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# OperationsManagement BUAD306

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This 40 page Class Notes was uploaded by Jaquelin Borer on Saturday September 19, 2015. The Class Notes belongs to BUAD306 at University of Delaware taught by SusanMurphy in Fall. Since its upload, it has received 71 views. For similar materials see /class/207104/buad306-university-of-delaware in Business Administration at University of Delaware.

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Date Created: 09/19/15

BUAD306 Inventory Management Material to Scan 0 ABC Systems 0 Service Level calculations 0 Fixed order Interval Model 0 Single Period Model 0 Continuous Stocking Levels 0 Discrete Stocking Levels 0 Everyday Inventory 0 Food 0 Gasoline 0 Clean clothes What else 0 Inventory 0 Stock or quantity of items kept to meet demand 0 Takes on different forms Final goods Raw materials Purchasedcomponent parts Labor lnprocess materials Working capital Inventory 0 Static only one opportunity to buy and sell units 0 Dynamic ongoing need for units reordering must take place Demand 0 Dependent Demand Items are used internally to produce a final product 0 Independent Demand Items are final products demanded by external customers Reasons To Hold Inventory 0 To meet anticipated demand 0 To smooth production requirements 0 To decouple components of the production distribution system 0 To protect against stockouts 0 To take advantage of order cycles 0 To hedge against price increases or to take advantage of quantity discounts 0 To permit operations Inventory Costs 0 Carrying Costs Costs of holding an item in inventory 0 Ordering Costs Costs of replenishing inventory 0 Shortage stockout Costs Temporary or permanent loss of sales when demand cannot be met Inventory Management How much and when to order inventory 0 Objective To keep enough inventory to meet customer demand and also be costeffective 0 Purpose To determine the amount of inventory to keep in stock how much to order and when to order Inventory Management Requirements 0 A system to keep track of the inventory on hand and on order 0 A reliable forecast of demand 0 Knowledge of lead times 0 Reasonable estimates of inventory costs 0 A classification system for inventory items 0 Inventory Control Systems 0 Control the level of inventory by determining how much to order and when Continuous Perpetual Inventory System a continual record of the inventory level for every item is maintained Periodic Inventory System inventory on hand is counted at specific time intervals Other Control SystemsTools o TwoBin System two containers of inventory reorder when the first is empty 0 Universal Product Code UPC Bar code printed on a label that has information about the item to which it is attached 0 RFID Tags 0 llllIH 214800 232087768 Considerations 0 Lead Time Time interval between ordering and receiving the order 0 Cycle Counting Physical count of items in inventory 0 Usage Rate Rate at which amount of inventory is depleted 0 Inventory Cycle Profile of Inventory Level Over Time Quantity on hand Reorder point Time Receive Place Receive Place Receive order order order order order lt 39 Lead time Economic Order Quantity 0 The EOQ Model determines the optimal order size that minimizes total inventory costs Inventory Costs 0 Carrying Costs cost associated with keeping an item in stock Includes storage warehousing insurance security taxes opportunity cost depreciation etc 0 Ordering Costs cost associated with ordering and receiving inventory Determining quantities needed preparing documentation shipping inspection of goods etc 0 Optimal Order Quantity O Q 2DS 2 Annual Demand Order Cost per unit H Annual Holding Cost per unit Q0 Length of order cycle Basic EOQ Model Annua Annua Total cost carrtylng ordering cos cost g 23 TC 2H Q Where Q Order quantity in units H Holding carrying cost per unit D Demand usually in units per year 8 Ordering cost Annual Cost Cost Minimization Goal The TotalCost Curve is UShaped TCHQS Carrying Costs Ordering Costs Qooptima order quantity Order Quantity Q EOQ Example A local office supply store expects to sell 1800 printers next year Annual carrying cost is 45 per printer and ordering cost is 60 The company operates 288 days a yeah A What is the E00 B How many times per year does the store reorder C What is the length of an order cycle D What is the total annual cost if the E00 quantity is ordered Given Demand D 1800 Holding Cost H 45 per unit per year Ordering Cost S 60 A What is the E00 Qo 203 H B How many times per year does the store reorder Number of orders DQO C What is the length of an order cycle QJD Given Demand D 1800 Holding Cost H 45 per unit per year Ordering Cost S 60 D What is the total annual cost if the E00 quantity is ordered TC Carrying cost Ordering cost QC2 H DQO S EOQ Example A local electronics store expects to sell 14200 flatscreen TVs next year Annual carrying cost is 40 per TV and ordering cost is 80 The company operates 364 days a year A What is the E00 B How many times per year does the store reorder C What is the length of an order cycle D What is the total annual cost if the E00 quantity is ordered Given Demand D 14200 Holding Cost H 40 per unit per year Ordering Cost S 80 A What is the E00 QO B How many times per year does the store reorder Number of orders DQO C What is the length of an order cycle QJD Given Demand D 14200 Holding Cost H 40 per unit per year Ordering Cost S 80 D What is the total annual cost if the E00 quantity is ordered TC Carrying cost Ordering cost 0 Quantity Discounts oA price discount on an item if predetermined numbers of units are ordered TC Carrying cost Ordering cost Purchasing cost Q2HDQSPD where P Unit Price Quantity Discount Example Comptek Computers wants to reduce a large stock of PCs it is discontinuing It has offered the University Bookstore a quantity discount pricing schedule as shown below Given the discount schedule and its known costs the bookstore wants to determine if it should take advantage of this discount or order the basic EOQ order size Quantity Price Carrying Cost 190 1 49 1400 Ordering Cost 2500 50 89 1100 Annual Demand 200 units 90 900 0 First determine the optimal size and cost with the basic EOQ model 00 o This order size is eligible for the first discount of 1100 now we compute the total cost TC Compare this cost to an ordering size of 90 TC HW 13 A mailorder house uses 18000 boxes a year Carrying costs are 60 per box per year and ordering costs are 96 The following price schedule is offered Determine the E00 and the of orders per year Boxes Unit Price 10001999 125 20004999 120 50009999 115 10000 110 Reorder Point 0 The level of inventory at which a new order should be placed 0 If demand and lead time are both constant the reorder point is ROP d LT where d Demand rate LT Lead time in days or weeks 0 Reorder Point Example A discount carpet store is open 311 days per year If annual demand is 10000 yards of carpet and the lead time to receive an order is 10 days determine the reorder point for carpet ROPdLT Thus when the inventory level falls to yards of carpet a new order is placed Always round up Safety Stock 0 A buffer added to the inventory on hand during lead time ROP Expected demand during lead time Safety Stock In our last example if safety stock was 15 yards of carpet then we would order when the inventory level fell to EOQ with Incremental Replenishment EPQ 0 Used when company makes its own product 0 Considers a variety of coststerms Carrying Cost Setup Cost analogous to ordering costs Maximum and Average Inventory Levels Economic Run Quantity Cycle Time Run Time EOQ with Incremental Replenishment EPQ 0 Definitions 8 Setup Cost H Holding Cost Imax Maximum Inventory Iavg Average Inventory D DemandYear p Production or Delivery Rate u Usage Rate EOQ with Incremental Replenishment Total Cost Carrying ImaXZ H DQO 8 Cost Setup Cost Economic run quantity QO 2DSH fppu Cycle time time between QO u runs Run time production QO p phase Maximum Inventory Level Imax Q0 ppu Average Inventory Level I 2 average max 0 Assumptions 0 Only one item is involved 0 Annual demand is known 0 Usage rate is constant 0 Usage occurs continually production periodically 0 Production rate is constant 0 Lead time doesn t vary 0 No quantity discounts EOQ Replenishment Example A toy manufacturer uses 48000 rubber wheels per year for its product The firm makes its own wheels which it can produce at a rate of 800 per day The toy trucks are assembled uniformly over the entire year Carrying cost is 1 per wheel a year Setup cost for a production run of wheels is 45 The firm operates 240 days per year Determine the Optimal run size Minimum total annual cost for carrying and setup Cycle time for the optimal run size Run time D 48000 wheels per year 8 45 H 1 per wheel per year p 800 wheels per day u 48000 wheels per 240 days or 200 wheels per day TCmin Cycle time Run time Now suppose that this toy company has been offered an opportunity to make an additional product to sell with its toy trucks This product which would allow the trucks to make a horn sound will require 4 days of production per 12 day cycle this includes setup time Could the company utilize the same wheel production line to produce this additional product Why

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