Scribd
Upload
34 views19 pages

MSC 705 Lecture 10

This document discusses inventory management concepts including determining cost parameters, economic order quantity (EOQ), quantity discounts, reorder point (ROP), and ABC classification. It provides examples of calculating EOQ with different unit prices, determining the best order quantity when given multiple price options based on quantity. It also demonstrates calculating ROP when demand and lead time are constant or variable, and provides an example of ABC classification where 80% of inventory value comes from 20% of items (Class A), 15% from 30% of items (Class B), and 5% from 50% of items (Class C).

Uploaded by

nusratpte07
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
34 views19 pages

MSC 705 Lecture 10

This document discusses inventory management concepts including determining cost parameters, economic order quantity (EOQ), quantity discounts, reorder point (ROP), and ABC classification. It provides examples of calculating EOQ with different unit prices, determining the best order quantity when given multiple price options based on quantity. It also demonstrates calculating ROP when demand and lead time are constant or variable, and provides an example of ABC classification where 80% of inventory value comes from 20% of items (Class A), 15% from 30% of items (Class B), and 5% from 50% of items (Class C).

Uploaded by

nusratpte07
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
You are on page 1/ 19

LECTURE 10

 CHAPTER 9 : INVENTORY MANAGEMENT


Determination of Cost Parameters
 Holding cost per unit Vs. Holding Rate
 H = Holding cost of one unit of an item in
inventory per year
 h = holding rate of one dollar’s worth of
inventory , usually expressed as a
percentage, e.g. 35%
 H = holding rate ( h) * cost of one unit of
the item ( c )
 EOQ= Q*= √2* D*S/H
 EOQ= Q*= √2* D*S/(h*c)
EOQ Quantity Discount
 https://youtu.be/smMhdlojqiY

 Step 1: Calculate the EOQ for the lowest cost


option. Check if this EOQ lies in the range
corresponding to its per-unit price. If yes,
then this EOQ is your best order quantity.
Otherwise, go to step 2.

 Step 2: Calculate EOQ for ALL cost options.


Create a table finding the total cost for ALL
cost options [considering EOQ as Q if EOQ lies
in the range corresponding to its per-unit
price, otherwise, choose the lowest in the
range as your Q].
How Much to Order in Case of
Quantity Discounts

 Usually vendors provide discounts if


purchases are made in large quantities of
a certain item or when a group of items
are combined. Furthermore, economics of
scale also exist in transportation costs
when large volumes are shipped.
 Example:
 D = 1600 units/ year
 S = $ 10
 h = 20%
 Suppose the vendor gives the following
discounts:

 Quantity purchased prices


1 – 799 units $ 1.00 per
unit
800 – 1599 units $ 0.98
1600 & more $ 0.97
EOQ is 400 units at $ 1.00
EOQ is 404 units at $ 0.98
EOQ is 406 units at $ 0.97
Price Order Annual Purchasing Annual Ordering Annual Holding Cost Annual Total Cost
c Quantity Cost Cost (Q/2 *(h*c)
Q D*c (D/Q)*S

.97 1600 1600*.97 (1600/1600) (1600/2)*.2*.97 $1717.2


=1552 *10=$10 =$155.2

.98 800 1600*.98 (1600/800)* (800/2)*.2*.98 $1666.4


=1568 10 =$78.4
=$20
$1 400 1600*1 (1600/400)* (400/2)*.2*1 $1680
=1600 10 =$40
=$40
 GROUP ASSIGNMENT:
 D = 750 units/ year
 S = $ 160
 h = 30%
 Suppose the vendor gives the following
discounts:

Quantity purchased prices


< 450 units $ 7.00 per unit
450 & more Units $ 5.00 per
unit
When to Order??

Lead Time Demand


Constant Constant
Constant Varies
Varies Constant
Varies Varies
When to Order??
If Demand and Lead Time are Constant:

ROP = Demand During Lead Time

ROP = ( Demand per period) * (# of periods in


LT)
When Demand & Lead Time are Constant
 ROP = Demand During Lead Time
 ROP = ( Demand per period) * ( # of
periods in LT)
 D = 1200 units (100 units per month)
 Q = 300 units Lead Time = 1 month

 When should we place the order?


 ROP = 100*1 = 100
 When inventory comes down to 100 unit, place
another order for 300 units.
Demand Varies and Lead Time is
Constant
Demand Varies and Lead Time is
Constant
ROP= Average Demand during Lead Time
+
Safety Stock
=(d*LT) + Z*Standard Deviation of
Demand During Lead Time

[Standard Deviation of Demand During


Lead Time = Standard Deviation per
Period* √ LT]
Practice Problem
 Demand is Normally Distributed with:
 Mean Demand per week = 25 units
Standard Deviation of Demand per Week =10

Desired Customer Service Level = 99.85%


Lead Time = 2 Weeks
1. When should we place the order?
ROP= =(d*LT) + Z*Standard Deviation of Demand
During Lead Time
= (25*2) + 2.96*10* √ 2 = 92
When inventory comes down to 92 units, place another
order to satisfy 99.85% customers
Practice Problem
 Mean Demand During Lead Time = 50 units
 Variance of Demand During Lead Time = 225
units
1.What ROP would Provide a Customer Service Level of
84%
ROP= 50 + 1*15 = 65
2.What Safety Stock is necessary to have 2.5% stock-
out
SS = 1.96*15 = 30 units
3.An ROP of 95 Units provides what level of customer
service?
95 = 50 + Z*15 => Z = 3
Customer Service Level of 99.87%
ABC CLASSIFICATION
% of Inventory Value % of Items Class
80% 20% A

15% 30% B

5% 50% C
Practice ABC Classification Problem
from Book

 https://youtu.be/2h7nOY2ICHA
Thanks Much!!

You might also like