Inventory Models:
Simple EOQ Model and
Production Run Model
Inventory Models
Inventory
- refers to the goods or materials held by an organization for
future use and might include raw materials, parts from suppliers
and semi-finished products as wells as finish goods awaiting sale
or shipment.
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Inventory Models
Having the right levels of inventory, or stock, is critical for many
organizations.
Too much inventory makes costs escalate.
Too little inventory - sales and production may suffer.
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Role of Inventory
Being able to meet customer demand for a product or service
where the demand has a degree of uncertainty.
Help organizations cope with seasonal or cyclical demand for
items.
Help organizations reduce, or manage, risk.
Take advantage of price discounts.
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Inventory Counting Systems
Methods used to track the quantity of goods on hand are:
1. Periodic Inventory Systems - relies upon an occasional physical count of the
inventory to determine the ending inventory balance and the cost of goods sold.
2. Perpetual inventory systems - keeps continual track of inventory balances with
updates made automatically whenever a product is received or sold.
Inventory Cost
Holding Cost Ordering cost
- cost incurred in - cost involved in
carrying a given level of actually placing an order
inventory for a period of and receiving of
time. inventory.
Stockout Cost
- cost involved when
customer demand
cannot be met because
of insufficient inventory.
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Economic Order Quantity Model
Optimum amount of an item that should be
ordered at any given point in time, such that the
total annual cost of carrying and ordering that
item is minimized.
Simply put – how much product should you
purchase to maintain a cost- efficient supply
chain?
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Economic Order Quantity Model
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Economic Order Quantity Model
The local distributor of Philippine made furniture plan to sell 540
rattan chairs of a certain design. Annual carrying costs is ₱150
per unit and ordering cost is ₱1,450. The distributor operates 288
days a year.
a. Determine the EOQ.
b. Find how many times per year does the store reorder.
c. Find the length of an order cycle.
d. Calculate the total annual cost if the EOQ quantity is ordered.
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The local distributor of Philippine made furniture plan to sell 540 rattan chairs of a certain design. Annual carrying costs is
₱150 per unit and ordering cost is ₱1,450. The distributor operates 288 days a year. a. Determine the EOQ. b. Find how many
times per year does the store reorder. c. Find the length of an order cycle. d. Calculate the total annual cost if the EOQ
quantity is ordered.
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The When-to-Order Decision
Reorder Point (ROP) in EOQ
Inventory Position Reorder Point
- amount of inventory on - the inventory position at
hand plus the amount of which a new order should be
inventory on order. placed.
Formula:
Where:
D = demand
LT = lead time
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Ex. ╺
An ePaint Internet store is open 250
days per year. If annual demand is 15,000
gallons of Aerosol paint and the lead time
to receive an order is 10 days, determine
the reorder point for the paint.
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The ePaint internet store In inventory terminology, the ten-day
guarantees a ten-day delivery on any delivery period is referred to as the lead
order placed by X Company. time for a new order,
If we assume that X Company
operates 250 days per year, the And
annual demand of 15 000 gallons
implies a daily demand of 15 000/250
the 600-gallons demand anticipated during
= 60 gallons.
this period is referred to as the lead-time
So, we expect (10 days) (60 demand.
gallons per day) = 600 gallons of
Aerosol paint to be sold during the
ten days it takes a new order to reach
the X Company warehouse.
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Production Run Model
A production run is a quantity of units that are produced
contiguously by a production line. It is common for a
factory to produce one type of item until desired levels of
inventory are achieved. This process of producing units for
a period of time is known as a production run.
Production Run Model
Batch Production Mass Production
A bakery does a production run of 14 A luggage company sells 1000 units
batches of cookies each morning. Each of a small tote bag each month. They
batch is 1200 cookies. When the produce this in a production run of 10,000
production run is complete, machines units. These units then sit in inventory
undergo a changeover for a production run until they are sold.
of bread.
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Production Run Model
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Ex.
A toy manufacturer uses 63,000 rubber wheels per year for its popular convertible
series. The firm makes its own wheels which it can produce at a rate of 500 per day. The
toy convertibles are assembled uniformly over the entire year. Carrying cost is ₱20 per
wheel a year. Set up cost for a production run of wheels is ₱2,500. The firm operates 315
days per year. Determine the:
a. Optimal run size
b. Minimum total annual cost for carrying and set up
c. Cycle Time for the optimal run size
d. Run Time
Solution:
Given:
D = 63,000 wheels per year
S = 2,500 per order
H = 20 per unit per year
P = 500 wheels per day
U = 63,000 wheels per 315 days or
200 wheels per day (63,000/315)
Solution:
Given:
D = 63,000 wheels per year
S = 2,500 per order
H = 20 per unit per year
P = 500 wheels per day
U = 63,000 wheels per 315 days or
200 wheels per day (63,000/315)
Solution:
Given:
D = 63,000 wheels per year
S = 2,500 per order
H = 20 per unit per year
P = 500 wheels per day
U = 63,000 wheels per 315 days or
200 wheels per day (63,000/315)
Solution:
Given:
D = 63,000 wheels per year
S = 2,500 per order
H = 20 per unit per year
P = 500 wheels per day
U = 63,000 wheels per 315 days or
200 wheels per day (63,000/315)
Solution:
Given:
A. Optimal Run Size (Qₒ) = 5,120
D = 63,000 wheels per year
B. Minimum total annual cost = 61,482
S = 2,500 per order
H = 20 per unit per year C. Cycle Time = 26 days
P = 500 wheels per day
D. Run Time = 10 days
U = 63,000 wheels per 315 days or
200 wheels per day (63,000/315)
The End
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