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LSCM 360 - S08 WK 7 Inventory Management

LSCM 360 - S08 WK 7 Inventory Management - Inventory...

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Inventory Management Inventory Management
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9-2 Inventory Management Inventories are stocks of goods and materials that are maintained to satisfy normal demand patterns Inventory costs are important to consider Inventory turnover = cost of goods sold (or units per time- period) divided by avg. value of inventory (or avg. units of inventory) cost of goods sold = inventory turnover average inventory
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9-3 Inventory Classifications Psychic stock (stimulates demand) Cycle or base stock Safety or buffer stock Pipeline or in-transit stock Speculative stock
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9-4 Inventory-Related Costs Inventory carrying (holding) costs Risk Costs Obsolescence Inventory shrinkage Storage Space Costs Variable storage and handling costs Service Costs Insurance costs Taxes Capital or Finance Costs Interest charges Opportunity cost Stockout Costs – the cost of not having inventory on hand when demand occurs
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9-5 Inventory-Related Costs Use “Marginal analysis” to analyze the trade- off between inventory carrying cost and stockout costs From table on next slide: what is the optimal number of units of safety stock?
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9-6 Determination of Safety Stock Level Number of Units of Safety Stock Total Value of Safety Stock ($480 per Unit) 25% Annual Carrying Cost Carrying Cost of Incremental Safety Stock Number of Additional Orders Filled Additional Stockout Costs Avoided 10 $4,800 $1,200 $1,200 20 $6,481.00 20 9,600 2,400 1,200 16 5,184.80 30 14,400 3,600 1,200 12 3,888.60 40 19,200 4,800 1,200 8 2,592.40 50 24,000 6,000 1,200 6 1,944.30 60 28,800 7,200 1,200 4 1,296.20 70 33,600 8,400 1,200 3 972.15
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9-7 When to Order Fixed order quantity system Fixed order interval system Reorder point (ROP) ROP = DD x RC under certainty ROP = (DD x RC) + SS under uncertainty Where DD = daily demand RC = length of replenishment cycle SS = safety stock
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9-8 Fixed Order Quantity Model under Conditions of Certainty 200 400 0 Days 10 20 30 40 50 60 Inventory Order placed Order arrival Order placed Average cycle inventory A. Order quantity of 400 units; replenishment time 10 days daily demand = 20 units Order arrival
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9-9 HOW MUCH TO REORDER Inventory Carrying Cost
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9-10 HOW MUCH TO REORDER Order or Setup Cost
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9-11 HOW MUCH TO REORDER Inventory Costs
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9-12 HOW MUCH TO REORDER Fixed Order Quantity (Certainty): Simple EOQ Model Number of orders per year Order size ($) Ordering cost ($) Carrying cost ($) Total cost (sum of ordering and carrying cost) ($) 1 1,000 25 100 125 2 500 50 50 100 3 333 75 33 108 4 250 100 25 125 5 200 125 20 145
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9-13 HOW MUCH TO REORDER Fixed Order Quantity (Certainty): Simple EOQ Model Simple EOQ Model Assumptions Continuous, constant, known and infinite rate of demand on one item of inventory. A constant and known replenishment time. Satisfaction of all demand. Constant cost, independent of order quantity or time. No inventory in transit costs.
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