Inventory Management

Chapter 13 -
Inventory Management
To Accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Sixth Edition 2002 Prentice Hall, Inc. All rights reserved.
Inventory Costs
Interest or

Opportunity Costs Storage and Handling Costs Taxes, Insurance, and Shrinkage Costs Ordering and Setup Costs Transportation Costs
Types of Inventory
Types of Inventory
Cycle Inventory
Q+0 Average cycle inventory = 2
Types of Inventory
Cycle Inventory
Safety Stock Inventory
Types of Inventory
Cycle Inventory
Safety Stock Inventory Anticipation Inventory
Types of Inventory
Cycle Inventory
Safety Stock Inventory Anticipation Inventory Pipeline Inventory

Pipeline inventory = DL = dL
Types of Inventory
Types of Inventory
Cycle inventory = Q/2
Example 13.1
Types of Inventory
Cycle inventory = Q/2 = 280/2 = 140 drills
Example 13.1
Types of Inventory
Cycle inventory = Q/2 = 280/2 = 140 drills Pipeline inventory = DL = dL
Example 13.1
Types of Inventory
Cycle inventory = Q/2 = 280/2 = 140 drills Pipeline inventory = DL = dL = (70 drills/week)(3 weeks) = 210 drills
Example 13.1
Types of Inventory
Figure 13.1
ABC Analysis
ABC Analysis
100
90
Percentage of dollar value
80 70 60 50 40 30
20
10 0 10 20 30 40 50 60 70 80 90 100
Figure 13.2
Percentage of items
ABC Analysis
100
90
80 70 60 50 40 30
20
10 0 10 20 30 40 50 60 70 80 90 100
Figure 13.2
Percentage of items
ABC Analysis
100 Class B Class C
90 Class A 80
70 60 50 40 30
20
10 0 10 20 30 40 50 60 70 80 90 100
Figure 13.2
Percentage of items
ABC Analysis
100 Class B Class C
90 Class A 80
70 60 50 40 30
20
10 0 10 20 30 40 50 60 70 80 90 100
Figure 13.2
Percentage of items
ABC Analysis
100 Class B Class C
90 Class A 80
70 60 50 40 30
20
10 0 10 20 30 40 50 60 70 80 90 100
Figure 13.2
Percentage of items
ABC Analysis
100 Class B Class C
90 Class A 80
70 60 50 40 30
20
10 0 10 20 30 40 50 60 70 80 90 100
Figure 13.2
Percentage of items
How Much? When!

Economic Order Quantity

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

On-hand inventory (units)
Figure 13.3
Time

On-hand inventory (units)
Figure 13.3
Time

Receive order On-hand inventory (units)
Figure 13.3
Time

Figure 13.3
1 cycle
Time

Figure 13.3
1 cycle
Time

Receive order On-hand inventory (units) Inventory depletion (demand rate)
Figure 13.3
1 cycle
Time

Figure 13.3
1 cycle
Time

Q 2
Average cycle inventory
Figure 13.3
1 cycle
Time
Annual cost (dollars)
Figure 13.4
Lot Size (Q)

Holding cost (HC)
Figure 13.4
Lot Size (Q)

Holding cost (HC) Ordering cost (OC)
Figure 13.4
Lot Size (Q)


Total cost = HC + OC Annual cost (dollars)
Holding cost (HC) Ordering cost (OC)
Figure 13.4
Lot Size (Q)


Example 13.2
3000
2000
1000
| 50
| 100
| 150
| 200
| 250
| 300
| 350
| 400
Lot Size (Q)


Example 13.2
3000
Total cost =
2000
Q D (H) + (S) 2 Q
Holding cost =
Q (H) 2
1000
Ordering cost =
0 | 50 | 100 | 150 | 200 | 250 | 300 | 350 | 400
D (S) Q
Lot Size (Q)


Example 13.2
3000
Total cost =
2000 Birdfeeder
Q D (H) + (S) 2 Q
costs
Holding cost = Q (H) 2
D = (18 /week)(52 weeks) = 936 units H = 0.25 ($60/unit) = $15 S = 1000 $45 Q = 390 units Q D C= (H) + (S) 2 Q
0 | 50 | 100 | 150 | 200 | 250
Ordering cost =
| 300 | 350 | 400
D (S) Q
Lot Size (Q)


Example 13.2
3000
Total cost =
2000 Bird
Q D (H) + (S) 2 Q
feeder costs
D = (18 /week)(52 weeks) = 936 units H = 0.25 ($60/unit) = $15 S = 1000 $45 Q = 390 units Q D C= (H) + (S) 2 Q C=
0 | | | | $2925 $3033 50 + $108 100 = 150 200 | 250
Ordering cost =
| 300 | 350 | 400
D (S) Q
Lot Size (Q)


Current cost
3000
Example 13.2
Total cost =
2000 Bird
Q D (H) + (S) 2 Q
feeder costs
0 | | | | $2925 $3033 50 + $108 100 = 150 200 | 250
Ordering cost =
| 300 | 350 | 400
D (S) Q
Lot Size (Q)
Current Q

Current cost
3000
Example 13.2
Total cost =
2000 Bird
Q D (H) + (S) 2 Q
feeder costs
0 | | | | $2925 $3033 50 + $108 100 = 150 200 | 250
Ordering cost =
| 300 | 350 | 400
D (S) Q
Lot Size (Q)
Current Q

Current cost
3000
Example 13.2
Total cost =
2000 Bird
Q D (H) + (S) 2 Q
feeder costs
D = (18 /week)(52 weeks) = 936 units H = 0.25 ($60/unit) = $15 S = 1000 $45 Q = 468 units Q D C= (H) + (S) 2 Q
0 | 50 | 100 | 150 | 200 | 250
Ordering cost =
| 300 | 350 | 400
D (S) Q
Lot Size (Q)
Current Q

Current cost
3000
Example 13.2
Total cost =
2000 Bird
Q D (H) + (S) 2 Q
feeder costs
0 | | $3510 50 + $90 100
Ordering cost =
| 250 | 300 | 350 | 400
D (S) Q
| | $3600200 150
Lot Size (Q)
Current Q

Current cost
3000
Figure 13.4
Total cost =
2000
Q D (H) + (S) 2 Q
Holding cost =
Q (H) 2
1000
Ordering cost =
0 | 50 | 100 | 150 | 200 | 250 | 300 | 350 | 400
D (S) Q
Lot Size (Q)
Current Q

Current cost
3000
Bird feeder costs

Q D Total cost = D(H )(18 + /week)(52 (S) = weeks) = 936 units 2 Q
2000
H = 0.25 ($60/unit) = $15 S = $45 Q = EOQ EOQ = H
Q Holding cost = (H) Q D 2DS 2 C= (H ) + (S)
1000
Ordering cost =
0 | 50 | 100 | 150 | 200 | 250 | 300 | 350 | 400
D (S) Q
Example 13.3
Lot Size (Q)
Current Q

Current cost
3000
Bird feeder costs

2000
H = 0.25 ($60/unit) = $15 S = $45 Q = 75 units EOQ =

1000
Ordering cost =
0 | 50 | 100 | 150 | 200 | 250 | 300 | 350 | 400
D (S) Q
Example 13.3
Lot Size (Q)
Current Q

Current cost
3000
Bird feeder costs

2000

1000
C = $562 + $562 = $1124

Ordering cost =
D (S) Q
| 50
| 100
| 150
| 200
| 250
| 300
| 350
| 400
Example 13.3
Lot Size (Q)
Current Q

Current cost
3000
Bird feeder costs

2000

1000
C = $562 + $562 = $1124

Ordering cost =
D (S) Q
| 50
| 100
| 150
| 200
| 250
| 300
| 350
| 400
Example 13.3
Lot Size (Q)
Current Q

Current cost
3000
Bird feeder costs

2000

1000
C = $562 + $562 = $1124

Ordering cost =
Lowest cost
0 | 50 | 100 | 150 | 200 | 250
D (S) Q
| 300
| 350
| 400
Example 13.3
Current Best Q Lot Size (Q) Q (EOQ) To Accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Sixth Edition 2002 Prentice Hall, Inc. All rights reserved.

Current cost
3000
Bird feeder costs

2000
H = 0.25 ($60/unit) = $15 S = $45 Q = 75 units EOQ = 2DS H C= D Q (H ) + (S) Q 2
1000
C = $562 + $562 = $1124
Lowest cost
0 | 50 | 100 | 150 | 200 | 250 | 300 | 350 | 400
Example 13.3

Current cost
3000
2000
Birdfeeder costs Time between orders Q D Total cost = D(H + /week)(52 (S) =)(18 weeks) = 936 units 2 Q EOQ = $15 HTBO = 0.25 ($60/unit) = = 75/936 = 0.080 year EOQ D S = $45 Q = 75 units EOQ = 2DS H C= D Q (H ) + (S) Q 2
1000
C = $562 + $562 = $1124
Lowest cost
0 | 50 | 100 | 150 | 200 | 250 | 300 | 350 | 400
Example 13.3

Current cost
3000
2000
Birdfeeder costs Time between orders Q D Total cost = D(H + /week)(52 (S) =)(18 weeks) = 936 units 2 Q EOQ = $15 HTBO = 0.25 ($60/unit) = = 75/936 = 0.080 year EOQ D S = $45 Q = 75 units TBOEOQ = (75/936)(12) = 0.96 months
1000
TBOEOQ = (75/936)(52) = 4.17 weeks TBOEOQ = (75/936)(365) = 29.25 days
Lowest cost
0 | 50 | 100
| 150
| 200
| 250
| 300
| 350
| 400
Example 13.3

Current cost
3000
Total cost =
2000
Q D (H) + (S) 2 Q
Holding cost =
Q (H) 2
1000
Lowest cost
0 | 50 | 100 | 150 | 200 | 250
Ordering cost =
| 300 | 350 | 400
D (S) Q
Figure 13.5
How Much? When!

Continuous Review
On-hand inventory
Time
Figure 13.7
Continuous Review
Order received
On-hand inventory
OH
Time
Figure 13.7
Continuous Review
IP Order received
On-hand inventory
OH
R
Order placed L TBO Figure 13.7
Continuous Review
IP Order received Order received IP Order received
IP
Order received
On-hand inventory
OH
OH
OH
R
Order placed L TBO TBO Order placed L TBO Figure 13.7
Order placed L
Time
Continuous Review
IP Order received Order received IP Order received IP Order received
On-hand inventory
Chicken Soup Q
OH
OH
OH
R
Order placed L TBO TBO Order placed L TBO Example 13.4
Order placed
L
Time
Continuous Review
IP
Order received
On-hand inventory
Chicken Soup
OH
OH
R
Order placed L TBO
R = Average OH demand during lead time = (25)(4) = 100 cases

Order placed L TBO TBO Example 13.4 L
Order placed
Time
Continuous Review
IP
Order received
On-hand inventory
Chicken Soup
Q
OH
R = Average demand during lead time OH = (25)(4) = 100 OH cases

IP = OH + SR BO Order Order = 10 + 200 0 = 210 cases placed
placed L TBO TBO L TBO Example 13.4
R
Order placed
Time
Uncertain Demand
Uncertain Demand
Figure 13.8
On-hand inventory
Time
Uncertain Demand
Figure 13.6 IP Order received Order received IP Order received
On-hand inventory
Order received
Q OH
Q
Q
R
Order placed Order placed Order placed
L1 TBO1 TBO2
L2 TBO3
L3
Time
Reorder Point / Safety Stock
Average demand during lead time
Figure 13.9

Cycle-service level = 85%
Probability of stockout (1.0 0.85 = 0.15) Average demand during lead time z L
Figure 13.9

Safety Stock/R Cycle-service level = 85%
Probability of stockout (1.0 - 0.85 0.85 = = 0.15) 0.15) Average demand during lead time z L
Example 13.5

Safety Stock/R Safety stock = z L = 2.33(22) = 51.3 = 51 boxes Cycle-service level = 85%
Probability of stockout (1.0 - 0.85 0.85 = = 0.15) 0.15) Average demand during lead time z L
Example 13.5

Safety Stock/R Safety stock = z L = 2.33(22) = 51.3 = 51 boxes Cycle-service level = 85%
Reorder point = ADDLT + SS = 250 + 51 = 301 boxes Average demand during lead time z L
Example 13.5
Probability of stockout (1.0 - 0.85 0.85 = = 0.15) 0.15)
Lead Time Distributions

t = 15
+
75 Demand for week 1
Figure 13.10

t = 15
+
t = 15
+
Figure 13.10

t = 15
+
t = 15
+
t = 15
=
Figure 13.10

t = 15
t = 26
+
t = 15
+
t = 15
225 Demand for three-week lead time
=
Figure 13.10

t = 15
t = 26 Bird feeder Lead Time Distribution

t = 15
+
+
t = 15
=
Example 13.6

t = 15
t = 26 Bird feeder Lead Time Distribution t = 1 week t = 15 d = 18 L=2
+
+
t = 15
=
Example 13.6

t = 15
t = 26 Bird feeder Lead Time Distribution t = 1 week t = 15 d = 18 L =5 2 L=2 = 7.1
+
+
L = t
t = 15
=
Example 13.6

t = 15
t = 26 Bird feeder Lead Time Distribution t = 1 week t = 15 d = 18 L =5 2 L=2 = 7.1
+
+
75 Safety Demand for week 2
L = t
stock = zL =
t = 15
225 for 1.28(7.1)Demand = 9.1 or 9 units three-week lead time
Reorder point = dL + Safety stock = 2(18) + 9 = 45 units
Example 13.6


t = 15
t = 26 Bird feeder Lead Time Distribution t = 1 week t = 15 d = 18 L=2 Reorder point = 2(18) + 9 = 45 units
+
t = 15
=
Example 13.6

t = 15
t = 26 Bird feeder Lead Time Distribution t = 1 week t = 15 d = 18 L=2 Reorder point = 2(18) + 9 = 45 units
+
75 936 225 C= ($15) + ($45) + 9($15) Demand for 2 75 three-week lead time
t = 15
C = $562.50 + $561.60 + $135 = $1259.10
=
Example 13.6
Periodic Review Systems

T
On-hand inventory
Time P
Figure 13.11

T On-hand inventory
Q1
Order placed
Time P
Figure 13.11

T On-hand inventory
Q1
Order placed
L P
Figure 13.11
Time P

T On-hand inventory
Order received Q1
Order placed
L P
Figure 13.11
Time P

T On-hand inventory
Order received Q1 Q2
Order received Q3
Order received
Order placed
Order placed
L P
Figure 13.11
L P
Time

T IP On-hand inventory
Order received
OH
IP
Order received OH Q3
IP Order received
Q1
IP1 IP3 Order placed IP2
Q2
Order placed
L P
Figure 13.11
L P
Time
Protection interval

Order received
OH
IP
Q1
Q2
Order Order IP Order received received IP = OHreceived + SR BO Q3 Q OH t = T - IPt
TV Set IP - P System
Order placed
T = 400 OH = 0
BO = 5 SR = 0
IP = 0 + 0 5 = 5 sets Q = 400 (5) = 405 sets

L P P L Time
Protection interval

Order received
OH
IP
Order received OH Q3
IP Order received
Q1
Q2
Order placed
L P
Example 13.7
L P
Time
Protection interval

Order Order P and T Bird feeder Calculating

received OH received
IP
IP Order received
Q1
Q2
OH
Q3
Order placed
L P
Example 13.8
L P
Time
Protection interval

T IP
Order OrderP and T Bird feederCalculating

received received
IP
On-hand inventory
IP Order received
Q3 = 90% t = 18 units L = 2 weeks cycle/service level Q1 OH OH Q2 EOQ = 75 units D = (18 units/week)(52 weeks) = 936 units IP1 IP3 Order placed IP2 Order placed
L P
Example 13.8
L P
Time
Protection interval


received received
IP
IP Order received
Q3 = 90% t = 18 units L = 2 weeks cycle/service level Q1 OH OH Q2 EOQ = 75 units D = (18 units/week)(52 weeks) = 936 units IP1 IP3 IP2 EOQ 75 P= (52) = (52) = 4.2 or 4 weeks D 936 Order Order placed P+L = t P + L = 5 placed 6 = 12 units
L P
Example 13.8
L P
Time
Protection interval


received received
IP
IP Order received
Q3 = 90% t = 18 units L = 2 weeks cycle/service level Q1 OH OH Q2 EOQ = 75 units D = (18 units/week)(52 weeks) = 936 units IP1 IP3 IP2 EOQ 75 P= (52) = (52) = 4.2 or 4 weeks D 936 Order Order placed P+L = t P + L = 5 placed 6 = 12 units T = Average demand during the protection interval + Safety stock = d (P + L) + zP + L L L L = (18 units/week)(16 weeks) + 1.28(12 units) = 123 units Time P P
Example 13.8
Protection interval


received received
IP
IP Order received
Q3 = 90% t = 18 units L = 2 weeks cycle/service level Q1 OH OH Q2 EOQ = 75 units D = (18 units/week)(52 weeks) = 936 units IP1 IP3 Order placed IP2
P = 4 weeks
T = 123 units
Order placed
L P
Example 13.8
L P
Time
Protection interval


received received
IP
IP Order received
Q3 = 90% t = 18 units L = 2 weeks cycle/service level Q1 OH OH Q2 EOQ = 75 units D = (18 units/week)(52 weeks) = 936 units IP1 IP3 Order placed IP2
P = 4 weeks
T = 123 units
Order 936placed
4(18) C= ($15) + ($45) + 15($15) 2 4(18)

C = $540 + $585 + $225 = $1350
L P P L
Time
Example 13.8
Protection interval
Comparison of Q and P Systems

P Systems
Convenient to administer Orders may be combined IP only required at review

Q Systems
Individual review frequencies Possible quantity discounts Lower, less-expensive safety stocks
ABC Analysis Solved Problem 2
Comparison of P and Q Systems Solved Problem 6

Inventory Management

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Chapter 13 -

Safety Stock Inventory

Safety Stock Inventory Anticipation Inventory

Safety Stock Inventory Anticipation Inventory Pipeline Inventory

Percentage of dollar value

Percentage of dollar value

Percentage of dollar value

Percentage of dollar value

Percentage of dollar value

Percentage of dollar value

How Much? When!

Economic Order Quantity

Economic Order Quantity

Economic Order Quantity

Economic Order Quantity

Economic Order Quantity

Economic Order Quantity

Economic Order Quantity

Economic Order Quantity

Economic Order Quantity

Economic Order Quantity

Economic Order Quantity

Average cycle inventory

Economic Order Quantity

Economic Order Quantity

Annual cost (dollars)

Lot Size (Q)

Economic Order Quantity

Annual cost (dollars)

Holding cost (HC)

Lot Size (Q)

Economic Order Quantity

Annual cost (dollars)

Holding cost (HC) Ordering cost (OC)

Lot Size (Q)

Economic Order Quantity

Holding cost (HC) Ordering cost (OC)

Lot Size (Q)

Economic Order Quantity

Economic Order Quantity

Annual cost (dollars)

Lot Size (Q)

Economic Order Quantity

Annual cost (dollars)

Lot Size (Q)

Economic Order Quantity

Annual cost (dollars)

Lot Size (Q)

Economic Order Quantity

Annual cost (dollars)

Lot Size (Q)

Economic Order Quantity

Annual cost (dollars)

Lot Size (Q)

Economic Order Quantity

Annual cost (dollars)

Lot Size (Q)

Economic Order Quantity

Annual cost (dollars)

Lot Size (Q)

Economic Order Quantity

Annual cost (dollars)

Lot Size (Q)