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Inventory Management: Tanay Agrawal Sripal Jain Sudeepta Borah Mayank Baheti

Inventory management involves determining order quantities and reorder points to minimize costs while maintaining adequate stock levels to meet demand. Economic order quantity (EOQ) models balance ordering and carrying costs to find the optimal order size. Reorder points set the inventory level that triggers a new order and include safety stock to account for demand variability. Amazon initially stocked only popular items but later outsourced inventory management to distributors to reduce costs and increase profit margins while still providing fast delivery to customers.

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61 views32 pages

Inventory Management: Tanay Agrawal Sripal Jain Sudeepta Borah Mayank Baheti

Inventory management involves determining order quantities and reorder points to minimize costs while maintaining adequate stock levels to meet demand. Economic order quantity (EOQ) models balance ordering and carrying costs to find the optimal order size. Reorder points set the inventory level that triggers a new order and include safety stock to account for demand variability. Amazon initially stocked only popular items but later outsourced inventory management to distributors to reduce costs and increase profit margins while still providing fast delivery to customers.

Uploaded by

rnaganirmita
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Inventory Management

TANAY AGRAWAL SRIPAL JAIN SUDEEPTA BORAH MAYANK BAHETI

Outline
Elements of Inventory Management
Inventory Control Systems Economic Order Quantity Models Quantity Discounts Reorder Point

Order Quantity for a Periodic Inventory System


Case study

What is inventory?
Stock of items kept to meet future demand

Purpose of inventory management


how many units to order when to order

Types of Inventories
Raw materials
Purchased parts and supplies Work-in-process (partially completed) products (WIP) Items being transported Tools and equipment

Inventory and Supply Chain Management


Bullwhip effect
demand information is distorted as it moves away from the end-use customer higher safety stock inventories are stored to compensate

Seasonal or cyclical demand

Inventory provides independence from vendors


Take advantage of price discounts Inventory provides independence between stages and avoids work stop-pages

Two Forms of Demand

Dependent
Demand for items used to produce final products Tires stored at a Goodyear plant are an example of a dependent demand item

Independent
Demand for items used by external customers Cars, appliances, computers, and houses are examples of independent demand inventory

Inventory and Quality Management


Customers usually perceive quality service as availability of goods they want when they want them

Inventory must be sufficient to provide highquality customer service in TQM

Inventory Costs
Carrying cost
cost of holding an item in inventory Ordering cost cost of replenishing inventory Shortage cost temporary or permanent loss of sales when demand cannot be met

Inventory Control Systems


Continuous constant amount system ordered when (fixedinventory declines to orderpredetermined level quantity) Periodic system (fixedtimeperiod)

order placed for variable amount after fixed passage of time

Economic Order Quantity (EOQ) Models

EOQ

optimal order quantity that will minimize total inventory costs

Basic EOQ model Production quantity model

Assumptions of Basic EOQ Model

Inventory Order Cycle


Order quantity, Q Inventory Level

Demand rate

Reorder point, R

Lead time Order Order placed receipt

Lead time Order Order placed receipt

Time

EOQ Cost Model


Co - cost of placing order Cc - annual per-unit carrying cost D - annual demand Q - order quantity CoD Q CcQ 2 CcQ 2

Annual ordering cost =


Annual carrying cost = Total cost = CoD + Q

EOQ Cost Model


Deriving Qopt Proving equality of costs at optimal point CoD CcQ = Q 2 Q2 2C o D = Cc 2C o D Cc

Co D CcQ TC = + Q 2
CoD Cc TC = + Q2 2 Q C0D Cc 0= + Q2 2 Qopt = 2C o D Cc

Qopt =

EOQ Cost Model (cont.)


Annual cost ($) Slope = 0 Minimum total cost CcQ Carrying Cost = 2

Total Cost

CoD Ordering Cost = Q Optimal order Qopt Order Quantity, Q

Production Quantity Model


An inventory system in which an order is received gradually, as inventory is simultaneously being depleted

AKA non-instantaneous receipt model

Assumption Q is received all at once is relaxed p - daily rate at which an order is received over time, a.k.a. production rate d - daily rate at which inventory is demanded

Production Quantity Model (cont.)


Inventory level Maximum inventory level Average inventory level

Q(1-d/p)

Q (1-d/p) 2

0 Order receipt period Begin End order order receipt receipt Time

Production Quantity Model (cont.)


p = production rate
Maximum inventory level = Q - Q d p

d = demand rate

=Q1- d p
Q d Average inventory level = 12 p CoD CcQ d TC = Q + 2 1 - p

2CoD Qopt = d Cc 1 p

Quantity Discounts

Price per unit decreases as order quantity increases

CoD CcQ TC = + + PD Q 2

P = per unit price of the item where D = annual demand

Quantity Discount Model (cont.)


ORDER SIZE 0 - 99 100 199 200+ PRICE $10 8 (d1) 6 (d2)

TC = ($10 ) TC (d1 = $8 ) TC (d2 = $6 )

Inventory cost ($)

Carrying cost

Ordering cost

Q(d1 ) = 100 Qopt

Q(d2 ) = 200

Reorder Point
Level of inventory at which a new order is placed

R = dL

where

d = demand rate per period L = lead time

Variable Demand with a Reorder Point


Q Inventory level

Reorder point, R

0 LT Time LT

Reorder Point with a Safety Stock

Inventory level

Q
Reorder point, R

Safety Stock

0 LT Time LT

Reorder Point With Variable Demand


R = dL + zd L
where d = average daily demand L = lead time d = the standard deviation of daily demand z = number of standard deviations corresponding to the service level probability zd L = safety stock

Reorder Point for a Service Level

Probability of meeting demand during lead time = service level

Probability of a stockout

Safety stock zd L dL Demand

Reorder Point for Variable Demand


The carpet store wants a reorder point with a 95% service level and a 5% stockout probability
d = 30 yards per day L = 10 days d = 5 yards per day For a 95% service level, z = 1.65 R = dL + z d L = 30(10) + (1.65)(5)( 10) Safety stock = z d L = (1.65)(5)( 10)

= 326.1 yards

= 26.1 yards

Order Quantity for a Periodic Inventory System

Q = d(tb + L) + zd where d tb L d zd

tb + L - I

= average demand rate = the fixed time between orders = lead time = standard deviation of demand

tb + L = safety stock I = inventory level

CASE STUDY: AMAZON TODAY


Initially started as online book store, later added considerable items to consolidate its position On an average, added a new product once in every six week (from year 1999).

One of the first shopping site launched in year 1995

Inventory Management at AMAZON


Established 10 warehouse in U.S.A by making its bonds worth $2 billion public

Company was negative on spending time in opening stores and warehouse

Later started maintaining its own warehouse

Each ware house establishment cost was estimated to be $50 million

Innovative Inventory Management


Stocked only popular items and request less popular item to dealer

In early 2001, Amazon decided to outsource its inventory management.

The step was in order to increase the profit margin.

Distributer shipped the item ordered to the company.

Received goods are packed and shipped to the corresponding customer.

Thus Amazon started acting as trans shipment company.

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