2. Inventory Management STU

8/6/2019 2. Inventory Management STU

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Supply Chain ManagementSupply Chain Management

Dr.Dr. SomkiatSomkiat MansumitrchaiMansumitrchai

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Copyright: Dr. Somkiat Mansumitrchai

Inventory Management

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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.


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1.2 Introduction

In fact, the goal of effective inventorymanagement 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.

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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.

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Supplier

Manufacturer

Warehouse&

DistributionCustomersFinished

product

Distribute

Raw material

Production


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1.2 Introduction

Inventory can appear in many places in thesupply chain, and in several forms:

Raw material inventory

Work-in process (WIP) inventory

Finished product inventory

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Supplier

Manufacturer

Warehouse&

DistributionCustomersFinished

product

Distribute

Raw material

Production

Raw material inventory

WIP Inventory

Finished product inventory

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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.


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a. The short life cycle of an increasingnumber of products. This implies that

historical data about consumer demand may

not be available.

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PLC

TIME

Introduction

Maturity Decline

Growth

Short life cycle

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b. The presence of many competing

products or product groups in the

marketplace. It is much more difficult to

estimate demand for individual products.


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2. The presence in many situations of a

significant uncertainty in the quantity andquality of the supply, supplier costs, and

delivery times.

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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.

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Techniques Using for

Inventory Management


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2.1 The Basic EconomicOrder Quantity (EOQ)

Model

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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.

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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 anorder.


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Assumptions:

4. An inventory carrying cost, h, alsoreferred to as a holding cost, is accrued

per unit held in inventory per day that

the unit is held.

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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.

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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).


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0

InventoryLevel

Average inventory

On hand Q/2

Usage rate

Order quantity = Q

(maximum inventory level)

Minimum

Inventory

Time

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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

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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) = D S

Q Q


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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) = Q H

2 2

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EOQ Model

3. Optimal order quantity is found when annual setup cost equals

annual holding cost

D S = Q H

Q 2

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EOQ Model

4. To solve forQ*

2 DS = Q H

Q = 2 DS

H

Q = 2DS

H

2

2

*


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AnnualCost

Curve for total cost

of holding and setup

Minimum

total cost

Holding cost

curve

Setup (or order)

cost curve

Order quantityOptimal

Order

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 orders (T) as follows:

Expected number of orders = N = Demand = D

Order Quantity Q*

2

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EOQ Model


(N) and the expected time between orders (T) as follows:

Expected time between orders ( T)

= Number of working days per year

N


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EOQ Model

We can also calculate the total annual inventory costs.

TC = D S + Q H

Q 2

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Example

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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.


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Solution:

Q* = 2DSH

Q* = 2(1,000)(10)

0.50

= 40,000 = 200 units

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Solution


(N)

Expected number of orders = N = Demand = D

Order Quantity Q*

= 1,000 = 5 orders per year

200

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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


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EOQ Model

We can also calculate the total annual inventory costs.

TC = D S + Q HQ 2

= 1,000 ($10) + 200 ($.50)200 2

= (5)($10) + (100)($.50)

= $50+$50 = $100

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Practice & Exercise

2. Inventory Management STU

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