Chapter 10 Inventory Management
Economic Order Model
1. demand is known and constant 2. lead time is known and constant 3. All inventory received completely 4. Ordering costs are known and constant 5. Holding costs are known and constant 6. stock outs are completely avoided
periodic order quantity
Economic order quantity / average weekly usage
Quantity discount
a discount is given for orders over a certain volume, must consider the purchase cost, ordering cost and carrying cost
Relevant costs for Economic order model
annual ordering costs, annual holding costs, as the order quantity increases the average inventory and the cost of carrying increase
annual carrying cost
average inventory X cost of carrying one unit per year, or average inventory X unit cost X carrying cost in percent
ordering costs
buyer time costs, transportation costs, receiving costs, miscellaneous costs
holding costs
handling costs, occupancy cost, obsolescence cost, miscellaneous cost
two most important factors in inventory management
how much to order, and when to order
Four costs of inventory
item cost, stockout cost, holding cost, ordering cost
main objective of inventory management
minimize total inventory related costs to meet the customer needs
Annual ordering cost
number of orders X cost/ order
lot-for-lot
order exactly what is needed, quantities change based on needs, use of time phased info(from MRP and MPS), most often used with A items
fixed order quantity
order quantity is fixed but period varies, minimal cost of carrying and ordering
ABC inventory analysis
places inventory in different classes base on inventory cost
fixed period quantity
quantity varies, order period fixed, order enough to cover demand overtime period
four types on inventory
raw materials, finished goods, work in process, and distribution
lot size
the quantity ordered in a single order or manufactured in a single production run