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14_posting_-_Inventory_Control_2

14_posting_-_Inventory_Control_2 - Inventory Management 2 1...

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10/24/2011 1 Inventory Management 2
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10/24/2011 2 Price-Break Model We assumed constant purchasing costs C , but… Order Quantity (Q) C o s t Assumption
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10/24/2011 3 Cost Holding Annual Cost) Setup or der Demand)(Or 2(Annual = iC 2DS = Q OPT Based on the same assumptions as the EOQ model, the price- break model has the same Q opt formula: i = percentage of unit cost attributed to carrying inventory C = unit price iC = H Since C changes for each price-break, the formula above will have to be used with each price-break cost value Price-Break Model
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10/24/2011 4 A company has a chance to reduce their inventory ordering costs by placing larger quantity orders using the price-break order quantity schedule below. What should their optimal order quantity be if this company purchases this single inventory item with an e-mail ordering cost of $4, a carrying cost rate of 2% of the inventory cost of the item, and an annual demand of 10,000 units? A company has a chance to reduce their inventory ordering costs by placing larger quantity orders using the price-break order quantity schedule below. What should their optimal order quantity be if this company purchases this single inventory item with an e-mail ordering cost of $4, a carrying cost rate of 2% of the inventory cost of the item, and an annual demand of 10,000 units? Order Quantity(units) Price/unit($) 0 to 2,499 $1.20 2,500 to 3,999 1.00 4,000 or more .98 Price-Break Example
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10/24/2011 5 Annual Demand ( D )= 10,000 units Cost to place an order ( S )= $4 First, plug data into formula for each price-break value of C Carrying cost % of total cost ( i )= 2% Cost per unit ( C ) = $1.20, $1.00, $0.98 Next, determine if the computed Q opt values are feasible or not Price-Break Example Range 0 – 2499 2500 – 3999 4000 + Feasible?
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10/24/2011 6 Since the feasible solution occurred in the first price-break, it means that all the other true Q opt values occur at the beginnings of each price-break interval. Why? Since the feasible solution occurred in the first price-break, it means that all the other true Q opt values occur at the beginnings of each price-break interval. Why? 0 1826 2500 4000 Order Quantity Total annual costs Because the total annual cost function is a “u” shaped function Because the total annual cost function is a “u” shaped function Price-Break Example
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10/24/2011 7 iC 2 Q + S Q D + DC = TC Next, we plug the true Q opt values into the total cost annual cost function to determine the total cost under each price- break Next, we plug the true Q opt values into the total cost annual cost function to determine the total cost under each price- break Price-Break Example
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10/24/2011 8 Inventory is only counted at set review periods No R (reorder driven by fixed time period) Commonly used when Vendors make routine visits to refill all their products Buyers combine orders for several products from the same
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