Inventory: Physical stock of material kept in store until needed.

Stock is formed whenever inputs or outputs are not used at the time they are available

 All organizations hold stock of some kind There costs associated with holding inventory

 Act as buffer between supply and demand Allow for demands that are larger than expected or unexpected times. Allows for deliveries that are delayed Take advantage of price discount on bulk purchasing Allow purchase of an item when the price is low and expected to rise.

 Allow for purchase of items going out of production or difficult to get. Take full load and reduces transportation cost. Give cover for emergencies

Types of Stock
Raw Material (RM ) Work in Progress (WIP) Finished Goods Spare part Consumables

Costs
Unit cost: Price of an item Ordering cost : cost of placing order, correspondence cost, receiving cost Holding Cost : Cost of carrying inventory cost of money, storage space cost, losses, handling insurance etc. Shortage cost : item needed but not in stock

Inventory Management
Balance between the costs What item to stock? When to place order? How much to order ?

 Inventory system used Type of demands Supply reliability

Problems
A company purchases 18000 units per year. The holding cost per unit is Rs 1.20 per year and procurement cost per order is Rs 400. No shortages are allowed and lead time is zero Determine; Optimum order quantity Total cost per year , the cost of one unit is one rupee one. No. of orders placed Time between orders

 The demand for the product is constant at 20 boxes a month. Each box costs $ 20, the cost of processing and arranging delivery is $ 60, and holding cost is $18 a box a year. What are the economic order quantity, cycle length and costs

 Demand for an item is constant at 20 units a week, the reorder cost is $125 and order and holding cost is $2 an unit a week. If the supplier guarantees delivery within two weeks , what is the best ordering policy

 Demand for item in an organisation is constant at the rate of 500 units a month Unit cost is $ 100. The purchase department sends out an average of 3000 orders a year and their operating costs are $ 180, 000. Any stock have capital financing charges of 15 %, warehouse charges of 7 % and other overhead charges of 8 % a year. The lead time is constant at one week

 Find a good ordering policy for the item What range of order size keeps variables costs within 10 per cent of the optimal. What is the variable cost if orders are placed for 200 unit at a time

Quantity Discount
Quantity discounts are price reductions for large orders offered to customers to induce them to buy in large quantities. There are two general models - carrying costs are constant ( $2 per item) - carrying cost expressed as a % of purchase price

Case 1
There will be a single minimum point All curves have their minimum point at the same quantity Consequently the total cost curves line up vertically

Procedure for computing EOQ

Compute the minimum point Only one unit price range will have the minimum point in it feasible range since ranges do not overlap. Identify the range If the feasible minimum point is on the lowest price range, that is the optimal If the minimum point is in any other range, compute the total cost for minimum point and for the price breaks of all lower costs and compare and select.

Example
D= 816 cases per year, Ordering cost = $12 , Holding cost = $4 per case per year. Range Price ($) -----------------------------1-49 20 50- 79 18 80- 99 17 100 or more 16

EOQ = 69-97 ( 70) TAC(70) = 14968 TAC ( 80) = 14154 TAC ( 100 ) = 13354.

Overall optimum = 100

Case 2
When carrying costs are specified as a percentage of unit price , each curve will have a different minimum point. Curve minimum will shift to the right

 Starting with lowest unit price , compute the minimum point for each price until you find a feasible minimum point If the minimum point for the lowest unit price is feasible, it is the optimal order quantity. Other wise compute total cost at the price break for all lower prices and compare with the total cost of the feasible minimum point . Select the lowest cost .

Example
D= 4000, ( switches ) ordering cost = $30, holding cost = 40% range unit price ($) Holding cost -------------------------------------------------------1-499 0.9 =.36 500 999 0.85 = .34 1000 or more 0.80 = .32

 Starting with lowest cost Minimum point ( .80) = 866 ( not feasible ) Minimum point ( 0.85) = 840 TAC ( 840) = 3686 TAC ( 1000) = 3480 Minimum cost order size = 1000

Example
An item of inventory has a unit cost of $80, reorder cost of $100 and holding cost of $2 a unit a week. Demand for the has a mean of 100 a week with a standard deviation of 10. Lead time is constant at three weeks. Design an inventory policy for the item to give a service level of 95 %. How would you change this to give a 98 % service level? What re the costs of these two policies?

 Demand for an item has a mean of 200 units and standard deviation of 40 units. Stock is checked every four weeks and lead time is constant two weeks. Describe a policy that will give a 95 % service level. If there are 200 unit in stock and it is time to place an order, what should be the order size ? If the holding cost is $ 2 unit a week, what is the cost of safety cost with this policy ?

 The office supply shop estimates that the average demand for a popular ball point pen is 12,000 per week with a standard deviation of 3000 pens. The current inventory policy for replenishment orders of 156, 000pens. The average lead time from the distributors is 5 weeks with a standard deviation of 2 weeks . If the management want a 90 % cycle service level, what should the reorder point be.

Example
Suppose that the manager of a construction supply house determined from the historical records that demand for sand during lead time averages 50 tons. In additions demand during lead time could be described by a normal distribution that has a mean of 50 tons with a standard deviation of 5 tons. Assuming that the manager is willing to accept a stock out risk of 3 %. What reorder point should be used ?