Chap6 - Chap. 6 Inventory Analysis Agenda Why hold...

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1 Chap. 6 Inventory Analysis Agenda Why hold inventory? Illustrate the tradeoff in holding costs vs. ordering costs using the Economic Order Quantity (EOQ) model Reorder points (ROP) Determining relevant costs for the EOQ model ABC inventory classification The role inventory in supply chains
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2 Types of Inventory Raw material inventory and purchased components Work-in-process inventory (WIP) Finished goods inventory Supplies Retail goods Working capital Spare parts for equipment
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3 Why hold Inventory? 1. Economies of scale (Chap. 6) If incur a large fixed ordering cost when ordering from a supplier, then order size large Setup time/cost large on equipment, so batch size set at a large number Quantity discounts from suppliers Trade promotions lead to forward buying 2. Uncertainty (Chap. 7) – safety stock (safety inventory)
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4 Why Hold Inventory? 1. Production and Capacity Decisions in Manufacturing If product demand fluctuates, then production strategies include Chase demand strategy Level production strategy Maintaining smooth or level production rate; allow inventory to build during low demand periods; inventory depletes during high demand periods (MTS) Which production strategy is better?
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5 Why Hold Inventory? 4. Buffer inventory within a production process -- sometimes deliberately place buffer inventory within the process to buffer activities from unexpected events or variability upstream e.g. buffer in front of the bottleneck -- variability (statistical fluctuations) in processes causes buffers to buildup periodically and periodically to be drawn down
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6 Two Key Questions How much to order? When to order? Inventory Demand pulls items out of inventory Order from external or internal suppliers to replenish inv goods orders
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Inventory Management for a Retailer Popular Sporting Goods has observed a monthly demand for its line of Gore-Tex jackets of 100 jackets per month – demand is evenly spread throughout the month The cost of a jacket is $200 for Popular Popular incurs a fixed cost of $300 every time it places an order with its supplier to replenish the jackets Cost of capital is 15%. Assume physical holding costs are negligible
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This note was uploaded on 05/12/2008 for the course MIS 560 taught by Professor Slaton during the Spring '08 term at University of Arizona- Tucson.

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Chap6 - Chap. 6 Inventory Analysis Agenda Why hold...

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