Inventory


Stock of items held to meet future
demand
Inventory management answers two
questions
• How much to order
• When to order
Inventory Hides Problems
Bad
Design
Lengthy
Setups
Inefficient
Layout
Poor
Quality
Machine
Breakdown
Unreliable
Supplier
Lower Levels Of Inventory To
Expose Problems
Bad
Design
Lengthy
Setups
Inefficient
Layout
Poor
Quality
Machine
Breakdown
Unreliable
Supplier
Inventory Function in Supply Chain

Pipeline (in transit) inventory

Decoupling inventory
•

Buffer inventory or safety stock
•

Plan for expected seasonal fluctuations
Lot size inventory
•

Protection against uncertain demand or lead times
Anticipation inventory
•

Interdependent operations with different process rates
Take advantage of price or quantity discounts
Speculation inventory
•
Hedge against price increases
Inventory Costs

Carrying Cost
• cost of holding an item in inventory
• Examples include warehousing, handling,
pilferage, spoilage and investment costs


Ordering Cost
• cost of
replenishing inventory
Shortage Cost
• temporary or permanent loss of sales when
demand cannot be met
Dependent versus Independent
Demand
Item
Demand
Source
Material
Type
Method of
Estimating
Demand
Planning
Method
Materials With
Independent Demand
Materials With
Dependent Demand
Company Customers
Parent Items
Finished Goods
WIP & Raw Materials
Forecast & Booked
Customer Orders
EOQ & ROP
Calculated
MRP
Push/Pull View of Supply Chains
Procurement,
Manufacturing and
Replenishment cycles
PUSH PROCESSES
Customer Order
Cycle
PULL PROCESSES
Customer
Order Arrives
The (Q,r) Policy

Q is the order quantity which specifies the
number of units to order for an item when it is
time to replenish the inventory

r is the reorder point, the inventory position at
which an order should be placed

the inventory position is the amount of
inventory on hand plus the amount of
inventory on order
The Inventory Order Cycle
Demand
rate
Inventory Level
Order qty, Q
Reorder point, R
0
Lead
time
Order
Order
Placed Received
Lead
Time
time
Order
Order
Placed
Received
EOQ Cost Model
CO - cost of placing order
D - annual demand
CC - annual per-unit carrying cost
Q - order quantity
Annual ordering cost = COD/Q Annual carrying cost = CCQ/2
Total cost = COD/Q + CCQ/2
Class Exercise Example:
CC = $0.75 per yard CO = $150
D = 10,000 yards
EOQ Model Cost Curves
Slope = 0
Annual
cost ($)
Total Cost
Minimum
total cost
Carrying Cost = CcQ/2
Ordering Cost = CoD/Q
Optimal order
Qopt
Order Quantity, Q
EOQ Cost Model
CO - cost of placing order
D - annual demand
CC - annual per-unit carrying cost
Q - order quantity
Annual ordering cost = COD/Q Annual carrying cost = CCQ/2
Total cost = COD/Q + CCQ/2
CoD CcQ

Q
2
2CoD
Q2 
Cc
2CoD
Qopt 
Cc
TCmin 
CoD CcQopt

Qopt
2
EOQ Example
CC = $0.75 per yard CO = $150
Qopt 

2CoD
Cc
TCmin 
2(150)(10,000)
(0.75)
 2,000 yards
Number of orders per year =
Order cycle time =
D = 10,000 yards
CoD CcQopt

Qopt
2
(150)(10,000) (0.75)(2,000)

2,000
2
 $750  750  $1,500

D
10,000

5
Qopt
2,000
311
311

 60.2 store days
D / Qopt
5
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
Reorder Point Example
Demand = 10,000 yds/year
Store open 311 days/year
Daily demand = 10,000 / 311 = 32.154 yds/day
Lead time = L = 10 days
R = dL = (32.154)(10) = 321.54 yds
Safety Stocks

Safety stock
• buffer added to on hand inventory during
lead time

Stockout

Service level
• an inventory shortage
• probability that the inventory available
during lead time will meet demand
Inventory level
Reorder Point With
A Safety Stock
Q
Reorder
point, R
Safety stock
0
LT
Time
LT