answers the the question how much to order

Excess= Cost per unit – salvage value per unit

(weekly, bi-weekly)

Vital part of business

1) necessary for operations

2) contribute to customer satisfaction.

“typically”

30% current assets

90% working capital invested in inventory

shortage cost = revenue per unit – cost per unit

(fruits, magazines, flowers)

goal is to identify the order quaint that will maximize the long-run excess and shortage cost

continous distribution

discrete distiribtion

acts as a cousin for

2) make decisions about

i. when to order

ii. how much to order

1. how much to order

2. when to order

EOQ=

SQRT(2*annual usage in units)*(ordering cost)/annual carrying cost per unit

ROP=demand * lead time + safety stock

ROP= 21*2+4

ROP=42+4

ROP46

FOI

ROP

EOQ

the EOQ factors are demand, ordering costs, & carrying costs.

textbook

wedding gifts

sugar

newspaper

textbook

wedding gifts

sugar

brownies

EOQ

ROP

FOI

none

double its former value

about 50% of its former value

about 71% of its former value

unaffected.

because S in the under the square root sign, multiplying its value be 2 will increase the EOQ by the square root of 2 which is 0.707

EOQ= SQRT(2)/2

EOQ=1.4/2

EOQ= 0.707

EOQ

lead time

annual holding cost

ROP

safety stock

shortage

holding

excess

ordering

2. WIP work in process

3. finished goods,

4. tools and supplies

5. maintenance and repais (MRO) inventory

6. goods in transit to warehouse or customer (pipeline inventory)

the right goods viable in the right quantity in the right place

(establish a system of tracking)

2. costs of ordering and carrying inventories

1. measure performance

2.customer satisfaction:

(how many back orders) (how many complaints)

3. inventory turnover

10%-20% # of items in inventory

70% of annual dollar value

“B” moderately important

“C” least important

50%-60% # of items in inventory

10%-15% of annual dollar value

accuracy is important because because it leads to disruption in operations, poor customer service and unnecessary high levels of inventory cost

Accuracy is needed

A items: ± 0.2 %

B items: ± 1 %

C items: ± 5 %

When the quantity on hand of an item drops to this amount, the item is reordered.

Determinants of the reorder point

The rate of demand

The lead time

The extent of demand and/or lead time variability

The degree of stockout risk acceptable to management.

To reduce the likelihood of a stockout, it becomes necessary to carry safety stock

Safety stock

Stock that is held in excess of expected demand due to variable demand and/or lead time

II. variation reduction

III. lean operations

IV. supply chain management.