PowerPoint PresentationInventory ManagementTypes of InventorySlide 4Slide 5Inventory-Related CostsGoals of inventory managementWhen to OrderHow Much to ReorderEconomic Order Quantity ModelEOQ ExampleInventory FlowsSummaryInventory ManagementInventory Management•What to order•When to order•How much to order•Where to stockTypes of InventoryRaw materialsPurchased parts and suppliesLaborIn-process (partially completed) productsComponent partsWorking capitalTools, machinery, and equipmentSafety stockJust-in-caseInventory Management•What is Inventory?•satisfy normal demand patterns•Inventory management–Decisions drive other logistics activities–Different functional areas have different inventory objectives–Inventory costs are important to consider•Inventory turnover•Inventory carrying costs•Pull•Push•Just-in-timeInventory Management PhilosophiesInventory-Related Costs•Inventory carrying (holding) costs–Obsolescence–Inventory shrinkage–Storage costs–Handling costs–Insurance costs–Taxes–Interest charges–Opportunity cost•StockoutsGoals of inventory managementWhen to Order•Reorder point (ROP)ROP = DLT x LT under certaintyROP = (DLT x LT) + SS under uncertaintyWhere DLT = demand during lead timeLT = Lead TimeSS = safety stockHow Much to Reorder•Economic order quantity (EOQ) in dollarsEOQ = √2ACO/ICWhereEOQ = the most economic order size, in dollars A = annual usage CO = administrative costs per order of placing the order IC = carrying costs of the inventory (%)Economic Order Quantity ModelEconomic Order Quantity Model•EOQ seeks to minimize inventory cost by determine a fixed optimal order quantity to be placed.•EOQ model: balance the cost of ordering and the cost of holding inventory.1) Cost of Ordering2) Cost of Holding InventoryEOQ ExampleAnnual Usage = 45,000 unitsOrdering costs = $30 per orderCarrying costs = 20%# ORDERS/YEAR = A/Q = 45,000/3675 = 12.24Inventory Flows•Safety stock can prevent against three problem areas–Longer-than-normal _____________–Variability in ________________•When fixed order quantity system is used, time between orders may vary•When reorder point is reached, fixed order quantity is orderedSummary•Why have inventory•Asset or liability•EOQ – purpose and calculation•Inventory Turns•Types of inventory•Purpose of inventory•Safety
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