Topic-14 Inventory MGT.ppt

Placed q 2 q 3 order order received received oh oh l

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placed Q 2 Q 3 Order Order received received OH OH L L Protection interval Protection interval IP IP 1 IP IP 3 IP IP 2 IP IP IP IP IP IP OH OH

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Fixed Order Quantity System A perceptual system (sometimes called a fixed quantity or Q/R system) is one that used a fixed reorder point (R) and a fixed order quantity (Q). The time between orders varies depending on when the inventory reaches the reorder point.
Fixed Order Quantity System The inventory behavior is: LT LT LT Q Q R (d) SS= 0

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Fixed Order Quantity System Where: R= reorder point = (d*L) + SS Q= economic order quantity = EOQ = D= annual demand (expressed in units/ year) L= reorder lead time (expressed as a fraction of a year) S= ordering cost (expressed as \$ per order) C= item cost (expressed in \$ per unit) F= inventory holding cost fraction (expressed as a fraction of item cost per year) H= holding cost = (C*F) The total annual cost (TC) for a purchased item managed with a perpetual inventory system can be calculated as follows: TC= (cost of the item) + (ordering cost) + (inventory holding cost) D*C + ( Q/2)*H + (D/Q)*S 2* DS H
Example 15.2 Example 15.2 3000 3000 — 2000 2000 — 1000 1000 — 0 0 — | | | | | | | | 50 50 100 100 150 150 200 200 250 250 300 300 350 350 400 400 Lot Size ( Lot Size ( Q ) Annual cost (dollars) Annual cost (dollars) Total cost = ( Total cost = ( H ) + ( ) + ( S ) D Q Q 2 Holding cost = ( Holding cost = ( H ) Q 2 Ordering cost = ( Ordering cost = ( S ) D Q Economic Order Quantity Economic Order Quantity

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Economic Order Quantity Economic Order Quantity Annual cost (dollars) Annual cost (dollars) Lot Size ( Lot Size ( Q ) Figure 15.4 Figure 15.4 Holding cost ( Holding cost ( HC HC ) Ordering cost ( Ordering cost ( OC OC ) Total cost = Total cost = HC HC + + OC OC
See Example on Your Supplement P. 15-15.

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Example of Determining Economic Order Quantity An importer/distributor or toys uses a standard, corrugated cardboard box for shipping orders to customers. These boxes are used at the rate of 120,000 per year. Each box costs \$0.30, and the estimated annual holding cost is 60% of the purchase price. It requires 20 minutes (or 0.33 hours) to prepare an order for this item. The wage rate of the inventory and purchasing clerks is \$5.00 per hour. D=120,000; C=0.30; F=0.60; H=0.3x0.6=0.18 Problem: Determine how many boxes should be ordered from the supplier each time. Solution: S= (1/3) x \$5= \$1.65 EOQ= √2.D.S/H = √2x120,000x1.65/0.18 = 1,483 ≈1,500
Problem: If lead time is one day and there are 250 working days during the year, what is the reorder point? Solution: d= 120,000/250= 480, L=1, SS=0 R= d.L + SS= (480X1) + 0 = 480 Problem: What is the total annual cost of this reordering system? Solution: TC = D.C + (D/Q).S + (Q/2).H = (120,000)(0.3) + (120,000/1,483)1.65+(1483/2)X0.18 = \$36,267

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Economic Order Quantity Economic Order Quantity 1. 1. Demand rate is constant Demand rate is constant 2. 2. No constraints on lot size No constraints on lot size 3. 3. Only relevant costs are holding and Only relevant costs are holding and ordering/setup ordering/setup 4. 4. Decisions for items are independent Decisions for items are independent from other items from other items 5. 5. No uncertainty in lead time or supply No uncertainty in lead time or supply 6.
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