Inventory Management: Costs, Patterns, and Approaches - Prof. Samir Y. Khoury, Study notes of Systems Engineering

Download Inventory Management: Costs, Patterns, and Approaches - Prof. Samir Y. Khoury and more Study notes Systems Engineering in PDF only on Docsity! OSTA aN MC aa liberate  © 2008 Prentice Hall 9-2 Learning Objectives  To determine the costs of holding inventory  To identify the costs associated with a stockout  To understand the EOQ concept  To differentiate the various inventory flow patterns  To explore approaches to managing inventory © 2008 Prentice Hall 9-5 Inventory Management  Low inventory turnover = high inventory carrying costs, little (or no) stockout costs  High inventory turnover = low inventory carrying costs, high stockout costs  Managing the tradeoff is important to maintain service levels © 2008 Prentice Hall 9-6 Inventory Classifications  Psychic stock – Large quantities used to stimulates demand (common in retail stores)  Cycle or base stock – Needed to satisfy normal demand during the reorder cycle  Safety or buffer stock – Stock held in addition to cycle stock to guard against uncertainty in demand or lead time.  Pipeline or in-transit stock – Inventory that is en route between various nodes (plant, warehouse, or store)  Speculative stock – Inventory held in anticipation of seasonal demand, projected price increases, shortages, etc. © 2008 Prentice Hall 9-7 Inventory-Related Costs  Inventory carrying (holding) costs – Obsolescence – Inventory shrinkage – Storage costs – Handling costs – Insurance costs – Taxes – Interest charges – Opportunity cost  Stockouts © 2008 Prentice Hall 9-10 How Much to Reorder  Economic order quantity (EOQ) in dollars EOQ = √2AB/C Where EOQ = the most economic order size, in dollars A = annual usage, in dollars B = administrative costs per order of placing the order C = carrying costs of the inventory (%) © 2008 Prentice Hall 9-11 How Much to Reorder  Economic order quantity (EOQ) in units EOQ = √2DB/IC Where EOQ = the most economic order size, in units A = annual demand, in units B = administrative costs per order of placing the order C = carrying costs of the inventory (%) I = dollar value of the inventory, per unit © 2008 Prentice Hall 9-12 Inventory Flows  Safety stock can prevent against two problem areas – Increased rate of demand – Longer-than-normal replenishment  When fixed order quantity system like EOQ is used, time between orders may vary  When reorder point is reached, fixed order quantity is ordered