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					Inventory
Management




     Chapter 10—Inventory Management
Learning Objectives
 Be Able To Apply Concepts Listed In
  Learning Goals
 Be Able To Use Formulas Listed In
  The Equation Summary of Chapter




           Chapter 14—Inventory Management   1
Inventory Costs
 Interest or
    Opportunity Costs
   Storage and
    Handling Costs
   Taxes, Insurance, and
    Shrinkage Costs
   Ordering and Setup Costs
   Transportation Costs
            Chapter 10—Inventory Management
Types of Inventory
Cycle Inventory
                                  Q+0
        Average cycle inventory =
                                   2




            Chapter 10—Inventory Management
Types of Inventory
Cycle Inventory
                                               Q
        Average cycle inventory =
                                               2

Safety Stock Inventory




             Chapter 10—Inventory Management
Types of Inventory
Cycle Inventory
                                               Q
        Average cycle inventory =
                                               2

Safety Stock Inventory
Anticipation Inventory




             Chapter 10—Inventory Management
Types of Inventory
Cycle Inventory
                                               Q
        Average cycle inventory =
                                               2

Safety Stock Inventory
Anticipation Inventory
Pipeline Inventory

        Pipeline inventory = DL = dL


             Chapter 10—Inventory Management
ABC Classification

 Start With Inventoried Items Ranked by
  Dollar Value in Inventory in Descending
  Order
 Plot Cumulative Dollar Value in Inventory
  Versus Cumulative Items in Inventory
 . . . more




             Chapter 14—Inventory Management   7
ABC Classification
   Typical Observations
       A Small Percentage of Items (Class A) Make up
        a Large Percentage of Inventory Value
       A Large Percentage of Items (Class C) Make up
        a Small Percentage of Inventory Value
   These Classifications Determine How
    Much Attention Should Be Given to
    Controlling Inventory of Different Items




                  Chapter 14—Inventory Management   8
ABC Analysis
                                 100 —

                                 90 —
    Percentage of dollar value
                                 80 —

                                 70 —

                                 60 —

                                 50 —

                                 40 —

                                 30 —

                                 20 —

                                 10 —

                                  0—
                                         10   20   30   40   50   60   70   80   90 100
                                                   Percentage of items
                                              Chapter 10—Inventory Management
ABC Analysis
                                                                       Class C
                                 100 —             Class B
                                 90 —
    Percentage of dollar value      Class A
                                 80 —

                                 70 —

                                 60 —

                                 50 —

                                 40 —

                                 30 —

                                 20 —

                                 10 —

                                  0—
                                         10   20   30   40   50   60   70   80   90 100
                                                   Percentage of items
                                              Chapter 10—Inventory Management
ABC Analysis
                                                                       Class C
                                 100 —             Class B
                                 90 —
    Percentage of dollar value      Class A
                                 80 —

                                 70 —

                                 60 —

                                 50 —

                                 40 —

                                 30 —

                                 20 —

                                 10 —

                                  0—
                                         10   20   30   40   50   60   70   80   90 100
                                                   Percentage of items
                                              Chapter 10—Inventory Management
How
Much?
 When!

   Chapter 10—Inventory Management
Economic
Order
Quantity



     Chapter 10—Inventory Management
Economic Order Quantity

Assumptions
1. Demand rate is constant
2. No constraints on lot size
3. Only relevant costs are holding and
   ordering/setup
4. Decisions for items are independent
   from other items
5. No uncertainty in lead time or
   supply
             Chapter 10—Inventory Management
Economic Order Quantity
 On-hand inventory (units)




                                           Time
                             Chapter 10—Inventory Management
Economic Order Quantity

                                    Receive
                                    order
 On-hand inventory (units)




                             Q




                                               Time
                                 Chapter 10—Inventory Management
Economic Order Quantity

                                    Receive
                                    order
 On-hand inventory (units)




                             Q




                                    1 cycle
                                               Time
                                 Chapter 10—Inventory Management
Economic Order Quantity

                                    Receive
                                    order
 On-hand inventory (units)




                             Q




                                    1 cycle
                                               Time
                                 Chapter 10—Inventory Management
Economic Order Quantity

                                    Receive         Inventory depletion
                                    order           (demand rate)
 On-hand inventory (units)




                             Q




                                    1 cycle
                                               Time
                                 Chapter 10—Inventory Management
Economic Order Quantity

                                    Receive         Inventory depletion
                                    order           (demand rate)
 On-hand inventory (units)




                             Q




                                    1 cycle
                                               Time
                                 Chapter 10—Inventory Management
Economic Order Quantity

                                    Receive         Inventory depletion
                                    order           (demand rate)
 On-hand inventory (units)




                             Q




                             Q                                     Average
                             —                                     cycle
                             2
                                                                   inventory




                                    1 cycle
                                               Time
                                 Chapter 10—Inventory Management
Economic Order Quantity
 Annual cost (dollars)




                                                   Holding cost (HC)




                            Lot Size (Q)
                         Chapter 10—Inventory Management
Economic Order Quantity
 Annual cost (dollars)




                                                   Holding cost (HC)

                                                   Ordering cost (OC)



                            Lot Size (Q)
                         Chapter 10—Inventory Management
Economic Order Quantity


                         Total cost = HC + OC
 Annual cost (dollars)




                                                      Holding cost (HC)

                                                      Ordering cost (OC)



                               Lot Size (Q)
                            Chapter 10—Inventory Management
     Economic Order Quantity
Current
   cost
                         3000 —
                                                 Q       D
 Annual cost (dollars)




                                  Total cost =     (H) +   (S)
                                                 2       Q

                         2000 —
                                                                                       Q
                                                                    Holding cost =       (H)
                                                                                       2

                         1000 —
                                                                                            D
                                                                     Ordering cost =          (S)
                                                                                            Q

                           0—       |    |        |     |      |       |         |     |
                                   50   100      150   200    250     300       350   400
                                                                                       Current
                                                  Lot Size (Q)
                                              Chapter 10—Inventory Management            Q
             Economic Order Quantity
Current
   cost
                         3000 —                              Bird feeder costs
                                               Q      D
 Annual cost (dollars)




                                                 = + Q (S)
                                  Total cost = D(H)(18 /week)(52 weeks) = 936 units
                                               2
                                                H = 0.25 ($60/unit) = $15
                         2000 —
                                                S = $45                   Q = EOQ
                                                                                Q
                                                                 Holding cost =
                                                                         Q         (H)
                                                EOQ =
                                                             2DS
                                                                    C=     (H) + 2 D (S)
                                                              H                 2           Q
                         1000 —
                                                                                            D
                                                                     Ordering cost =          (S)
                                                                                            Q

                           0—       |    |      |       |      |       |         |     |
                                   50   100    150     200    250     300       350   400
                                                                                       Current
                                                  Lot Size (Q)
                                              Chapter 10—Inventory Management            Q
     Economic Order Quantity
Current
   cost
                         3000 —                              Bird feeder costs
                                               Q      D
 Annual cost (dollars)




                                                 = + Q (S)
                                  Total cost = D(H)(18 /week)(52 weeks) = 936 units
                                               2
                                                H = 0.25 ($60/unit) = $15
                         2000 —
                                                S = $45                   Q = 75 units
                                                                                Q
                                                                 Holding cost =
                                                                         Q         (H)
                                                EOQ =
                                                             2DS
                                                                    C=     (H) + 2 D (S)
                                                              H                 2           Q
                         1000 —
                                                                                            D
                                                                     Ordering cost =          (S)
                                                                                            Q

                           0—       |    |      |       |      |       |         |     |
                                   50   100    150     200    250     300       350   400
                                                                                       Current
                                                  Lot Size (Q)
                                              Chapter 10—Inventory Management            Q
     Economic Order Quantity
Current
   cost
                         3000 —                              Bird feeder costs
                                               Q      D
 Annual cost (dollars)




                                                 = + Q (S)
                                  Total cost = D(H)(18 /week)(52 weeks) = 936 units
                                               2
                                                H = 0.25 ($60/unit) = $15
                         2000 —
                                                S = $45                   Q = 75 units
                                                                                Q
                                                                 Holding cost =
                                                                         Q         (H)
                                                EOQ =
                                                             2DS
                                                                    C=     (H) + 2 D (S)
                                                              H                 2           Q
                         1000 —
                                                        C = $562 + $562 = $1124
                                                                                            D
                                                                     Ordering cost =          (S)
                                                                                            Q

                           0—       |    |      |       |      |       |         |     |
                                   50   100    150     200    250     300       350   400
                                                                                       Current
                                                  Lot Size (Q)
                                              Chapter 10—Inventory Management            Q
     Economic Order Quantity
Current
   cost
                         3000 —                              Bird feeder costs
                                               Q      D
 Annual cost (dollars)




                                                 = + Q (S)
                                  Total cost = D(H)(18 /week)(52 weeks) = 936 units
                                               2
                                                H = 0.25 ($60/unit) = $15
                         2000 —
                                                S = $45                   Q = 75 units
                                                                                Q
                                                                 Holding cost =
                                                                         Q         (H)
                                                EOQ =
                                                             2DS
                                                                    C=     (H) + 2 D (S)
                                                              H                 2           Q
                         1000 —
                                                        C = $562 + $562 = $1124
                                                                                            D
                                                                     Ordering cost =          (S)
                                                                                            Q

                           0—       |    |      |       |      |       |         |     |
                                   50   100    150     200    250     300       350   400
                                                                                       Current
                                                  Lot Size (Q)
                                              Chapter 10—Inventory Management            Q
      Economic Order Quantity
Current
   cost
                         3000 —                                 Bird feeder costs
                                                 Q      D
 Annual cost (dollars)




                                                   = + Q (S)
                                    Total cost = D(H)(18 /week)(52 weeks) = 936 units
                                                 2
                                                   H = 0.25 ($60/unit) = $15
                         2000 —
                                                   S = $45                   Q = 75 units
                                                                                   Q
                                                                    Holding cost =
                                                                            Q         (H)
                                                   EOQ =
                                                                2DS
                                                                       C=     (H) + 2 D (S)
                                                                 H                 2           Q
                         1000 —
                                                           C = $562 + $562 = $1124
                                                                                               D
Lowest                                                                  Ordering cost =          (S)
                                                                                               Q
  cost
                           0—         |     |      |       |      |       |         |     |
                                     50    100    150     200    250     300       350   400
                                  Best Q                                                  Current
                                                     Lot Size (Q)
                                  (EOQ)          Chapter 10—Inventory Management            Q
     Economic Order Quantity
Current
   cost
                         3000 —                                 Bird feeder costs
                                                 Q      D
 Annual cost (dollars)




                                                   = + Q (S)
                                    Total cost = D(H)(18 /week)(52 weeks) = 936 units
                                                 2
                                                   H = 0.25 ($60/unit) = $15
                         2000 —
                                                   S = $45                   Q = 75 units

                                                                2DS                D       Q
                                                   EOQ =                   C=        (H) +   (S)
                                                                 H                 Q       2
                         1000 —
                                                           C = $562 + $562 = $1124
Lowest
  cost
                           0—         |     |      |       |      |       |         |     |
                                     50    100    150     200    250     300       350   400
                                  Best Q                                                  Current
                                                     Lot Size (Q)
                                  (EOQ)          Chapter 10—Inventory Management            Q
     Economic Order Quantity
Current
   cost
                         3000 —                            Birdfeeder costs
                                                          Time between orders
                                                 Q      D
 Annual cost (dollars)




                                                   = + Q (S)
                                    Total cost = D(H)(18 /week)(52 weeks) = 936 units
                                                 2
                                                   = 0.25 = EOQ= 75/936
                                                 HTBO ($60/unit) = $15 = 0.080 year
                                                       EOQ
                                                 S = $45        D        Q = 75 units
                         2000 —

                                                                2DS                D       Q
                                                   EOQ =                   C=        (H) +   (S)
                                                                 H                 Q       2
                         1000 —
                                                           C = $562 + $562 = $1124
Lowest
  cost
                           0—         |     |      |       |      |       |         |     |
                                     50    100    150     200    250     300       350   400
                                  Best Q                                                  Current
                                                     Lot Size (Q)
                                  (EOQ)          Chapter 10—Inventory Management            Q
      Economic Order Quantity
Current
   cost
                         3000 —                            Birdfeeder costs
                                                          Time between orders
                                                 Q      D
 Annual cost (dollars)




                                                   = + Q (S)
                                    Total cost = D(H)(18 /week)(52 weeks) = 936 units
                                                 2
                                                   = 0.25 = EOQ= 75/936
                                                 HTBO ($60/unit) = $15 = 0.080 year
                                                       EOQ
                                                 S = $45        D        Q = 75 units
                         2000 —

                                                     TBOEOQ = (75/936)(12) = 0.96 months

                                                     TBOEOQ = (75/936)(52) = 4.17 weeks
                         1000 —
                                                     TBOEOQ = (75/936)(365) = 29.25 days
Lowest
  cost
                           0—         |     |      |       |      |       |         |     |
                                     50    100    150     200    250     300       350   400
                                  Best Q                                                  Current
                                                     Lot Size (Q)
                                  (EOQ)          Chapter 10—Inventory Management            Q
      Economic Order Quantity
Current
   cost
                         3000 —
                                                   Q       D
 Annual cost (dollars)




                                    Total cost =     (H) +   (S)
                                                   2       Q

                         2000 —
                                                                                          Q
                                                                       Holding cost =       (H)
                                                                                          2

                         1000 —
                                                                                               D
Lowest                                                                  Ordering cost =          (S)
                                                                                               Q
  cost
                           0—         |     |       |      |      |       |         |     |
                                     50    100     150    200    250     300       350   400
                                  Best Q                                                  Current
                                                     Lot Size (Q)
                                  (EOQ)          Chapter 10—Inventory Management            Q
How
Much?
 When!

   Chapter 10—Inventory Management
              Continuous Review


                        Order
                        received
On-hand inventory




                                   Q


                         OH

                    R



                                                                         Time


                                       Chapter 10—Inventory Management
                    Continuous Review

                                        IP

                        Order
                        received
On-hand inventory




                                    Q


                         OH

                    R
                           Order
                          placed


                                    L
                              TBO
                                             Chapter 10—Inventory Management
              Continuous Review

                                        IP                     IP                   IP

                        Order                Order                  Order                Order
                        received             received               received             received
On-hand inventory




                                    Q                     Q                     Q


                         OH                   OH                     OH

                    R
                           Order                 Order                  Order
                          placed                placed                 placed


                                    L                      L                    L             Time
                              TBO                  TBO                    TBO
                                              Chapter 10—Inventory Management
                Uncertain Demand
On-hand inventory




                    R




                                                            Time


                          Chapter 10—Inventory Management
                Uncertain Demand
                                         IP
                                                            IP
                                          Order
                                                                                          Order
                        Order             received
                                                                                          received
                        received                                 Order
On-hand inventory




                                                                 received
                                                                                     Q
                                     Q                     Q
                                               OH

                    R
                            Order              Order                         Order
                           placed             placed                        placed




                                     L1                    L2                        L3      Time
                              TBO1                  TBO2                      TBO3
                                              Chapter 10—Inventory Management
Reorder Point / Safety Stock




         Average
         demand
           during
        lead time



              Chapter 10—Inventory Management
Reorder Point / Safety Stock


                                 Cycle-service level = 99%



                                          Probability of stockout
                                          (1.0 – 0.99 = 0.01)
           Average
           demand
             during
          lead time                      R

                                zL

             Chapter 10—Inventory Management
Reorder Point / Safety Stock
       Safety Stock/R
 dL = 250
 L = 22
                                    Cycle-service level = 99%
 SL = 99%
 z = 2.33


                                             Probability of stockout
                                             (1.0 – 0.99 = 0.015)
             Average
             demand
               during
            lead time                       R

                                   zL

                Chapter 10—Inventory Management
Reorder Point / Safety Stock
        Safety Stock/R
 Safety stock   = zL
                = 2.33(22) = 51.3
                                       Cycle-service level = 99%
                = 51 boxes



                                                Probability of stockout
                                                (1.0 – 0.99 = 0.01)
                 Average
                 demand
                   during
                lead time                      R

                                      zL

                   Chapter 10—Inventory Management
Reorder Point / Safety Stock
        Safety Stock/R
 Safety stock   = zL
                = 2.33(22) = 51.3
                                       Cycle-service level = 99%
                = 51 boxes

 Reorder point = dL + SS
               = 250 + 51
               = 301 boxes                      Probability of stockout
                                                (1.0 – 0.99 = 0.01)
                 Average
                 demand
                   during
                lead time                      R

                                      zL

                   Chapter 10—Inventory Management
    Lead Time Distributions
             t = 15



                    +
      75
Demand for week 1




                        Chapter 10—Inventory Management
    Lead Time Distributions
             t = 15



                    +
      75
Demand for week 1
                        t = 15



                              +
                75
          Demand for week 2




                              Chapter 10—Inventory Management
    Lead Time Distributions
             t = 15



                    +
      75
Demand for week 1
                         t = 15



                              +
                75
          Demand for week 2
                                    t = 15



                                       =
                             75
                       Demand for week 310—Inventory Management
                                Chapter
                                                                      L  t L

    Lead Time Distributions                                            L  15 3
                                                                       L  26
             t = 15
                                                                      L = 26

                    +
      75
Demand for week 1
                         t = 15



                              +                               225
                                                          Demand for
                75
          Demand for week 2                           three-week lead time
                                    t = 15



                                       =
                             75
                       Demand for week 310—Inventory Management
                                Chapter
    Lead Time Distributions
             t = 15
                                                                      t = 26

                    +       Bird feeder Lead Time Distribution
      75
Demand for week 1
                               t
                         t = 15 = 1 week       d = 18       L=2
                               t = 5          SL = 90%

                              +                               225
                                                          Demand for
                75
          Demand for week 2                           three-week lead time
                                    t = 15



                                        =
                             75
                       Demand for week 310—Inventory Management
                                Chapter
    Lead Time Distributions
             t = 15
                                                                      t = 26

                    +       Bird feeder Lead Time Distribution
      75
Demand for week 1
                               t
                         t = 15 = 1 week       d = 18       L=2
                               t = 5          SL = 90%

                              +   L = t     L =5      2   = 7.1
                                                              225
                                                          Demand for
                75
          Demand for week 2                           three-week lead time
                                    t = 15



                                        =
                             75
                       Demand for week 310—Inventory Management
                                Chapter
    Lead Time Distributions
             t = 15
                                                                    t = 26

                    +       Bird feeder Lead Time Distribution
      75
Demand for week 1
                               t
                         t = 15 = 1 week       d = 18       L=2
                               t = 5          SL = 90%

                             +    L = t     L =5      2   = 7.1
                                                              225
                75 Safety      stock = zL =               = 9.1 or 9
                                                1.28(7.1)Demand for units
          Demand for week 2                          three-week lead time
                                    t = 15
                    Reorder point = dL + SS

                                        =
                                  = 2(18) + 9 = 45 units


                             75
                       Demand for week 310—Inventory Management
                                Chapter
    Lead Time Distributions
             t = 15
                                                                      t = 26

                    +       Bird feeder Lead Time Distribution
      75
Demand for week 1
                               t
                         t = 15 = 1 week  d = 18     L=2
                          Reorder point = 2(18) + 9 = 45 units

                              +                               225
                                                          Demand for
                75
          Demand for week 2                           three-week lead time
                                    t = 15



                                       =
                             75
                       Demand for week 310—Inventory Management
                                Chapter
    Lead Time Distributions
             t = 15
                                                                  t = 26

                    +       Bird feeder Lead Time Distribution
      75
Demand for week 1
                               t
                         t = 15 = 1 week  d = 18     L=2
                          Reorder point = 2(18) + 9 = 45 units

                              +
                          When stock drops to 45, order 75

                           C=
                              75
                                 ($15) +
                                         936        225
                                             ($45) + 9($15)
                                                Demand for
                75            2          75 three-week lead time
          Demand for week 2
                                    t = 15
                        C = $562.50 + $561.60 + $135 = $1259.10

                                       =
                             75
                       Demand for week 310—Inventory Management
                                Chapter
                    Periodic Review Systems
                    T
On-hand inventory




                                                                   Time
                             P                      P


                                 Chapter 10—Inventory Management
                    Periodic Review Systems
                    T
On-hand inventory




                         Q1




                        Order
                        placed




                                                                       Time
                                 P                      P


                                     Chapter 10—Inventory Management
                    Periodic Review Systems
                    T
On-hand inventory




                         Q1




                        Order
                        placed




                          L                                            Time
                                 P                      P


                                     Chapter 10—Inventory Management
                    Periodic Review Systems
                    T
                                 Order
                                 received
On-hand inventory




                         Q1




                        Order
                        placed




                          L                                            Time
                                 P                      P


                                     Chapter 10—Inventory Management
                    Periodic Review Systems
                    T
                                 Order                  Order               Order
                                 received               received            received
On-hand inventory




                                                                       Q3
                         Q1
                                                Q2




                        Order                         Order
                        placed                        placed




                          L                     L                      L      Time
                                 P                      P


                                     Chapter 10—Inventory Management
                    Periodic Review Systems
                     T
                                IP   Order                 IP                      IP Order
                                                                 Order
                                     received                    received             received
On-hand inventory




                                                                              Q3
                           Q1                                            OH
                                          OH          Q2
                    IP1

                    IP3
                          Order                                 Order
                          placed                                placed
                    IP2


                            L                         L                       L         Time
                                     P                           P
                                Protection interval
                                          Chapter 10—Inventory Management
                    Periodic Review Systems
                     T
                                IP    Order                IP                      IP Order
                                                        Order
                                     Bird feeder— Calculating P and T
                                     received                    received             received
On-hand inventory




                                                                              Q3
                           Q1                                            OH
                                          OH          Q2
                    IP1

                    IP3
                          Order                                 Order
                          placed                                placed
                    IP2


                            L                         L                       L         Time
                                      P                          P
                                Protection interval
                                          Chapter 10—Inventory Management
                    Periodic Review Systems
                     T
                                   IP    Order               IP                    IP Order
                                                           Order
                                        Bird feeder—Calculating P and T
                                        received                   received           received
On-hand inventory




                            t = 1 units d = 18 L = 2 weeks              Q3
                               Q5                               cycle/service level = 90%
                                                                   OH
                                            OH        Q2
                          EOQ = 75 units     D = (18 units/week)(52 weeks) = 936 units
                    IP1

                    IP3
                             Order                                Order
                             placed                               placed
                    IP2


                               L                         L                     L        Time
                                         P                         P
                                   Protection interval
                                             Chapter 10—Inventory Management
                     Periodic Review Systems
                     T
                                   IP    Order               IP                    IP Order
                                                           Order
                                        Bird feeder—Calculating P and T
                                        received                  received            received
On-hand inventory




                            t = 1 units d = 18 L = 2 weeks              Q3
                               Q5                               cycle/service level = 90%
                                                                   OH
                                            OH        Q2
                          EOQ = 75 units     D = (18 units/week)(52 weeks) = 936 units
                    IP1
                                     EOQ            75
                    IP3           P=        (52) =     (52) = 4.2 or 4 weeks
                                      D            936
                             Order                       Order
                             placed P+L = t P + L = 5 placed 12 units
                                                           6 =
                    IP2


                               L                         L                     L        Time
                                         P                        P
                                   Protection interval
                                             Chapter 10—Inventory Management
                    Periodic Review Systems
                     T
                                     IP    Order            IP                  IP Order
                                                             Order
                                          Bird feeder—Calculating P and T
                                          received               received          received
On-hand inventory




                              t = 1 units d = 18 L = 2 weeks              Q3
                                 Q5                                cycle/service level = 90%
                                                                     OH
                                              OH        Q2
                            EOQ = 75 units     D = (18 units/week)(52 weeks) = 936 units
                    IP1
                                        EOQ            75
                    IP3              P=        (52) =     (52) = 4.2 or 4 weeks
                                         D            936
                                Order                       Order
                                placed P+L = t P + L = 5 placed 12 units
                                                              6 =
                    IP2
                          T = Average demand during the protection interval + Safety stock
                            = d (P + L) + zP + L
                                  L                     L                   L       Time
                            = (18 units/week)(6 weeks) + 1.28(12 units) = 123 units
                                           P                   P
                                    Protection interval
                                              Chapter 10—Inventory Management
                    Periodic Review Systems
                     T
                                   IP    Order               IP                    IP Order
                                                           Order
                                        Bird feeder—Calculating P and T
                                        received                   received           received
On-hand inventory




                            t = 1 units d = 18 L = 2 weeks              Q3
                               Q5                                cycle/service level = 90%
                                                                   OH
                                            OH        Q2
                          EOQ = 75 units     D = (18 units/week)(52 weeks) = 936 units
                    IP1
                                        P = 4 weeks          T = 123 units
                    IP3
                             Order                                Order
                             placed                               placed
                    IP2


                               L                         L                     L        Time
                                         P                         P
                                   Protection interval
                                             Chapter 10—Inventory Management
                    Periodic Review Systems
                     T
                                   IP    Order                IP                   IP Order
                                                           Order
                                        Bird feeder—Calculating P and T
                                        received                   received           received
On-hand inventory




                            t = 1 units d = 18 L = 2 weeks              Q3
                               Q5                               cycle/service level = 90%
                                                                   OH
                                            OH        Q2
                          EOQ = 75 units     D = (18 units/week)(52 weeks) = 936 units
                    IP1
                                        P = 4 weeks           T = 123 units
                    IP3
                             Order                              Order
                             placed   4(18)                  936placed
                    IP2            C=       ($15) +       ($45) + 15($15)
                                        2           4(18)

                                        C = $540 + $585 + $225 = $1350
                               L                         L                     L        Time
                                         P                         P
                                   Protection interval
                                             Chapter 10—Inventory Management
Comparison of Q and P Systems

P Systems
    Convenient to administer
    Orders may be combined
    IP only required at review
Q Systems
    Individual review frequencies
    Possible quantity discounts
    Lower, less-expensive safety stocks
               Chapter 10—Inventory Management

				
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