• 1. CHAPTER 6 Inventory Management
    • 2. Purposes of InventoryEnables the firm to achieve economics of scale Balances supply and demand Enables specialization in manufacturing Provides protection from uncertainties in demand and order cycle Acts as a buffer between critical interfaces within the supply chain
    • 3. 2004000Days102030405060InventoryOrderplacedOrderarrivalOrderplacedAveragecycleinventoryA.Orderquantityof400unitsOrderarrivalThe Effect of Reorder Quantity on Average Inventory Investment with Constant Demand and Lead Timea6-3 a
    • 4. InventoryOrderplacedOrderarrivalAveragecycleinventoryDays1020304050600100200B.Orderquantityof200unitsThe Effect of Reorder Quantity on Average Inventory Investment with Constant Demand and Lead Timeb6-3 b
    • 5. AveragecycleinventoryOrderarrivalOrderplacedC.Orderquantityof600unitsDays102030405060Inventory0300600The Effect of Reorder Quantity on Average Inventory Investment with Constant Demand and Lead Timec6-3 c
    • 6. Average Inventory Investment Under Conditions of UncertaintyA.WithvariabledemandInventoryAveragecycleinventorySs(afetytock50)yAverageinventor(150)200100810203040Days{{a6-4 a
    • 7. Average Inventory Investment Under Conditions of UncertaintyB.WithvariableleadtimeInventoryAveragecycleinventoryyAverageinventor(140)2001001012{203040DaySs(afetytock40)s{b6-4 b
    • 8. C.WithvariabledemandandleadtimeInventoryAveragecycleinventoryyAverageinventor(200)2001001012{203040DayySs(afet0tock10)s{8Average Inventory Investment Under Conditions of Uncertaintyc6-4 c
    • 9. EOQ=2PDCVwhere:P = The ordering cost (dollars per order)D = Annual demand or usage of the product (number of units)C = Annual inventory carrying cost (as a percentage of product cost or value)V = Average cost or value of one unit of inventoryThe EOQ Model6-5
    • 10. Size of orderAnnual cost(dollars)Lowesttotalcost(EOQ)Total costInventorycarryingcostOrdering costCost Trade-offs to Determine the Most Economic Order Quantity6-6
    • 11. OrderQuantityNumberof Orders(D/Q)OrderingCostPX (D/Q)InventoryCarryingCost1/2 Q X C X VTotalCost406080100120140160200300400120806048403530241812$ 4,800 3,200 2,400 1,920 1,600 1,400 1,200 960 720 480$ 500 750 1,000 1,250 1,500 1,750 2,000 2,500 3,750 5,000$ 5,300 3,950 3,400 3,170 3,100 3,150 3,200 4,460 4,470 5,480Cost Trade-offs Required to Determine the Most Economic Order Quantity6-7
    • 12. Symptoms of Poor InventoryIncreasing numbers of back orders Increasing dollar investment in inventory with back orders remaining constant. High customer turnover rate. Increasing number of orders being canceled. Periodic lack of sufficient storage space. Wide variance in inventory turnover among distribution centers and major inventory items.6-8