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Inventory Models

The document discusses inventory models used in manufacturing and retail organizations. It describes different types of inventories like raw materials, work in progress, spare parts, and finished goods. It also discusses different inventory systems like fixed order quantity, periodic review, and reorder point systems. The document focuses on the classical economic order quantity (EOQ) model, describing the assumptions of the model and how it is used to determine optimal order quantities to minimize total inventory costs.

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PRACHI RAUT
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20 views13 pages

Inventory Models

The document discusses inventory models used in manufacturing and retail organizations. It describes different types of inventories like raw materials, work in progress, spare parts, and finished goods. It also discusses different inventory systems like fixed order quantity, periodic review, and reorder point systems. The document focuses on the classical economic order quantity (EOQ) model, describing the assumptions of the model and how it is used to determine optimal order quantities to minimize total inventory costs.

Uploaded by

PRACHI RAUT
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Inventory Models

Inventory
• Manufacturing and retailing organisations
• Represent…
– Raw material
– Work in progress
– Spare parts/consumables
– Finished goods
Types of inventories
• Movement inventories
– Transit or pipeline inventories
• Buffer inventories
– Uncertainties of demand/supply
– Lead time
– Safety stock
Types of inventories
• Anticipation inventories
• Decoupling inventories
– Disengage activities of various machines/workers
• Cycle inventories
Inventory Decisions
• How much to order ?
• When should be the order placed?
• How much safety stock is needed?
Inventory Costs
• Purchase cost
– Also known as Nominal cost
– Purchase/Production
• Ordering cost
– Also known as Procurement cost
– Purchase order + transportation+ inspection…..
– Set up cost
– Independent of order size
– Per unit ordering cost reduces as order size increases
Inventory costs contd.
• Carrying cost
– Also known as Holding cost / Storage cost
– Proportional to the amount of inventory
• Stockout cost
– Cost associated with not serving the customers
– Shortages
Inventory Management Systems
• Fixed order quantity system
– Re-order point system
– Q-system
– Size of order fixed
• Periodic review system
– Fixed intervals
– Size of order not fixed
• Ss System
Fixed-Order Quantity System
• Classical EOQ model
• EOQ with price breaks
• EOQ with shortages
• Probabilistic EOQ model
The classical EOQ Model
• Economic Order Quantity (EOQ) model
• Wilson formulation
• Cost model - > Inventory model
The classical EOQ Model contd.
• Demand is certain, continuous and constant
• Lead time is known
• Per unit holding cost, ordering cost are
constant and independent of the quantity
ordered
• Purchase price is constant
• The inventory is replenished immediately, as
stock level reaches zero
Inventory Profile : EOQ model
• Q = Maximum stock level
• d = Consumption in units / day
• R = Reorder point
• T = Inventory cycle
EOQ Cost Model
T(Q) = O (Q) + H(Q)
Where ….
Q = The ordering quantity
T(Q) = Total (variable) annual inventory cost
O(Q) = Total annual ordering cost
H(Q) = Total annual holding cost

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