Introduction of Inventory Management

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Introduction of Inventory Management Powered By Docstoc
					Chapter 8: On Inventory Management.

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 INTRODUCTION
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 The shape of the total inventory costs curve (this is a graph plotted with size of
 order quantity on the X axis and total inventory costs on the Y axis) can be
 either relatively flat or a saucer with relatively steep sides. This determines
 whether the firm will face large or small cost penalties if (1) its estimates of
 order costs and carrying costs are off by some percentage and (2) its
 calculations of Economic Order Quantity (EOQ) are in error. The computer
 helps us to identify what causes the shape of the total inventory cost-curve to
 be either relatively flat or alternatively more U-shaped.



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                                                        acbfdf62-f112-45f2-b8bf-80fa29edde47.xls
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 QUESTIONS
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 1) You are given the following data:

                         Firm A        Firm B        Firm C          Firm D
          V               $0.10        $50.00         $0.10           $0.50
          U               1,000         1,000         1,000           1,000
          F                 $20           $20           $20             $20
          CP              $0.01         $0.01           $20             $20

     where
          V     =   Variable ordering costs per order
          U     =   Annual usage in units
          F     =   Fixed ordering costs
          CP    =   Carrying cost in dollars per unit of inventory

     For each of firms A, B, C, and D, do the following:

     a) Look at the calculation of EOQ (Screen #3).

     b) Call up the graph.

     c) Look at the table of total inventory costs and its components (Screen #4).

     d) At the lowest total inventory costs, what is the relation between variable ordering costs
        and variable carrying costs?

 2) For which firm is EOQ the largest? Smallest? Why?

 3) For which firm is the EOQ relatively insensitive to the size of order quantity (flat total cost of
    inventory)? Why is this so?

 4) Make up your own questions by varying any assumptions.

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                                                                     acbfdf62-f112-45f2-b8bf-80fa29edde47.xls
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 CALCULATION OF ECONOMIC ORDER QUANTITY
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                                  FIRM X

          V = $400.00 = Variable ordering costs per order
          U=       3,000 = Annual usage in units
           F = $4,000 = Fixed ordering costs
        CP = $14.00 = Carrying cost in dollars per unit of inventory
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                          2VU
    EOQ =
                           CP
                                2  x  400 x 3000
    EOQ =                   [ ———————————————————— =
                                                 ]                                                 414.04 units
                                       14

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                                                                             acbfdf62-f112-45f2-b8bf-80fa29edde47.xls
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TABLE OF INVENTORY COSTS ( FIRM X )
===========================================
                                     Total       Total
                        Fixed     Variable    Variable        Total
           Order     Ordering    Ordering     Carrying    Inventory
         Quantity      Costs        Costs       Costs        Costs

            50.0    $4,000.0   $24,000.0      $350.0      $28,350.0
           100.0    $4,000.0   $12,000.0      $700.0      $16,700.0
           150.0    $4,000.0    $8,000.0    $1,050.0      $13,050.0
           200.0    $4,000.0    $6,000.0    $1,400.0      $11,400.0
           250.0    $4,000.0    $4,800.0    $1,750.0      $10,550.0
           300.0    $4,000.0    $4,000.0    $2,100.0      $10,100.0
           350.0    $4,000.0    $3,428.6    $2,450.0       $9,878.6
           400.0    $4,000.0    $3,000.0    $2,800.0       $9,800.0
           414.0    $4,000.0    $2,898.3    $2,898.3       $9,796.6
           500.0    $4,000.0    $2,400.0    $3,500.0       $9,900.0
           550.0    $4,000.0    $2,181.8    $3,850.0      $10,031.8
           600.0    $4,000.0    $2,000.0    $4,200.0      $10,200.0
           650.0    $4,000.0    $1,846.2    $4,550.0      $10,396.2
           700.0    $4,000.0    $1,714.3    $4,900.0      $10,614.3
           750.0    $4,000.0    $1,600.0    $5,250.0      $10,850.0
           800.0    $4,000.0    $1,500.0    $5,600.0      $11,100.0
           850.0    $4,000.0    $1,411.8    $5,950.0      $11,361.8
           900.0    $4,000.0    $1,333.3    $6,300.0      $11,633.3
           950.0    $4,000.0    $1,263.2    $6,650.0      $11,913.2
         1,000.0    $4,000.0    $1,200.0    $7,000.0      $12,200.0

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                                              acbfdf62-f112-45f2-b8bf-80fa29edde47.xls
                                                     ECONOMIC ORDERING QUANTITY
                                                               FIRM X
                  $30,000.0




                  $25,000.0




                  $20,000.0
                                                                                            EOQ =       414.04        units
Inventory Costs




                                                                                Total Costs for EOQ    $9,796.6
                  $15,000.0




                  $10,000.0




                   $5,000.0




                       $0.0
                              0.0   200.0           400.0               600.0                  800.0                1,000.0          1,200.0

                                                                   Units per Order

                                            Fixed Cost      Ordering Cost          Carrying Cost       Total Cost




                                                                                                        acbfdf62-f112-45f2-b8bf-80fa29edde47.xls

				
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