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Inventory Control Models Explained

The document discusses inventory control models, defining inventory as stored resources used to meet current or future needs, including raw materials and finished goods. It outlines the planning and control systems necessary for managing inventory levels, minimizing costs, and determining order quantities and reorder points. Key concepts include the Economic Order Quantity (EOQ) model and the significance of balancing ordering and carrying costs to avoid stockouts.

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16 views11 pages

Inventory Control Models Explained

The document discusses inventory control models, defining inventory as stored resources used to meet current or future needs, including raw materials and finished goods. It outlines the planning and control systems necessary for managing inventory levels, minimizing costs, and determining order quantities and reorder points. Key concepts include the Economic Order Quantity (EOQ) model and the significance of balancing ordering and carrying costs to avoid stockouts.

Uploaded by

ze9e17
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

INVENTORY CONTROL MODELS

INVENTORY

• INVENTORY IS ANY STORED RESOURCE THAT IS USED TO SATISFY A CURRENT


OR A FUTURE NEED.
• RAW MATERIALS
• WORK-IN-PROCESS
• FINISHED GOODS
INVENTORY PLANNING AND CONTROL SYSTEM

Planning on what
inventory to stock Forecasting parts Controlling
and how to acquire of products or inventory levels
it demands

Feedback
measurements to
revise plans and
forecasts
USES OF INVENTORY
• THE DECOUPLING FUNCTION
• DECOUPLE MANUFACTURING PROCESSES; THERE COULD BE DELAYS & INEFFICIENCIES
• STORING RESOURCES
• PRODUCTS HAVE DEFINITE SEASONS BUT THE DEMAND IS CONSTANT DURING THE YEAR
• IRREGULAR SUPPLY & DEMAND
• QUANTITY DISCOUNTS
• SUPPLIERS OFFER DISCOUNTS FOR LARGE ORDERS
• AVOIDING STOCKOUTS & SHORTAGES
• IF YOU ARE REPEATEDLY OUT OF STOCK, CUSTOMERS ARE LIKELY TO GO ELSEWHERE TO SATISFY
THEIR NEEDS
FUNDAMENTAL DECISIONS WHEN
CONTROLLING INVENTORY

• HOW MUCH TO ORDER


• WHEN TO ORDER

* A MAJOR OBJECTIVE OF ALL INVENTORY MODELS IS TO MINIMIZE INVENTORY


COSTS.
MOST SIGNIFICANT INVENTORY COSTS

• COST OF THE ITEMS (PURCHASE COST OR MATERIAL COST)


• COST OF ORDERING
• COST OF CARRYING OR HOLDING INVENTORY
• COST OF STOCKOUTS
ECONOMIC ORDER QUANTITY (EOQ):
DETERMINING HOW MUCH TO ORDER
• THE FOLLOWING ASSUMPTIONS MUST BE MET:
• DEMAND IS KNOWN AND CONSTANT
• THE LEAD TIME (TIME BETWEEN THE PLACEMENT AND THE RECEIPT OF THE ORDER) IS KNOWN AND
CONSTANT
• THE RECEIPT OF INVENTORY IS INSTANTANEOUS
• THE PURCHASE COST PER UNIT IS CONSTANT THROUGHOUT THE YEAR. QUANTITY DISCOUNTS ARE
NOT POSSIBLE
• THE ONLY VARIABLE COSTS ARE ORDERING COST, AND HOLDING OR CARRYING COST
• ORDERS ARE PLACED SO THAT STOCKOUTS OR SHORTAGE ARE AVOIDED COMPLETELY
INVENTORY COSTS IN THE EOQ SITUATION
• MINIMIZE THE SUM OF THE ORDERING AND CARRYING COSTS,
MINIMIZE THE TOTAL COST
• ANNUAL ORDERING COST = (NUMBER OF ORDERS PER YEAR)(COST OF
PLACING EACH ORDER)
• TO DETERMINE ANNUAL HOLDING/CARRYING COST, USE THE AVERAGE
INVENTORY LEVEL
• ANNUAL CARRYING COST = (AVERAGE INVENTORY)(INVENTORY CARRYING
COST PER UNIT PER YEAR)
INVENTORY COSTS

• ANNUAL ORDERING COST = (NO. OF ORDERS PLACED PER YEAR)(ORDERING COST PER ORDER)
ANNUAL DEMAND
= [Link] UNITS IN EACH ORDER × ORDERING COST PER ORDER
𝐷
= 𝑄 𝐶𝑜

• ANNUAL CARRYING COST = (AVERAGE INVENTORY)(CARRYING COST PER UNIT PER YEAR)
ORDER QUANTITY
= 2
× CARRYING COST PER UNIT PER YEAR
𝑄
= 2 𝐶ℎ
FINDING THE EOQ

• WHEN THE EOQ ASSUMPTIONS ARE MET, THE TOTAL COST IS MINIMIZED
WHEN THE ANNUAL HOLDING COAT IS EQUAL TO THE ANNUAL ORDERING
COST

2𝐷𝐶𝑜
• 𝐸𝑂𝑄 = 𝑄∗ =
𝐶ℎ
REORDER POINT:
DETERMINING WHEN TO ORDER
• LEAD/DELIVERY TIME – TIME BETWEEN THE PLACING AND RECEIPT OR AN ORDER
• INVENTORY POSITION – INVENTORY ON HAND + INVENTORY ON ORDER
• REORDER POINT (ROP) – THE INVENTORY POSITION AT WHICH AN ORDER SHOULD BE PLACED
• 𝑅𝑂𝑃 = DEMAND PER DAY × LEAD TIME FOR A NEW ORDER IN DAYS
• 𝑅𝑂𝑃 = 𝑑 × 𝐿

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