INVENTORY Ch.

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Operations 2

MANAGEMENT [email protected]
 WHAT IS
INVENTORY?
A stock or store of goods

Types of inventory ?
Raw materials Work in process Finished goods

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OBJECTIVES OF INVENTORY
CONTROL
Inventory management has two main concerns

1) Level of customer service

Having the right goods available in the right quantity in the right place at
the right time

2) Costs of ordering and carrying inventories

The overall objective of inventory management is to achieve satisfactory levels of
customer service while keeping inventory costs within reasonable bounds

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INVENTORY
COSTS
1. Purchase cost
 The amount paid to buy the inventory

2. Holding (carrying) costs

 Cost to carry an item in inventory for a length of time, usually a year

3. Ordering costs
 Costs of ordering and receiving inventory

4. Setup costs
 The costs involved in preparing equipment for a job

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INVENTORY MANAGEMENT

EOQ EPQ Quantity discount

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BASIC EOQ MODEL (ECONOMIC ORDER
QUANTITY)
The basic EOQ model is used to find a fixed order quantity that will minimize
total annual inventory costs.
Total Cost  Annual Holding Cost  Annual Ordering Cost =10
Average Q No of orders D
inventory H  S
2 Q =5

where
Q  Order quantity in units
H  Holding (carrying) cost per unit, usually per year
D  Demand, usually in units per year
S  Ordering cost per order

2 DS 2(annual demand)(or der cost)

QO  
H annual per unit holding cost 6
 The Total-Cost Curve is U-Shaped
Annual Cost Q D
TC  H  S
2 Q

Holding Costs

Ordering Costs

Order Quantity (Q)

QO (optimal order quantity)
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PROBLEM
1
A large law firm uses an average of 40 boxes of copier paper a day. The firm operates 260
days a year. Storage and handling costs for the paper are $30 a year per box, and it costs
approximately $60 to order and receive a shipment of paper.
H= 30$ S= 60$ D=40*260= 10,400$
a. What order size would minimize the sum of annual ordering and carrying costs?

EOQ= EOQ= = 203.96=204 boxes

b. Compute the total annual cost using your order size from part a

TC= TC=

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 Problem 1 cont’d
H= 30$ S= 60$ D=40*260= 10,400$
c. Except for rounding, are annual ordering and carrying costs always equal at the EOQ?

YES

d. The office manager is currently using an order size of 200 boxes. The partners of the firm expect the
office to be managed “in a cost-efficient manner.” Would you recommend that the office manager use the
optimal order size instead of 200 boxes? Justify your answer.

TC= TC=

6,120 – 6,118.82 (only $1.18 higher than with EOQ)

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QUANTITY DISCOUNT MODEL
Price reduction for larger orders offered to customers to induce them to buy in large
quantities
Total Cost  Carrying Cost  Ordering Cost  Purchasing Cost
Q D
 H  S  PD
2 Q
where
P  Unit price

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PROBLEM 2
A jewelry firm buys semiprecious stones to make bracelets and rings. The supplier quotes a price of
$8 per stone for quantities of 600 stones or more, $9 per stone for orders of 400 to 599 stones, and
$10 per stone for lesser quantities. The jewelry firm operates 200 days per year. Usage rate is 25
stones per day, and ordering costs are $48.
D=25*200=5000 S=48

1 399 $10 a. If carrying costs are $2 per year for each stone, find the order quantity that will
minimize total annual cost.
400 599 $9
EOQ= EOQ= = 489.9=490 boxes
600 $8

TC=

TC490=
TC600=
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Problem 2 Cont’d
D=25*200=5000 S=48 b. If annual carrying costs are 30 percent of unit cost, what is the optimal
order size?
1 399 $10 0.3*10=3 EOQ= = 447 not feasible
EOQ=
400 599 $9 0.3*9=2.7

600 $8 EOQ= = 422 feasible

0.3*8=2.4

TC=

TC422=

TC600=

ROP  d  LT
where c. If lead time is six working days, at what point should the
d  Demand rate (units per period, per day, per week) company reorder?
LT  Lead time (in same time units as d )
ROP=25*6=150

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THANK YOU !