IE_425_H7_Inventory_Theory_I (1).pdf

IE_425_H7_Inventory_Theory_I (1).pdf - INVENTORY THEORY I...

This preview shows page 1 - 2 out of 12 pages.

1 INVENTORY THEORY I Inventory is material stored, waiting for processing, or experiencing processing. Inventories are ubiquitous throughout all sectors of the economy. Inventories are reported as current assets on the company's balance sheet. Inventories are significant assets that need to be monitored closely. Most managers don't like inventory because it is like money placed in a drawer, assets tied up in investments that are not producing any return and, in fact, incurring a borrowing cost. Inventory also incurs costs for the care of the stored material and is subject to spoilage and obsolescence. In spite of the bad features associated with inventory, it does have positive purposes. Raw material inventory provides a stable source of input required for production. Keeping large inventory levels require less often replenishments and may reduce ordering costs because of economies of scale. In- process inventory reduces the impact of the variability of the production rate in a plant and protects against failures in the processes. Final goods inventory provides for better customer service. The variety and easy availability of the product is an important marketing consideration. Inventory control policies are decision rules that focus on the trade-off between the costs and benefits of alternative solutions to questions of when and how much to order for each different type of item. Now we will discuss several types of inventory cost models to determine optimal policies starting with the deterministic case. Even though many features of an inventory system involve uncertainty of some kind, it is common to assume much simpler deterministic models for which solutions are found using mathematically. Deterministic models also provide a base on which to incorporate assumptions concerning uncertainty. COSTS TO BE CONSIDERED IN AN INVENTORY PROBLEM 1. Cost of ordering or manufacturing : ± ² z c , where z is the amount to order or manufacture. Two important forms: a) Linear: ± ² z c z c , where c is the unit price (cost). b) Two terms: a linear term and a constant term, i.e., c(z) z
Image of page 1

Subscribe to view the full document.

2 ¯ ® ­ ! ³ , 0 z , 0 z , z c K , 0 ) z ( c where K is the setup cost (administrative cost, ordering cost, etc.). 2. Holding cost : This includes the costs associated with storage (opportunity cost, storage space, insurance, protection, taxes, etc.). The cost may be function of: a) Maximum quantity held during a period. b) Average amount held during a period. c) Cumulated excess of supply over demand during a period.
Image of page 2
You've reached the end of this preview.
  • Spring '16

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern