Operation Research Essay

1303 words - 6 pages


Inventory Management


Inventory Management


Operations Management


William J. Stevenson

Inventory Management

8th edition
McGraw-Hill/Irwin Operations Management, Eighth Edition, by William J. Stevenson Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved.


Inventory Management


Inventory Management

Types of Inventories

Inventory: a stock or store of goods

Independent Demand


Dependent Demand

Raw materials & purchased parts • Partially completed goods called work in progress
• •

Finished-goods inventories







(manufacturing firms) or ...view middle of the document...


Classifying inventory according to some measure of importance and allocating control efforts accordingly.

• •

A physical count of items in inventory Cycle counting management
• •

A - very important B - mod. important C - least important

How much accuracy is needed? When should cycle counting be performed? Who should do it?

High Annual $ value of items Low

Few Many

Number of Items

11-15 Inventory Management

Economic Order Quantity Models
• • •

11-16 Inventory Management

Assumptions of EOQ Model

Economic order quantity model Economic production model Quantity discount model

• • • • • •

Only one product is involved Annual demand requirements known Demand is even throughout the year Lead time does not vary Each order is received in a single delivery There are no quantity discounts

11-17 Inventory Management

The Inventory Cycle
Profile of Inventory Level Over Time

11-18 Inventory Management

Total Cost

Figure 11.2 Q
Quantity on hand

Usage rate

Annual Annual Total cost = carrying + ordering cost cost TC = Q H 2 + DS Q

Reorder point

Receive order

Place Receive order order

Place Receive order order


Lead time

11-19 Inventory Management

Cost Minimization Goal
The Total-Cost Curve is U-Shaped

11-20 Inventory Management

Deriving the EOQ

Figure 11.4C

Annual Cost

TC =

D Q H+ S 2 Q

Using calculus, we take the derivative of the total cost function and set the derivative (slope) equal to zero and solve for Q.


2DS = H

2( Annual Demand )(Order or Setup Cost ) Annual Holding Cost

Ordering Costs
QO (optimal order quantity) Order Quantity (Q)

11-21 Inventory Management

Minimum Total Cost

11-22 Inventory Management

Economic Production Quantity (EPQ)
Production done in batches or lots • Capacity to produce a part exceeds the part’s usage or demand rate • Assumptions of EPQ are similar to EOQ except orders are received incrementally during production

The total cost curve reaches its minimum where the carrying and ordering costs are equal.
Q OPT = 2DS = H 2( Annual Demand )(Order or Setup Cost ) Annual Holding Cost

11-23 Inventory Management

11-24 Inventory Management

Economic Production Quantity Assumptions Only one item is involved • Annual demand is known • Usage rate is constant • Usage occurs continually • Production rate is constant • Lead time does not vary • No quantity discounts

Economic Run Size

Q0 =

p 2DS H p− u

11-25 Inventory Management

Total Costs with Purchasing Cost

11-26 Inventory Management

Total Costs with PD
Adding Purchasing cost doesn’t change EOQ

Figure 11.7

Annual Annual TC = carrying + ordering + Purchasing cost cost cost TC = Q H 2 + DS Q + PD


TC with PD

TC without PD





11-27 Inventory Management

Total Cost with Constant Carrying Costs

11-28 Inventory Management

When to Reorder...

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