Chapter 12 Inventory Control.ppt

Chapter 12: Inventory Control Purposes of Inventory 1. To maintain independence of operations 2. To meet variation in product demand 3. To allow flexibility in production scheduling 4. To provide a safeguard for variation in raw material delivery time 5. To take advantage of economic purchase-order size Inventory Costs Holding (or carrying) costs Costs for capital, storage, handling, “shrinkage,” insurance, etc Setup (or production change) costs Costs for arranging specific equipment setups, etc Ordering costs Costs of someone placing an order, etc Shortage costs Costs of canceling an order, etc Independent vs. Dependent Demand Inventory Systems Single-Period Inventory Model One time purchasing decision (Example: vendor selling t-shirts at a football game) Seeks to balance the costs of inventory overstock and under stock Multi-Period Inventory Models Fixed-Order Quantity Models Event triggered (Example: running out of stock) Fixed-Time Period Models Time triggered (Example: Monthly sales call by sales representative) The Newsvendor Model:  Wetsuit example The “too much/too little problem”: Order too much and inventory is left over at the end of the season Order too little and sales are lost. Example: Selling Wetsuits “Too much” and “too little” costs Co = overage cost (i.e. order “one too many” demand order amount) The cost of ordering one more unit than what you would have ordered had you known demand – if you have left over inventory the increase in profit you would have enjoyed had you ordered one fewer unit. For the example Co = Cost – Salvage value = c – v = 110 – 90 = 20 Cu = underage cost (i.e. order “one too few” – demand order amount) The cost of ordering one fewer unit than what you would have ordered had you known demand – if you had lost sales (i.e., you under ordered), Cu is the increase in profit you would have enjoyed had you ordered one more unit. For the example Cu = Price – Cost = p – c = 180 – 110 = 70 Newsvendor expected profit