Scribd Logo
Upload

Welcome to Scribd!

  • 33 views

    Notes: - Quiz This Friday - Covers 13 March Through Today

    Uploaded by

    Prabhamohanraj Mohanraj
    The document discusses inventory management and the economic order quantity (EOQ) model. It provides information on different inventory costs like ordering costs, holding costs, and the EOQ formula. It also discusses how to apply the EOQ model to multi-echelon inventory systems and the advantages of centralized inventory management. Simulation and EOQ are compared as methods for evaluating inventory policies.

    Copyright:

    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd

    Notes: - Quiz This Friday - Covers 13 March Through Today

    Uploaded by

    Prabhamohanraj Mohanraj
    33 views33 pages
    The document discusses inventory management and the economic order quantity (EOQ) model. It provides information on different inventory costs like ordering costs, holding costs, and the EOQ formula. It also discusses how to apply the EOQ model to multi-echelon inventory systems and the advantages of centralized inventory management. Simulation and EOQ are compared as methods for evaluating inventory policies.

    Original Description:

    Ppt

    Original Title

    Lecture 21

    Copyright

    © © All Rights Reserved

    Available Formats

    PPT, PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    The document discusses inventory management and the economic order quantity (EOQ) model. It provides information on different inventory costs like ordering costs, holding costs, and the EOQ formula. It also discusses how to apply the EOQ model to multi-echelon inventory systems and the advantages of centralized inventory management. Simulation and EOQ are compared as methods for evaluating inventory policies.

    Copyright:

    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    33 views33 pages

    Notes: - Quiz This Friday - Covers 13 March Through Today

    Uploaded by

    Prabhamohanraj Mohanraj
    The document discusses inventory management and the economic order quantity (EOQ) model. It provides information on different inventory costs like ordering costs, holding costs, and the EOQ formula. It also discusses how to apply the EOQ model to multi-echelon inventory systems and the advantages of centralized inventory management. Simulation and EOQ are compared as methods for evaluating inventory policies.

    Copyright:

    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    of 33

    Notes

    Quiz This Friday


    Covers 13 March through today
    MGTSC 352
    Lecture 21:
    Inventory Management
    A&E Noise example
    Methods for finding good inventory policies:
    1) simulation
    2) EOQ + LTD models
    Using EOQ for the Distribution Game:
    Multi-Echelon Systems
    Why Keep Inventory?
    1. Seasonality (anticipated variation)
    2. Provide flexibility (unanticipated
    variation) a.k.a.:
    3. Economies of scale
    4. Price speculation (not an ops reason)
    5. Something to work on
    6. NDR,JP
    Inventory By Where it IS
    Raw Materials
    Finished Goods
    Work in Process
    Or, with apologies to PS, One mans
    ceiling is another mans floor.
    Inventory

    Approximation 1: constant demand


    Therefore: We let inventory drop to
    zero just before an order arrives

    Time
    Acquisition Costs (pg. 142)
    No matter what the inventory policy,

    acquisition costs = Demand X Cost

    They dont change,


    So they dont go in the model

    (Unless you get quantity discounts, then it matters.)


    Order Costs
    Number of orders per year
    (3695 VCRs / year)/(80 VCRs / order)
    = 46.2 orders / year
    Total order cost per year
    (46.2 orders / year)($30 / order)
    = $1385.63 / year
    Total Order Costs = S * D/Q
    Holding Costs (pg. 143)
    Minimum inventory 0 for now
    Later = Safety Stock
    Maximum inventory = Q (+SS)
    Average inventory
    Q/2 = (80)/2 = 40 VCRs
    Total holding cost per year
    (40 VCR-years)($37.5 / VCR / year) = $1500 / year
    Total Holding Costs = H*Q/2
    pg. 144
    EOQ = Economic Order Quantity Model

    Given demand is constant


    Find the Q that minimizes total cost
    Acquisition costs dont
    depend on Q
    Total cost = acquisition cost + order cost +
    carrying cost + shortage cost No shortages, by
    assumption

    Total relevant cost = order cost + carrying cost


    pg. 147
    EOQ Derivation
    S = order cost ($/order) Q = order quantity
    H = carrying cost ($/item/year) N = number of orders per year
    D = demand (units/year) Iavg = average inventory

    Relevant cost = order cost + carrying cost


    RC = SN + H Iavg
    RC(Q) = SD/Q + HQ/2

    Note: you can change


    year to day, week, or any
    other time unit, as long as
    you are consistent
    Common mistake:
    inconsistent time units
    To Excel
    pg. 147
    EOQ Formula

    Relevant cost = ordering cost + carrying cost


    RC = SN + H Iavg
    RC(Q) = SD/Q + HQ/2
    The magic part (optional)
    pg. 147
    Using EOQ for A&E Noise YNOS XD

    D = 10.12 VCRs/day,
    S = $30/order,
    H = $0.10/VCR/day
    Q* = SQRT(210.1230/0.10) = 77.9
    round to Q* = 78

    N* = 10.12/78 = 0.13 orders/day = 47.4 orders/year


    Order every 365/47.4 = 8 days

    Relevant cost:
    RC(Q*) = S (D/Q*) + H (Q*/2)
    = 30 (10.12/78) + 0.10 (78/2)
    = 3.90 + 3.90
    = $7.80 / day = $2,847 / year
    Common mistake:
    using inconsistent time units

    D = 10.12 VCRs/day, S = $30/order, H =


    $37.5/VCR/year
    Q* = SQRT(210.1230/37.5) = 4
    Off by (77.9 4)/77.9 = 95%
    Will not be worth a lot of part marks
    Pg. 149

    More on EOQ: Economies of Scale


    The Capital Health Region* operates four hospitals.
    Presently each hospital orders its own supplies and
    manages its inventory. A common item used is a sterile
    intravenous (IV) kit, with a weekly demand of 600 per
    week at each hospital. Each IV kit costs $5 and incurs a
    holding cost of 30% per year. Each order incurs a fixed
    cost of $150 regardless of order size. The supplier takes
    one week to deliver an order. Currently, each hospital
    orders 6,000 kits at a time.
    Question 1: Could costs be decreased by ordering more
    often?
    Question 2: Would it make sense to centralize inventory
    management for the four hospitals?
    * Fictional data
    Analysis for one Hospital
    D = 600 / week = (600 / week) (52 weeks/year)
    = 31,200 / year
    S = $150 / order
    H = 0.3 5 = $1.50 / kit / year
    Q = SQRT(2 D S / H) = 2,498 2,500
    Costs:
    Q = 6,000:
    S D / Q + H Q / 2 = $780 + $4,500 = $5,280
    Q = 2,500:
    S D / Q + H Q / 2 = $1,872 + $1,875 = $3,747
    29% savings
    Analysis for one Hospital
    D = 600 / week = (600 / week) (52 weeks/year)
    = 31,200 / year
    S = $150 / order
    H = 0.3 5 = $1.50 / kit / year
    Q = SQRT(2 D S / H) = 2,498 2,500
    Close your course pack
    Active Learning: How do we change the
    analysis if inventory management were
    centralized for the four hospitals?
    Analysis for four hospitals
    managed together
    D = 4 31,200 / year = 124,800 / year
    S = $150 / order
    H = $1.50 / kit / year
    Q = SQRT(2 124,800 150 / 1.5) = 4,996 5,000
    Costs:
    Each hospital operated independently:
    4 $3,747 = $14,988 / year
    All four together:
    S D / Q + H Q / 2 = $3,744 + $3,750 = $7,494 / year
    50% savings
    Quadrupling demand doubles the optimal order
    quantity and doubles the total relevant cost
    Four hospitals managed together
    Costs:
    Each hospital operated independently:
    4 $3,747 = $14,988 / year
    All four together:
    S D / Q + H Q / 2 = $3,744 + $3,750 = $7,494 / year
    50% savings
    Quadrupling demand doubles the optimal order
    quantity and doubles the total relevant cost
    Determining ROP with EOQ model

    Lead time = 5 days


    Demand during lead time = (5 days) (10.12 VCRs / day) 51 VCRs
    Set ROP = 51 VCRs

    Inventory

    Problem: this
    calculation
    assumes constant ROP
    demand. May lead
    to shortages too
    frequently
    demand during lead time Time
    lead time
    Pg. 149

    What happens to Holding Cost


    when we Increase ROP?
    EOQ: constant demand, zero safety stock
    ROP = avg. demand during lead time
    Iavg = (min + max)/2 = (0+Q)/2 = Q/2
    Holding cost = H Q / 2
    If we add safety stock = SS, then:
    ROP = avg. demand during lead time + SS
    Iavg = Q/2 + min = SS + Q/2
    Holding cost = H (SS + Q / 2)
    Pg. 152

    Inventory
    How Shortages Happen

    Active learning:
    How could we
    have avoided the
    shortage?

    ROP
    Demand Leadtime
    during
    leadtime Demand that was not met

    Time
    Inventory
    The demand during the lead
    time is uncertain. Here are 4
    possibilities.

    ROP
    Well see how to pick
    ROP so as to provide
    a specified fill rate
    to Excel

    Time
    LTD Recap
    LTD worksheet in A&E Noise workbook
    Purpose: vary ROP (and Q, if desired) and
    see what happens to the fill rate
    LTD-exotic version: can vary the lead
    time
    Useful for comparing suppliers that provide
    different lead times
    pg. 151

    Simulation versus EOQ


    Dimension Simulation EOQ + LTD
    Ease of evaluating a Need to build model Simple formula for RC
    policy time consuming back of an envelope
    Finding the optimum Trial and error / data Plug into formula for
    table Q*
    Random demand Taken into account Ignored in EOQ
    fluctuations
    Seasonal demand Can be taken into Ignored
    fluctuations account
    Shortages Taken into account Ignored in EOQ
    Likely errors Errors in formulas Inconsistent units
    (common mistakes)
    Pg. 158

    Back to the Distribution Game: Can


    we use EOQ here?

    A multi-echelon system Retailer

    Supplier Warehouse Retailer

    Retailer
    Using EOQ for a two-echelon
    system
    Upper echelon:
    Use warehouse holding cost rate
    Ignore higher cost of holding inventory at retailers
    Lead time
    = 15 (supplier warehouse) + 5 (warehouse retailer)
    = 20 days
    Lower echelon:
    Use incremental retailer holding cost rate
    Lead time = 5 days
    Coordination: warehouse order size should be a
    multiple of the sum of the retailer order sizes
    Data
    Assume open 250 days / year

    Supplier to warehouse transit time: 15 days


    Warehouse to retailer transit time: 5 days
    Demand per retailer: 500 per year
    Selling price: $100/unit
    Purchase price: $70/unit
    Supplier to warehouse order cost: $200
    Warehouse to retailer order cost: $2.75
    Warehouse holding cost: $10/unit/year
    Retailer holding cost: $12/unit/year To Excel
    Upper echelon:
    Use warehouse holding cost rate
    (Ignore higher cost of holding inventory at retailers)

    Lead time = 15 (supplier warehouse) + 5 (warehouse


    retailer)
    = 20 days
    Upper echelon
    Retailer

    Supplier Warehouse Retailer

    Retailer
    Lower echelon:
    Use incremental retailer holding cost rate
    = retailer holding cost rate warehouse holding cost rate

    Lead time = 5 days

    Lower echelon

    Retailer

    Supplier Warehouse Retailer

    Retailer
    Coordination
    Suppose each retailer uses QLower = 20. If
    all retailers order at once, the total is 60.
    Active learning: you are the warehouse
    manager. Knowing the retailer order
    sizes, how would you pick the warehouse
    order size?
    Using EOQ for a 2-echelon system:
    the details
    Upper echelon:
    DUpper = 3 DRetailer
    SUpper = SWarehouse
    HUpper = HWarehouse
    LTUpper = LTSupplier Warehouse + LTWarehouse Retailer
    ROPUpper = DUpper LTUpper
    Lower echelon
    DLower = DRetailer
    SLower = SRetailer
    HLower = HRetailer - HWarehouse
    LTLower = LTWarehouse Retailer
    ROPLower = DLower LTLower
    Coordination: QUpper = n SUM(QLower)
    Choose n (an integer) and QLower to minimize total cost for
    the whole system
    Data
    Assume open 250 days / year

    Supplier to warehouse transit time: 15 days


    Warehouse to retailer transit time: 5 days
    Demand per retailer: 500 per year
    Selling price: $100/unit
    Purchase price: $70/unit
    Supplier to warehouse order cost: $200
    Warehouse to retailer order cost: $2.75
    Warehouse holding cost: $10/unit/year
    Retailer holding cost: $12/unit/year To Excel

    You might also like