Lecture 7 - Lecture 7 Inventory Models Source/1...

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Lecture 7 Inventory Models Source: /1 / D.R.Anderson, D.J.Sweeney, T.A.Williams. Quantitative Methods for Business, South-Western College Publishing, 11-th edition. Chapter 13. Contents: 7.1 Economic Order Quantity (EOQ) Model Inventory is a stored resource (stock) that is used to satisfy a current or future need (production, sales, etc.).  Types of inventory 1) Raw material inventory (purchased but not processed) Can be used to separate suppliers from the production process. 2) Work-in-process inventory Semi finished products at various stages of a production process. 3) MRO inventory Maintenance, repair and operating supplies (e.g., lubricating oil, soap, repair parts) 4) Finished goods Products ready for shipment. Inventory is risky and very expensive. In large organizations, the cost associated with inventory can run into the millions of dollars. Why do inventory? a) Unreliable delivery of stock Strikes, transport delays, weather, etc. b) Bulk discount Because of bulk buying c) Reduction in operational risk More stock then needed less risk of a “nil stock” (production stopping). “Nil stock” additional costs: Loss of profit Loss of sales Loss of reputation Cost of labor who can’t produce d) Reduced purchasing cycle reduced cost of ordering. e) Appreciation of stock value Stock purchased at a certain price protects from price increase during inflation. f) Increased flexibility of output Increase in demand (tax laws, habits, etc.) is covered by safety (reserve) stock. g) Advantage of low seasonal prices . Buying when prices are low (e.g. cotton, sugar, etc) reduction of the cost of production. In applications involving inventory, managers must answer two important questions . 1. How-much-to-order  How much should be ordered when the inventory is replenished?
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2. When-to-order When should the inventory be replenished? The purpose of this chapter is to show how quantitative models can assist in  making the  how-much-to-order  and  when-to-order  inventory decisions.  7.1 Economic Order Quantity (EOQ) Model Example 7.1 . R & В Beverage is a distributor of beer, wine, and soft drink products. The R & В manager decided to study of the inventory costs associated with Bub Beer. The purpose of the study is to establish the how-much-to-order and the when-to-order decisions for Bub Beer that will result in the lowest total cost. demand  information ): Because demand varies from a low of 1900 cases to a high of 2100 cases, the assumption of constant demand of 2000 cases per week appears to be a reasonable approximation. Using given  demand information  we consider a  mathematical model   (EOQ   model) that shows the  total cost  as the sum of the  holding cost  and the  ordering cost .
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Lecture 7 - Lecture 7 Inventory Models Source/1...

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