Slide 1

Supply Chain Management

Dr. Somkiat Mansumitrchai

Slide 2

Inventory Management

Copyright: Dr. Somkiat Mansumitrchai

Slide 3

1.2 Introduction
„ In many industries and supply chains,
inventory is one of the dominant costs.
„ For many managers, effective supply chain
management is synonymous with reducing
inventory levels in the supply chain.

Copyright: Dr. Somkiat Mansumitrchai

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1.2 Introduction
„ In fact, the goal of effective inventory
management in the supply chain is to have
the correct inventory at the right place at the
right time to minimize system costs while
satisfying customer service requirements.

Copyright: Dr. Somkiat Mansumitrchai

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1.2 Introduction
„ A typical supply chain consists of suppliers
and manufacturers, who convert raw
materials into finished products, and
distribution centers and warehouses, from
which finished products are distributed to
customers.

Copyright: Dr. Somkiat Mansumitrchai

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Supplier Raw material

Distribute
Warehouse
Finished & Customers
product Distribution

Manufacturer Production

Copyright: Dr. Somkiat Mansumitrchai

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1.2 Introduction
„ Inventory can appear in many places in the
supply chain, and in several forms:
„ Raw material inventory
„ Work-in process (WIP) inventory
„ Finished product inventory

Copyright: Dr. Somkiat Mansumitrchai

Slide 8
Raw material inventory

Supplier Raw material

Distribute
Warehouse
Finished & Customers
product Distribution

Manufacturer Production
Finished product inventory

WIP Inventory

Copyright: Dr. Somkiat Mansumitrchai

Slide 9

Inventory is held for a variety of reasons. It

is held due to
„ 1. Unexpected changes in customer
demand. Customer demand has been always
hard to predict.

Copyright: Dr. Somkiat Mansumitrchai

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„ 1. Unexpected changes in customer

„ a. The short life cycle of an increasing
number of products. This implies that
historical data about consumer demand may
not be available.

Copyright: Dr. Somkiat Mansumitrchai

Slide
11 PLC
Maturity Decline

Growth

Introduction

TIME

Short life cycle

Copyright: Dr. Somkiat Mansumitrchai

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„ 1. Unexpected changes in customer

„ b. The presence of many competing
products or product groups in the
marketplace. It is much more difficult to
estimate demand for individual products.

Copyright: Dr. Somkiat Mansumitrchai

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„ 2. The presence in many situations of a

significant uncertainty in the quantity and
quality of the supply, supplier costs, and
delivery times.

Copyright: Dr. Somkiat Mansumitrchai

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„ 3. Economies of scales offered by

transportation companies that encourages
firms to transport large quantities of items,
and therefore hold large inventories.

Copyright: Dr. Somkiat Mansumitrchai

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15

Techniques Using for

Inventory Management

Copyright: Dr. Somkiat Mansumitrchai

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2.1 The Basic Economic

Order Quantity (EOQ)
Model

Copyright: Dr. Somkiat Mansumitrchai

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„ 2.1 The Economic Lot Size Model

„ It is a simple model that illustrates the trade-
offs between ordering and storage costs.
Assumptions:
„ 1. Demand is constant at a rate of D items
per day.

Copyright: Dr. Somkiat Mansumitrchai

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Assumptions:
„ 2. Order quantities are fixed at Q items per
order; that is, each time the warehouse
places an order, it is for Q items.
„ 3. A fix cost (setup cost), S, is incurred
every time the warehouse places an
order.

Copyright: Dr. Somkiat Mansumitrchai

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Assumptions:
„ 4. An inventory carrying cost, h, also
referred to as a holding cost, is accrued
per unit held in inventory per day that
the unit is held.

Copyright: Dr. Somkiat Mansumitrchai

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Assumptions:
„ 5. The lead time, the time that elapses
between the placement of an order and
its receipt, is zero.
„ 6. Initial inventory is zero.

Copyright: Dr. Somkiat Mansumitrchai

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21

„ 2.1 The Economic Lot Size Model

„ Objective:
„ It is to find the optimal order policy that
minimizes annual purchasing and carrying
costs while meeting all demand (that is,
without storage).

Copyright: Dr. Somkiat Mansumitrchai

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Usage rate
Order quantity = Q
(maximum inventory level)
Inventory Level

Average inventory
On hand Q/2

Minimum
Inventory

Time
Copyright: Dr. Somkiat Mansumitrchai

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„ Formula: EOQ Model

„ Q = Number of pieces per order
„ Q* = Optimum number of pieces per order (EOQ)
„ D = Annual demand in units for the inventory item
„ S = Setup or ordering cost for each order
„ H = Holding or carrying cost per unit per year

Copyright: Dr. Somkiat Mansumitrchai

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„ EOQ Model
1. Annual setup cost
= (Number of orders placed per year) x (Setup or order cost per
order)
= Annual Demand (Setup or order cost per order)
Number of units in each order

= D (S) = DS
Q Q

Copyright: Dr. Somkiat Mansumitrchai

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„ EOQ Model
2. Annual holding cost
= (Average inventory level) x (Holding cost per unit per year)
= Order quantity (Holding cost per unit per year)
2
= Q (H) = QH
2 2

Copyright: Dr. Somkiat Mansumitrchai

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„ EOQ Model
3. Optimal order quantity is found when annual setup cost equals
annual holding cost

D S = QH
Q 2

Copyright: Dr. Somkiat Mansumitrchai

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27

„ EOQ Model
4. To solve for Q*
2
2 DS = Q H
2
Q = 2 DS
H

Q* = √ 2DS
H

Copyright: Dr. Somkiat Mansumitrchai

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Curve for total cost

of holding and setup

Minimum
total cost

Holding cost
Annual Cost

curve

Setup (or order)

cost curve

Optimal Order quantity

Order
Copyright: Dr. Somkiat Mansumitrchai quantity

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„ EOQ Model
We can find the expected number of orders placed during the year
(N) and the expected time between
2 orders (T) as follows:

Expected number of orders = N = Demand = D

Order Quantity Q*

Copyright: Dr. Somkiat Mansumitrchai

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„ EOQ Model
We can find the expected number of orders placed during the year
(N) and the expected time between orders (T) as follows:

Expected time between orders ( T )

= Number of working days per year

N

Copyright: Dr. Somkiat Mansumitrchai

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„ EOQ Model
We can also calculate the total annual inventory costs.

TC = D S + Q H
Q 2

Copyright: Dr. Somkiat Mansumitrchai

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Example

Copyright: Dr. Somkiat Mansumitrchai

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Sharp, Inc. a company that markets painless hypodermic needles to

hospitals, would like to reduce its inventory cost by
determining the optimal number of hypodermic needles to
obtain per order. The annual demand is 1,000 units; the setup
or ordering cost is $10 per order; and the holding cost per unit
per year is $.50. What is the optimal number of units per
order.

Copyright: Dr. Somkiat Mansumitrchai

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Solution:

Q* = √ 2DS
H

Q* =
√ 2(1,000)(10)
0.50

= √40,000 = 200 units

Copyright: Dr. Somkiat Mansumitrchai

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35

Solution
We can find the expected number of orders placed during the year
(N)
Expected number of orders = N = Demand = D
Order Quantity Q*

= 1,000 = 5 orders per year

200

Copyright: Dr. Somkiat Mansumitrchai

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36

„ EOQ Model
Assume that there is 250 working days per year. The expected time
between orders (T) as follows:

Expected time between orders ( T )

= Number of working days per year

N
= 250 working days per year = 50 days between order
5

Copyright: Dr. Somkiat Mansumitrchai

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„ EOQ Model
We can also calculate the total annual inventory costs.

TC = D S + Q H
Q 2
= 1,000 ($10) + 200 ($.50)
200 2
= (5)($10) + (100)($.50)
= $50+$50 = $100

Copyright: Dr. Somkiat Mansumitrchai

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Practice & Exercise

Copyright: Dr. Somkiat Mansumitrchai