Lecture 6 Flashcards
Running the store a little vs running the store a lot
1.8 L cartoon / week
Cost: refrigeration
Capital tied up (interest cost)
Risks: may go bad
300ml cartoon / day
Costs: low volume surcharge
Travel to shop each day
Risks: may want 2 one some days
Lot or batch size
the quantity that a stage of a supply chain either produces or purchases at a time
Cycle inventory
the average inventory in a supply chain due to either production or purchases in lot sizes that are larger than those demanded by the customer
Multi period inventory systems
Fixed order quantity models
Also called the economy order quantity, EOQ and Q-model
Event triggered
Multi period inventory systems
Fixed-time periods model
Also called the periodic system, periodic review system, fixed-order interval ssystem and P model
Time triggered
Q-model process
Idle state (waiting for demand)
Demand occurs (units withdraw from inventory or backordered)
Compute inventory position (position = on hand - on order - backorder)
Is position < reorder point –> yes –> issua an order for exactly Q units
P model process
Idle state (waiting for demand)
demand occurs (unit withdrawn from inventory or backorder)
UNTIL
Review time has arrived
Compute inventory position (position = on hand - on order -on backorder)
Compute order quantity to bring inventory up to required level
Issue an order for the number of units needed
Fixed-order quantity models
These models attempt to determine the specific point, R, at which an order will be placed and the size of that order, Q
Optimal order quantity (Qopt) - order size that minimizes total annual inventory related costs
Assumptions that are unrealistic but represent a starting point
Demand for the product is constant and uniform throughout the period
Lead time (time from ordering to receipt) is constant
price per unit of product is constant
inventory holding cost is based on average inventory
Ordering or setup costs are constant
All demands for the product will be satisfied
Basic fixed order quantity models (EOQ)
Always order Q units when inventory reaches reorder point (R)
Inventory arrives after lead time
Inventory is raised to maximum level
inventory is consumed at a constant rate with a new order placed when the reorder point (R) is reached once again
Economic order quantity model
The economic order quantity model is used to find a fixed order quantity that will minimize the total annual inventory costs
Total annual costs (“formula”)
annual purchase cost + annual ordering cost + annual holding cost
Total annual inventory costs
TC = DC + D/QS + Q/2H
TC = total annual cost
D = annual demand
C = cost per unit
Q = order quantity
S = cost of placing an order (setup cost)
H = annual cost of holding/storing one unit in inventory
Optimal order quantity formula
Qopt = squr(2DS/H)
Insights from EOQ
There is a direct trade off between order size and average inventory
Total cost is relatively insensitive to changes in…
Q - rounding of quantities
D - Errors in forecasting
S,H - Errors in cost parameters
Thus, EOQ is widely used despite its highly restrictive assumptions
EOQ is a good starting point in most inventory systems
It also helps to focus management attention on process improvement
Uncertainty and safety stock (regards of EOQ)
EOQ assumes that demand is certain (deterministic), however… demand forecasts are always “wrong)
Demand and delivery lead time are never certain and require safety stock
Safety inventory is carried to satisfy demand that exceeds the amount forecasted
Raising the level of saafety inventory increases product availability and thus the margin captured form customer purchases
Raising the level of safety inventory increases inventory holding costs
