Presentation on theme: "INVENTORY Inventory is the stock of any item or resource used in an organization and can include: raw materials, finished products, component parts, supplies-in-transit."— Presentation transcript:

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2 INVENTORY Inventory is the stock of any item or resource used in an organization and can include: raw materials, finished products, component parts, supplies-in-transit and work-in-process. An inventory system is the set of policies and controls that monitor levels of inventory and determines what levels should be maintained, when stock should be replenished, and how large orders should be 3

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3 WHY INVENTORY 1. To maintain independence of operations2. To meet variation in product demand, production rate and lead time 3. To allow flexibility in production scheduling 4. To provide a safeguard for variation in raw material delivery time 5. To take advantage of economic purchase-order size 6. Disruptions 4

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4 POSITIVE ASPECTS Decouple operations Avoid disruptionsReduces no of ordering / set up Hedge against inflation Meet unexpected demands Quantity discounts

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5 NEGATIVE ASPECTS Quality of product service bundleHide operational problems High cost Obsolescence Damage during storage Cost of tracking New product / technology introduction

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6 STOCK POINTS

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7 Independent vs. Dependent DemandIndependent Demand (Demand for the final end-product or demand not related to other items) Finished product Dependent Demand (Derived demand items for component parts, subassemblies, raw materials, etc) E(1) Component parts 6

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8 Inventory Systems Single-Period Inventory ModelOne time purchasing decision (Example: vendor selling t-shirts at a football game) Seeks to balance the costs of inventory overstock and under stock Multi-Period Inventory Models Fixed-Order Quantity Models Event triggered (Example: running out of stock) Fixed-Time Period Models Time triggered (Example: Monthly sales call by sales representative) 7

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9 INVENTORY CONTROL SYSTEMWhen to order How much to order Buffer Stock Maximum Inventory How often to review stock

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10 COSTS Holding (or carrying) costsCosts for storage, handling, insurance, etc Setup (or production change) costs Costs for arranging specific equipment setups, etc Ordering costs Costs of someone placing an order, transportation etc Shortage costs 5

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11 SINGLE PERIOD

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12 Single-Period Inventory Model8

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13 Single Period Model ExampleOur college basketball team is playing in a tournament game this weekend. Based on our past experience we sell on average 2,400 shirts with a standard deviation of We make Rs100 on every shirt we sell at the game, but lose Rs50 on every shirt not sold.


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How many shirts should we make for the game? Cu = Rs100 and Co = Rs50; P ≤ 100 / ( ) = .667 Z.667 = .432 (use NORMSINV(.667)) therefore we need 2, (350) = 2,551 shirts

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14 UNCERTAIN DEMAND

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15 Fixed-Order Quantity Model AssumptionsDemand for the product is constant and uniform throughout the period Lead time (time from ordering to receipt) is constant Price per unit of product is constant Instantaneous replacement

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16 FIXED ORDER QUANTITY

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17 Fixed-Order Quantity Model AssumptionsInventory holding cost is based on average inventory Ordering or setup costs are constant All demands for the product will be satisfied (No back orders are allowed) 9

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18 Cost Minimization Total Cost Holding Costs Annual Cost of Items (DC)QOPT Annual Cost of Items (DC) Ordering Costs Order Quantity (Q) 11

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19 TOTAL COST + + Total Annual = Cost Annual Purchase Cost AnnualOrdering Cost Annual Holding Cost + + 12

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20 PRICE DISCOUNT

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21 Price-Break Example ProblemA company has a chance to reduce their costs by placing larger quantity orders using the price-break order quantity schedule below. What should their optimal order quantity be if this company purchases this single inventory item with an ordering cost of Rs4, a carrying cost rate of 2% of the inventory cost of the item, and an annual demand of 10,000 units? Order Quantity(units) Price/unit(Rs) 0 to 2, Rs1.20 2,500 to 3, 4,000 or more 14

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