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Inventory Management

Inventory is stock or store of goods


Raw material
Work-in-process
Finished goods

Function of Inventory

To meet anticipated demand


To smooth production requirements seasonal
To protect against stockouts
To take advantages of quantity discounts
To permit operations about WIP

Inventory Management
Inventory Costs
Holding cost
Ordering cost
Shortage cost
Material Classification

Cost

Class A: 10-15% contributes 60-70% value


B

Class B: 20-30% contributes 20-30% value


C

Class C: 60-70% contributes 5-10% value


Quantity

Inventory Management

Quantity

Inventory ordering & usage occur in cycles

ROP

LT

Time

Inventory Management
Economic Order Quantity (EOQ)

EOQ is the order size that minimizes total cost


Assumptions

Only one product is involved


Annual demand requirements are known
Demand is spread evenly
Lead time does not vary
No quantity discount

Inventory Management

Annual Cost

Cost Curves

Total cost
Holding cost
Material cost
Ordering cost
EOQ

Order Quantity

Inventory Management
Cost Calculations

Q
H
Annual holding cost =
2
D
S
Annual ordering cost =
Q
Q
D
Total cost = TC H S
2
Q
Q
D
Total cost (including material) = TC H S D * P
2
Q
For minimum cost,

2 DS
H

Inventory Management
Quantity Discount

TC is affected by the price


discount on order size

Annual Cost

Total cost

Holding cost
Material cost
Ordering cost
EOQ

Order Quantity

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