Special Topics in Supply Chain

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Inventory: The Basics
Inventor
IE 5107
Material Flow Systems
Dr. Boray Huang
Industrial & Systems Engineering
National University of Singapore

Standardization
Standardization


When to standardize? When to customize?



The advantages of standardization:

Product Life Cycle

Matching
Matching demand with supplies

Unit Cost

Unit Price

Sales Revenue

Profit

Sale Amount

Production Cost

Production
Amount

Types
Types of Inventory


Raw material
 Purchased but not processed



Work-in-process
n Undergone some change but not completed
 A function of cycle time for a product



Maintenance/repair/operating (MRO)
 Necessary to keep machinery and processes
productive



Finished goods
 Completed product awaiting shipment

Functions
Functions of Inventory
 To

deal with variability
(fluctuations) in supply and
demand
 To take advantage of discount
 To hedge against inflation
 To lower the impact of fixed costs
 To provide convenience

The
The Material Flow Cycle
Cycle time
95%
Input

Wait for
inspection

Wait to
be moved

5%

Move Wait in queue Setup Run
time for operator time time

Output

Costs
Costs of Inventory


Holding Costs
◦ The costs of holding or “carrying” inventory over
time



Ordering (Setup) Costs
◦ The costs of placing an order and receiving goods
◦ The costs to prepare a production run for
manufacturing an order



Shortage Cost
◦ The costs of losing revenue or goodwill if an
The
order is not satisfied.



Purchase Cost?

Holding
Holding Costs
Category

Cost (and Range)
(and Range)
as a Percent of
Inventory Value

Housing costs (including rent or
(i
depreciation, operating costs, taxes,
insurance)

6% (3 - 10%)

Material handling costs (equipment lease or
depreciation, power, operating cost)

3% (1 - 3.5%)

Labor cost

3% (3 - 5%)

Investment costs (borrowing costs, taxes,
and insurance on inventory)
and insurance on inventory)
Pilferage, space, and obsolescence
Overall carrying cost
carrying cost

11% (6 - 24%)
3% (2 - 5%)
26%

Economic
Economic Order Quantity (EOQ)
Assumptions
1. Production is instantaneous
2. Receipt of inventor y is instantaneous and
complete (Delivery is immediate.)
3. Demand is known, constant, and
independent
4. Quantity discounts are not possible
discounts
5. Fixed setup for each production run /
order
order
6. Single product.
7. Stockout can be completely avoided

Inventory level

Inventory
Inventory Usage Over Time
Order
Order
quantity
quantity = Q
(maximum
inventory
level)

Usage rate

Minimum
inventory

Time

Average
inventory
inventory
on
on hand
Q
2

Annual
Annual Setup Cost
Q
Q*
D
A
h

= Number of pieces per order
= Optimal number of pieces per order (EOQ)
= Annual demand in units for the Inventory item
= Setup or ordering cost for each order
= Holding or carrying cost per unit per year

Annual setup cost = (Number of orders placed per year)
x (Setup or order cost per order)
Annual demand
Setup or order
=
Number of units in each order cost per order
=

D
(A)
Q

Annual
Annual Holding Cost
Q
Q*
D
A
h
c

= Number of pieces per order
Number of pieces per order
= Optimal number of pieces per order (EOQ)
= Annual demand in units for the Inventory item
= Setup or ordering cost for each order
= Holding or carrying cost per unit per year
= Production cost per unit

Annual holding cost = (Average inventory level)
x (Holding cost per unit per year)
=

Order quantity
(Holding cost per unit per year)
2

=

Q
(h)
2

Mi
Minimizing Total Costs
Objective is to minimize total costs
Curve for total
Curve for total
cost
cost of holding
and setup

Annual cost

Mi
Minimum
total cost
Holding cost
curve

Setup (or order)
cost curve
Optimal
order
quantity

Order quantity

Minimizing
Minimizing...
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