MECHANICAL ENGINEERING

DEPARTMENT
4th year Production

MDP445
Computer in Planning,
Analysis and Control

Lecture: 3
Computer in Control:
Inventory Control

Dr. Sayed Ali Zayan 2nd Term 2024/2025

Inventory control models
The primary purpose of inventory control is to ensure that the
right amount of the right item is ordered at the right time. But
what constitutes the right items, the right time, and the right
amount? The basic questions that have to be asked are
 What items should be ordered?
 When should an order be placed?
 How much should be ordered?
Reasons for holding stock items are
(i) to enable production processes to operate smoothly and efficiently
(ii) to take advantage of quantity discounts
(iii) to protect against possible shortages in the future
(iv) to absorb seasonal fluctuations in demand and supply
(v) to protect against inflation and price changes.
Inventory control models
Glossary of Inventory terms
 Unit cost is the price charged by suppliers for one unit of the item.
 Ordering (or setup) cost ordering cost includes costs arising from the
preparation and dispatch of the order, checking of the goods on delivery,
and other clerical support activities.
 Setup cost refers to the cost of preparing a machine or process for
manufacturing an order.
 Holding (or carrying) cost the cost of holding one unit of an item in stock for
one period of time. A typical holding cost would be expressed as, say, £20
a unit per year. A holding cost may also be expressed as a percentage of
the unit cost of the item. Holding costs include interest on the capital tied up
in stock, insurance, storage charges (rent, lighting, heating, refrigeration,
etc.), deterioration and obsolescence of stock.
 Shortage (or stockout) cost running out of stock can prove costly. Factory
production can be halted by a shortage of a single component or the lack
of spare parts for broken machine tools. Shops may lose business if they are
unable to supply goods when required, i.e., the customer may not wait for
out-of-stock items which are met by placing a back-order.
Inventory control models
Other basic terms used in inventory control are:
 Demand is the number of units to be supplied from stock in a given time
period, e.g., ten units per week. Estimates of the rate of demand during
the lead time are critical factors in inventory control systems.
 Allocated stock represents stock which has been set aside to satisfy an
order until such time as the stock can be dispatched. Although allocated
stock may be physically present in the stockroom, it should not be
included as ‘in stock’ (i.e., on hand) since it has already been
earmarked!.
 Lead time represents the time between placing an order and getting the
item in stock ready for use. Lead times are normally taken as constant
values, e.g., two weeks. However, it should be remembered that lead
times involve many activities which can give rise to uncertainty such as
order preparation, item production, packaging, transportation, checking
on arrival, etc. In practice, uncertainty exists in almost all inventory
systems.
 Inventory control models
 Order (or reorder) quantity i.e., ‘How much should be ordered so as to minimize total
costs?’ When an order is placed and stock is replenished, the quantity to be ordered
can be calculated using the classic economic order quantity (EOQ) equation. The EOQ
is the best-known of several techniques aimed at deriving an optimal order quantity.
 Re-order level (or order point) i.e., ‘When should orders be placed?’ An item’s lead time
will affect the timing of an order’s placement. The reorder level is the minimum level that
stocks on hand are allowed to reach before a new order is placed. When an order is
placed, the stock on hand must just cover demand until the order arrives.
 Inventory control models
 Cycle time the time taken between two
consecutive orders. A cycle time, Ta, can be
found for the year by dividing the order
quantity Q by the annual demand D, i.e., Ta (in
weeks) =52*Q/D.
 Safety (minimum or buffer) stock a backup
supply of items which are held for use in an
emergency, i.e., to protect against
uncertainties.
 Maximum stock a stock level selected as the
maximum desirable amount, which is then used
as an indicator to show when stocks have risen
too high.
Types of inventory models
 Economic Order Quantity (EOQ) Model

 The economic order quantity

(EOQ) model is the oldest and
best-known model for finding an
optimal order size that minimizes
costs.
 The two basic costs involved in
the management of inventory
are
(i) the ordering cost, and
(ii) the holding cost.

The objective of most inventory models is to minimize total cost. In the EOQ model, the
optimal order size represents the minimum point on the total cost (TC) curve where total
cost is given by the equation
total-cost = ordering-cost + holding-cost + purchase-cost
Economic Order Quantity (EOQ) Model
 Each order placed throughout the year will be always be for a fixed
quantity Q. Because the EOQ model does not allow any shortages,
the quantity Q is assumed to arrive whenever the quantity on hand
reaches zero. Since demand rate is taken to be constant, the on-
hand inventory will follow a sawtooth pattern as shown in Figure.
Note that the average inventory level is Q/2.
Economic Order Quantity (EOQ) Model
the optimal order quantity:
where:
Q0 = the optimal order quantity, S = ordering cost for each order
D = annual demand for the item, H = holding cost per unit per year
The total annual cost TC to purchase and stock an item can now be
written mathematically as
TC = DS/Q0 + HQ0/2 + DC
Where:
Annual ordering cost = DS/Q0,
Annual holding cost = HQ0/2,
Annual purchase cost = DC, where C = unit cost.
The number of orders: N = D/QO
 The Excel Sheet For EOQ model

Table 9.1 Economic order quantity (EOQ)

– worksheet formulae.
The Excel Sheet For EOQ model
Production Order Quantity Model
 In the EOQ model described above, the whole inventory order was placed
at one time, instantaneously raising the stock levels. This situation is typical
of wholesalers who operate with large inventories, large quantities, and
large turnovers. However in a manufacturing environment, the situation is
somewhat different. If a firm’s rate of production is greater than its customer
demand, the firm can meet its customers’ inventory requirements on an
ongoing basis, while also building up an inventory from surplus stock. When
this surplus inventory becomes large enough to meet customer demands
for a reasonable period of time, production of the item can stop until all
excess stock has been used up. On the other hand, if the production rate
falls below customer demand, there will be no surplus goods, and some
customer orders may not be fully met.
Production Order Quantity Model
The production order quantity (PROQ) model differs only from the EOQ
model in that replenishment is not instantaneous, otherwise the same
conditions hold, i.e.,
 A single item is considered.
 All costs are known exactly and do not vary.
 No shortages (stock outs) are allowed.
Production Order Quantity Model
 The basic PROQ equation, which is found by equating the
setup (ordering) cost to the holding cost and solving for Q0, is

where:
Q0 = the optimal order quantity
S = setup (ordering) cost
P = annual production rate
D = annual demand for the item
H = holding cost per unit per year
 If C = unit cost, then the PROQ total cost equation can be
written as
Production Order Quantity Model
Let
d = daily demand rate, p = daily production rate, and
t = number of days for a production run

length of the production run t must be:

an optimal cycle time, T0, can also be found, i.e., T0 = Q0/D.

Excel Sheet for PROQ model
Inventory Model with Planned Shortages
 The basic EOQ model does not allow any deliberate shortages. Many
shortages or stock outs can be handled by back-ordering, i.e., meeting
outstanding orders by shipping a (late) order after a customer has placed
the order. Such an approach makes sense where items are expensive
and/or bulky, e.g., cars. The size of the back-order depends largely on the
ratio between holding cost, H, and shortage cost, B. If H is equal to B, then
the back-order size equals the maximum stock level, M. If H is larger (or
smaller) than B, then the size of the back-order also becomes proportionally
larger (or smaller). The EOQ model with shortages is illustrated in Figure.
Inventory Model with Planned Shortages
 If back-orders do not incur too high a penalty, it is worthwhile
modifying the EOQ model by adding a back-order factor to the
total variable cost as shown in the equation below:

where:
Q0 = the optimal order quantity, S = ordering cost for each order
B = shortage cost per unit per year, D = annual demand for the item
H = holding cost per unit per year, C = Unit cost
 The maximum stock level MO, (or shortage level), is calculated from
the formula
Inventory Model with Planned Shortages
 and the back-order size (Maximum inventory level) is then
Q0 – MO.
 The total annual cost (TC) for the inventory model with backorders:
Total cost = ordering cost + shortage cost + holding cost + purchase cost

Several additional parameters of the EOQ model with shortages:

 Number of orders:

 The time between orders or cycle time t =t1 + t2:

Inventory Model with Planned Shortages
The time during which inventory is on hand (time during which demand
is met), t1:

the time during which there is a shortage (time during which demand is
back-ordered), t2:

the reorder point (r) with backorders is:

r = d LT - MO
where
LT = Lead time
d= daily demand
Excel Sheet For Inventory Model with Planned Shortages
Use C++ Software:
In Lecture
 END
Lecture
You can win, if you want