Chapter 12 Inventroy Mgt - Chapter12 InventoryManagement...

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     Chapter 12 Inventory Management
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        Inventory Management                  Def.    Inventory is anything that: Has economic   value Can be   accumulated     Can be   stored  
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        Inventory Management                  Objective: Customer service Avoid shortages    Minimize cost
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        Inventory Management                  Types of Inventory: Raw material In process - WIP   Finished goods Pipe line (in-process, in-transit)  
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        Inventory Management                  Functions of inventory: Demand uncertainty Seasonal demand    Smooth out production Decouple Quantity discounts  
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        Inventory Management: Costs                   Inventory related costs: Carrying costs:   Cost of keeping item in  inventory e.g. storage, utilities, taxes,  opportunity costs Ordering Costs:   Cost of placing an order  e.g. salary, qualifying a vendor, making out  the order, inspection    
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        Inventory Management                  Ex: Demand        = D = 10,000 units/yr Carrying cost = H = $2/unit/yr Ordering cost = S = $25/order                         500 units       5,000 units # of orders/yr  (D/Q)             20            2 Ordering costs/yr  (D/Q)(S)   $500          $50 Average inventory  (Q/2) 250         2,500 Carrying costs/yr  (Q/2)(H)    $500         $5,000  
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        Inventory Management                      Conclusions:    As “Q” increases: Average annual ordering cost decreases Average annual carrying cost increases Total cost in minimum when: (Average annual  =  (Average annual        ordering costs)          carrying costs)  
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     Ordering Cost Carrying Cost Total Cost Costs Order Quantity “Q” EOQ Q* Min TC
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        Inventory Management: EOQ Model                     Model 1:   The EOQ Model: Total cost is minimum when:        (Average annual      (Average annual        carrying costs)          ordering costs)   i.e. (Q/2) (H)     =   (D/Q) (S)                       Solve for “Q”           EOQ = Q * =     2DS   = H
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        Inventory Management: EOQ Model                   Ex:    Demand = D = 10,000 units/yr   Inventory carrying costs = H= $2/unit/yr   Ordering costs = S = $25/order 1) EOQ = ?
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        Inventory Management: EOQ Model                   2)  Average Inventory = ?
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