Download Chapter Six: Inventory

Chapter Six: Inventory
Part Four
“The Economic Ordering
Quantity.”
How Much Inventory
Should We Order?
• We don’t want too much inventory
because we don’t want to overpay
inventory carrying costs.
• We don’t want too little inventory because
we don’t want to be stocked out when
customers want our product.
• We determine the optimal amount of
inventory through the Economic Ordering
Quantity (EOQ).
How Much Inventory
Should We Order?
• We don’t want too much inventory
because we don’t want to overpay
inventory carrying costs.
• We don’t want too little inventory because
we don’t want to be stocked out when
customers want our product.
• We determine the optimal amount of
inventory through the Economic Ordering
Manually advance to
Quantity (EOQ).
the next slide.
Assumptions Regarding the
Economic Ordering Quantity
• Technically, the economic ordering
quantity only works when we have no
change in demand.
• Technically, the economic ordering
quantity only works when we have no
change in the amount of time it takes to fill
our order.
Assumptions Regarding the
Economic Ordering Quantity
• Technically, the economic ordering
quantity only works when we have no
change in demand.
• Technically, the economic ordering
quantity only works when we have no
change in the amount of time it takes to fill
our order.
Manually advance to
the next slide.
6-3 aa
The Effect of Reorder Quantity on
Average Inventory Investment with Constant
Demand and Lead Time
Demand is always the same
Delivery time is always the
same.
A. Orderquantity of 400 units
Inventory
Order
arrival
400
Order
placed
Order
arrival
Order
placed
Average
cycle
inventory
200
0
Days
10
20
30
40
50
.
From instructor’s material: “Strategic Logistics Management” by Stock and Lambert(2001).
60
Assumptions Regarding the
Economic Ordering Quantity
• Technically, the economic ordering
quantity only works when we have no
change in demand.
• Technically, the economic ordering
quantity only works when we have no
change in the amount of time it takes to fill
our order.
.
Average EOQ can be applied for varied demand
To illustrate the concept of optimal inventory
and varied replenishment times.
Economic Ordering Quantity
EOQ =
2CoD
CiU
Where
EOQ = Economic Ordering quantity.
Co = ordering cost (dollars per order)
Ci = Annual inventory carry costs (%
product cost or value)
D= Annual demand (number of units)
U = Average cost or value of one unit of
inventory
Economic Ordering Quantity
EOQ =
2CoD
CiU
Manually advance to
the next slide.
Where
EOQ = Economic Ordering quantity.
Co = ordering cost (dollars per order)
Ci = Annual inventory carry costs (%
product cost or value)
D= Annual demand (number of units)
U = Average cost or value of one unit of
inventory
From Text, Page139
• Ordering cost, Co = $19.
• Annual inventory carrying costs, Ci = 20%
or.20
• Annual demand in number of units, D =
2,400
• Cost per unit, U = $5.
From Text, Page139
• Ordering cost, Co = $19.
• Annual inventory carrying costs, Ci = 20%
or.20
• Annual demand in number of units, D =
2,400
• Cost per unit, U = $5.
From Text, Page139
•
•
•
•
Co = $19.
Ci = 20% or.20.
D = 2,400
U = $5.
2CoD
CV
From Text, Page139
•
•
•
•
Co = $19.
Ci = 20% or.20.
D = 2,400
U = $5.
2CoD
CV
From Text, Page139
•
•
•
•
Co = $19.
Ci = 20% or.20.
D = 2,400
U = $5.
2($19)(2400)
(.20)($5)
From Text, Page139
•
•
•
•
Co = $19.
Ci = 20% or.20.
D = 2,400
U = $5.
2($19)(2400)
(.20)($5)
=302
From Text, Page139
•
•
•
•
Co = $19.
Ci = 20% or.20.
D = 2,400
U = $5.
You can round to 300
2($19)(2400)
(.20)($5)
=302
When it is time to order (with
constant demand, lead time,
and price), this is how many
units we should order.
But it is rare when all these
conditions can be met.
When it is time to order (with
constant demand, lead time,
and price), this is how many
units we should order.
But it is rare when all these
conditions can be met.
When it is time to order (with
constant demand, lead time,
and price), this is how many
units we should order.
As a result we need safety stock…
But it is rare when all these
Conditions can be met.
When it is time to order (with
constant demand, lead time,
and price), this is how many
units we should order.
As a result we need safety stock,
but how much?
But it is rare when all these
Conditions can be met.
When it is time to order (with
constant demand, lead time,
and price), this is how many
units we should order.
As a result we need safety stock,
but how much? We’ll see later.
End of Part Four.