Chapter 12 ndash; Independent Demand Inventory Management.ppt

Chapter 12 – Independent Demand Inventory Management Operations Management by R. Dan Reid Nada R. Sanders 2nd Edition ? Wiley 2005 PowerPoint Presentation by R.B. Clough - UNH Inventories in the Supply Chain Independent vs. Dependent Demand Independent demand items are finished goods or other items sold to someone outside the company Dependent demand items are materials or component parts used in the production of another item (e.g., finished product) Types of Inventory:How Inventory is Used Anticipation or seasonal inventory Safety stock: buffer demand fluctuations Lot-size or cycle stock: take advantage of quantity discounts or purchasing efficiencies Pipeline or transportation inventory Speculative or hedge inventory protects against some future event, e.g. labor strike Maintenance, repair, and operating (MRO) inventories Objectives of Inventory Management Provide acceptable level of customer service (on-time delivery) Allow cost-efficient operations Minimize inventory investment Relevant Inventory Costs Order Quantity Strategies Examples of Ordering Approaches Three Mathematical Models for Determining Order Quantity Economic Order Quantity (EOQ or Q System) An optimizing method used for determining order quantity and reorder points Part of continuous review system which tracks on-hand inventory each time a withdrawal is made Economic Production Quantity (EPQ) A model that allows for incremental product delivery Quantity Discount Model Modifies the EOQ process to consider cases where quantity discounts are available Economic Order Quantity EOQ Assumptions: Demand is known constant - no safety stock is required Lead time is known constant No quantity discounts are available Ordering (or setup) costs are constant All demand is satisfied (no shortages) The order quantity arrives in a single shipment EOQ: Total Cost Equation EOQ Total Costs Total annual costs = annual ordering costs + annual holding costs The EOQ Formula Minimize the TC by ordering the EOQ