Unit 3 - Inventory Management & Inventory Control
Unit 3 - Inventory Management & Inventory Control
• Stock of materials
• Stored capacity Types of Inventory
• Raw material
• Work-in-progress
• Maintenance/repa
ir/operating
supply
• Finished goods
(a) Single-stage (b)Two-stage
inventory system inventory system
Suppliers Suppliers
e.g. Local retail store e.g. Automotive parts distributor
(c) Multi-stage inventory
system
Suppliers
• Divides in-hand
inventory into 3 classes Class B items - the
– A class, B class, C next 30% or so of
class
medium-value
Class A items - the
items which
• Basis is usually annual $ 20% or so of high-
volume account for around
value items which
– $ volume = Annual 10% of the total
account for around
demand x Unit cost stock value
80% of the total
stock value
• Policies based on ABC
analysis
– Develop class A
suppliers more Class C items -
– Give tighter physical
the remaining 50%
control of A items
– or so of low-value
Forecast A items
more carefully items which
account for around
the last 10% of the
total stock value
Other Inventory Classification & Measures
Obsolescence
• Holding costs - Insurance
associated with holding Extra staffing
or “carrying” inventory Interest
over time Pilferage
Damage
Warehousing
• Ordering costs -
associated with costs of
placing order and Supplies
receiving goods Forms
Order
processing
• Setup costs - cost to Clerical support
prepare a machine or
process for
manufacturing an order Clean-up costs
Re-tooling costs
Adjustment
costs
Inventory Models
• Probabilistic models
Total
costs Stock-holding
costs
Costs
Ordering
costs
Inventory Level
Optimal Average
Order Inventory
Quantity (Q*/2)
(Q*)
Reorder
Point
(ROP)
Time
Lead Time
EOQ Model Equations Total
costs
Stock-holding
costs
Costs
Ordering
costs
2 ×D ×S
Optimal Order Quantity = Q* = EOQ Order quantity
H
D
Expected Number of Orders =N =
Q*
Time
Supply Supply
Begins Ends
POQ Model Equations
2*D*
Optimal Order =Q = S
( )
d
Quantity H 1-
* p
Maximum
inventory level
=Q
* ( ) 1-
d
p
D S D = Demand per
Setup = * year
Cost Q
S = Setup cost
Holding
Cost
= 0.5 * H
*Q
( )
1-
d
p
H = Holding cost
d = Demand per
day
p = Production
per day
POQ Model Inventory
Inventory Level
Levels
Inventory level with no demand
Time
Supply Supply Demand portion of
Begins Ends cycle with no supply
Quantity Discount
Model
f or n t co unt
T C u is
D isco for D
No TC 1
C for 2
T unt
i s co
D
Quantity which
would be
ordered
Quantit Quantity Order
Lowest cost not y to to earn Quantity
in discount earn Discoun
Discoun t2
range t1
Probabilistic Models
• Answer how much & when to order
Time
Period Period Period