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