory costs
– Economic order quantity model (EOQ)
– Economic production quantity model (EPQ)
– Quantity discount model (QD)
© 2003 Anita Lee-Post
EOQ assumptions
• Demand is known & constant - no safety
stock is required
• Lead time (time between order placement
and arrival) is known & constant – no back
order is considered
• No quantity discounts are available
• Ordering (or setup) costs are constant
• All demand is satisfied (no shortages)
• The order quantity arrives in a single
shipment
© 2003 Anita Lee-Post
EOQ inventory profile
© 2003 Anita Lee-Post
EOQ total costs
Total annual costs = annual ordering costs + annual holding costs
© 2003 Anita Lee-Post
EOQ: Total cost equation
Annual holding cost 
Q
H
2
D
S
Q
D  Q 
Total cost at Q, TC Q   S    H 
Q   2 
where D : Annual Demand
Annaul ordering/setup cost 
S : Ordering/Setup cost per order
H : Holding cost per unit per year
 D
  EOQ 
 Minimal cost at EOQ, TC EOQ  
S  
H

 EOQ   2
where EOQ 
© 2003 Anita Lee-Post
2DS
H
EOQ: reorder point
© 2003 Anita Lee-Post
EOQ example
Given:
• Annual demand = 60,000
• Ordering cost = $25 per order
• Holding cost = $3 per item per year
• Number of working days per year = 240
(a)
(b)
(c)
(d)
(e)
(f)
What is the EOQ?
What is the total cost at EOQ?
What is the total number of orders placed in a year?
What is the time between orders?
What is the reorder point if lead time is 3 days?
What is the reorder point if lead time is 5 days?
© 2003 Anita Lee-Post
EOQ example continued
2  60000  25
 1000
3

 EOQ
  D
(b) Total cost at EOQ  
 H  
 S
 2
  EOQ

 1000
  60000

 
 3  
 25  $3000
 2
  1000

Annual demand
(c) Total number of orders placed in a year 
EOQ
60000

 60
1000
Number of workings days in a year
(d) Time between orders 
Total number of orders placed in a year
240

 4 days
60
(a) EOQ 
2DS

H
© 2003 Anita Lee-Post
EOQ example continued
(e) If lead time is 3 days (lead time  time between orders)
Reorder point  Daily demand  Lead time
Annual demand
60000
Daily demand 

 250
Number of working days in a year
240
 Reorder point  250  3  750
(f) If lead time is 5 days (lead time  time between orders)
Reorder point  Daily demand  Lead time - EOQ
Annual demand
60000
Daily demand 

 250
Number of working days in a year
240
 Reorder point  250  5  1000  1250  1000  250
© 2003 Anita Lee-Post