14_posting_-_Inventory_Control_2

14_posting_-_Inventory_Control_2 - Inventory Management 2...

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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 vendor or distributor Orders coincide with inventory counts or visa-versa
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14_posting_-_Inventory_Control_2 - Inventory Management 2...

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