Inventory Control ModelsIntroductionSlide 3Slide 4Slide 5The Inventory ProcessSlide 7Importance of Inventory ControlSlide 9Slide 10Inventory DecisionsInventory Cost FactorsSlide 13Economic Order QuantitySlide 15Inventory Usage Over TimeEOQ Inventory CostsInventory Costs in the EOQ SituationSlide 19Slide 20Slide 21Slide 22Finding the EOQEconomic Order Quantity (EOQ) ModelSumco Pump Company ExampleSlide 26Slide 27Slide 28Purchase Cost of Inventory ItemsSlide 30Sensitivity Analysis with the EOQ ModelSlide 32Reorder Point: Determining When To OrderDetermining the Reorder PointProcomp’s Computer Chip ExampleThe Reorder Point (ROP) CurveEOQ Without The Instantaneous Receipt AssumptionSlide 38Annual Carrying Cost for Production Run ModelSlide 40Slide 41Annual Setup Cost for Production Run ModelDetermining the Optimal Production QuantityProduction Run ModelBrown Manufacturing ExampleSlide 46Slide 47Slide 48Quantity Discount ModelsSlide 50Slide 51Slide 52Brass Department Store ExampleSlide 54Slide 55Slide 56Slide 57Use of Safety StockSlide 59Slide 60Slide 61© 2008 Prentice-Hall, Inc.Chapter 6To accompanyQuantitative Analysis for Management, Tenth Edition, by Render, Stair, and Hanna Power Point slides created by Jeff HeylInventory Control Models© 2009 Prentice-Hall, Inc.© 2009 Prentice-Hall, Inc. 6 – 2IntroductionInventory is an expensive and important asset to many companiesLower inventory levels can reduce costsLow inventory levels may result in stockouts and dissatisfied customersMost companies try to balance high and low inventory levels with cost minimization as a goalInventory is any stored resource used to satisfy a current or future needCommon examples are raw materials, work-in-process, and finished goods© 2009 Prentice-Hall, Inc. 6 – 3IntroductionBasic components of inventory planningPlanning what inventory is to be stocked and how it is to be acquired (purchased or manufactured)This information is used in forecasting demand for the inventory and in controlling inventory levelsFeedback provides a means to revise the plan and forecast based on experiences and observations© 2009 Prentice-Hall, Inc. 6 – 4IntroductionInventory may account for 50% of the total invested capital of an organization and 70% of the cost of goods sold© 2009 Prentice-Hall, Inc. 6 – 5IntroductionAll organizations have some type of inventory control systemInventory planning helps determine what goods and/or services need to be producedInventory planning helps determine whether the organization produces the goods or services or whether they are purchased from another organizationInventory planning also involves demand forecasting© 2009 Prentice-Hall, Inc. 6 – 6The Inventory ProcessSuppliers CustomersFinished GoodsRaw MaterialsWork in ProcessFabrication/ AssemblyInventory StorageInventory Processing© 2009 Prentice-Hall, Inc. 6 – 7Controlling Inventory LevelsIntroductionForecasting Parts/Product DemandPlanning on What Inventory to Stock and How to Acquire ItFeedback Measurements to Revise Plans and ForecastsFigure 6.1Inventory planning and control© 2009 Prentice-Hall, Inc. 6 – 8Importance of Inventory ControlFive uses of inventoryThe decoupling functionStoring resourcesIrregular supply and demandQuantity discountsAvoiding stockouts and shortagesThe decoupling functionUsed as a buffer between stages in a manufacturing processReduces delays and improves efficiency© 2009 Prentice-Hall, Inc. 6 – 9Importance of Inventory ControlStoring resourcesSeasonal products may be stored to satisfy off-season demandMaterials can be stored as raw materials, work-in-process, or finished goodsLabor can be stored as a component of partially completed subassembliesIrregular supply and demandDemand and supply may not be constant over timeInventory can be used to buffer the variability© 2009 Prentice-Hall, Inc. 6 – 10Importance of Inventory ControlQuantity discountsLower prices may be available for larger ordersCost of item is reduced but storage and insurance costs increase, as well as the chances for more spoilage, damage and theft.Investing in inventory reduces the available funds for other projectsAvoiding stockouts and shortagesStockouts may result in lost salesDissatisfied customers may choose to buy from another supplier© 2009 Prentice-Hall, Inc. 6 – 11Inventory DecisionsThere are only two fundamental decisions in controlling inventoryHow much to orderWhen to orderThe major objective is to minimize total inventory costsCommon inventory costs areCost of the items (purchase or material cost)Cost of orderingCost of carrying, or holding, inventoryCost of stockouts© 2009 Prentice-Hall, Inc. 6 – 12Inventory Cost FactorsORDERING COST FACTORS CARRYING COST FACTORSDeveloping and sending purchase orders Cost of capitalProcessing and inspecting incoming inventoryTaxesBill paying InsuranceInventory inquiries SpoilageUtilities, phone bills, and so on, for the purchasing departmentTheftSalaries and wages for the purchasing department employeesObsolescenceSupplies such as forms and paper for the purchasing departmentSalaries and wages for warehouse employeesUtilities and building costs for the warehouseSupplies such as forms and paper for the warehouseTable 6.1© 2009 Prentice-Hall, Inc. 6 – 13Inventory Cost FactorsOrdering costs are generally independent of order quantityMany involve personnel timeThe amount of work is the same no matter the size of the orderCarrying costs generally varies with the amount of inventory, or the order sizeThe labor, space, and other costs increase as the order size increasesOf course, the actual cost of items purchased varies with the quantity purchased© 2009 Prentice-Hall, Inc. 6 – 14Economic Order QuantityThe economic order quantityeconomic order quantity (EOQEOQ) model is one of the oldest and most commonly known inventory control techniquesIt dates from a 1915 publication by Ford W. HarrisIt is still used by a large number of organizations todayIt is easy to use but has a number of important assumptions© 2009 Prentice-Hall, Inc. 6 – 15Economic Order QuantityAssumptions1. Demand is known and constant2. Lead time (the time between the placement and receipt of an order) is known and constant3. Receipt of inventory is instantaneous Inventory from