# Operational Management Inventory Management

Pages: 9 (849 words) Published: March 19, 2013
INVENTORY MANAGEMENT

Course Instructor: Dr. Swati Singh Course: MBA- II Amity Business School

Raw material  In-Process  Finished Goods  Components & spare Parts 

Inventory Costs

Purchase Cost  Ordering Costs  Carrying / Holding Costs  Shortage Costs

 

Procurement / Ordering costs Holding costs
◦ Maintenance and Handling ◦ Taxes ◦ Obsolescence
◦ Lost sales (Customer goodwill) ◦ Backorders

Stock-outs costs

 Seasonal

Inventory

 Decoupling

Arise out of seasonality

Inventory

 Cyclic
 

Work-in progress- output of preceding stage becomes input for succeeding stage Inventory decisions require analysis of workstation capacities, resource availability & bottlenecks

Inventory

 Pipeline
  

Inventory in repeated cycles and consumed overtime Average cyclic inventory = Q/2

Inventory

It is carried according to the lead time Done to avoid shortage due to delays in delivery It is the additional inventory to buffer against uncertainties in demand & supply of raw materials & components

Deterministic Models
◦ The simplest inventory models assume demand and the other parameters of the problem to be deterministic and constant.

◦ The Economic Order Quantity (EOQ) model

Probabilistic Inventory models
◦ The demand is not known. Demand characteristics such as mean, standard deviation and the distribution of demand may be known.

◦ A fixed order quantity model ◦ A fixed time period model

Economic Order Quantity (EOQ)
It is an idealized inventory system to calculate the fixed order quantity that minimizes total costs. This optimal order size is called EOQ.

Reorder Level
Reorder level = lead time × demand per unit time ROL = LT × D

Probabilistic Inventory models
Q
Quantity on hand Profile of Inventory Level Over Time

Demand rate

Reorder point

Place order

Place order

Time

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EOQ

Reorder Level
Minimum Level Safety Stock T1

T2

T3

Time
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Q2 Q1

Q3

ML Safety Stock

T

T

T
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Time

Total Cost Curve

Annual Cost

Min Tc

Holding Cost

Ordering Cost

EOQ

Order Quantity
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EOQ = Optimum Quantity = Least Total Cost Total cost = Tc = D*Cp + D*Co + Q*Ch Q 2 Where, Tc = D = Cp = Q = Co = Ch = Total Cost Annual demand (units) Purchase cost / unit Order quantity (EOQ) Cost of Placing an order Holding cost

Total Cost (Min.) = Ordering Cost = Carrying Cost D * Co = Q * Ch Q 2 Where, D/Q = No. of orders, Q/2 = Average Inventory Thus, Q² = 2 D Co Ch

Or Q =√2 D Co = EOQ Ch

Q1. Telco Ltd. Uses 2,400 of particular type of component per year. ‘X’ enterprise supplies this at a price of Rs. 10 each. Ordering cost is Rs. 100 per order & carrying cost is 10% at Telco. ‘X’ enterprise wants to give 10% discount if order quantity is 1000. Is it advisable to accept the discount offer?

Sol.1 EOQ =√2 D Co = √2*2400* 100 = 690 units

Ch 1 Where, Ch= 10% x 10 Now, Total Cost for EOQ: Tc1 = D. Cp + D . Co + Q . Ch Q 2 = 2400 x 10 + 2400 x 100+690 x 10 x 10=24,693 690 2 100 Total cost for Discount offer i.e. for order of 1000 units Tc2 = 22,340 Hence, it is better to take discount offer as Tc2 < Tc1

Q2. Company ‘XYZ’ buys 2000 pencils/year at Rs 1/- each. The ordering cost is Rs 10/- per order. Inventory carrying cost is 16% per annum. Find: (1) EOQ (2) No. of orders & (3) Total inventory cost/year

Sol 2. (1) Given: D = 2000 units, Co = 10, Ch = 16 % of Cp = 16 % x 1 = .16 EOQ =√2x2000x10 = 500 units 0.16 (2) No. of orders = D = 2000 = 4 orders Q 500 (3) Tc = D . Co + Q . Ch =4 x 10+250 x 0.16 = 80

Q 2

Probabilistic Inventory models
Q
Quantity on hand Profile of Inventory Level Over Time

Demand rate

Reorder point

Place order