GLOBAL LOGISTIC MANAGEMENT
GLOBAL LOGISTIC MANAGEMENT


LECTURE 3: INVENTORY MANAGEMENT
Agenda
Agenda

1 What is Inventory Management
1 What is Inventory Management

2 Two forms of Demand
2 Two forms of Demand

3 Inventory and Supply Chain Management
3 Inventory and Supply Chain Management

4 Inventory and Quality Management
4 Inventory and Quality Management

5 Inventory Control system
5 Inventory Control system

6 Economic Order Quantity (EOQ)
6 Economic Order Quantity (EOQ)
Models
Models
Agenda
Agenda
7 Production Quantity Model
7 Production Quantity Model

8 Quantity Discounts
8 Quantity Discounts
9 Reorder Point
9 Reorder Point
10 Safety Stocks
10 Safety Stocks
1 What is Inventory management ?
1 What is Inventory management ?

Inventory management is the process of
Inventory management is the process of
trading off the level of inventory held to
trading off the level of inventory held to
achieve high customer service levels with
achieve high customer service levels with
the cost of holding inventory, including
the cost of holding inventory, including
capital tied up in inventory, variable
capital tied up in inventory, variable
storage costs and obsolescence.
storage costs and obsolescence.

The purpose of Inventory Management:
The purpose of Inventory Management:
◦
how many units to order
◦
when to order
2 Two forms of Demand
2 Two forms of Demand


Dependent
Dependent
◦
Demand for items used to produce final
Demand for items used to produce final
products
products
◦
Tires stored at a Goodyear plant are an
example of a dependent demand item

Independent
Independent
◦
Demand for items used by external
Demand for items used by external
customers
customers
◦
Cars, appliances, computers, and houses are
examples of independent demand
inventory
3 Inventory and Supply Chain Management
3 Inventory and Supply Chain Management

Bullwhip effect
Bullwhip effect
◦
demand information is distorted as it

moves away from the end-use customer
◦
higher safety stock inventories to are
stored to compensate

Seasonal or cyclical demand
Seasonal or cyclical demand

Inventory provides independence from
Inventory provides independence from
vendors
vendors

Take advantage of price discounts
Take advantage of price discounts

Inventory provides independence between
Inventory provides independence between
stages and avoids work stop-pages
stages and avoids work stop-pages
4 Inventory and Quality Management
4 Inventory and Quality Management

Customers usually perceive quality
Customers usually perceive quality
service as availability of goods they want
service as availability of goods they want
when they want them
when they want them


Inventory must be sufficient to provide
Inventory must be sufficient to provide
high-quality customer service in Total
high-quality customer service in Total
Quality Management (TQM)
Quality Management (TQM)
5 Inventory Control System
5 Inventory Control System

Continuous system (fixed-order-quantity)
Continuous system (fixed-order-quantity)
◦
constant amount ordered when
constant amount ordered when
inventory declines to predetermined
inventory declines to predetermined
level
level

Periodic system (fixed-time-period)
Periodic system (fixed-time-period)
◦
order placed for variable amount
order placed for variable amount
after fixed passage of time
after fixed passage of time
6 Economic Order Quantity (EOQ)
6 Economic Order Quantity (EOQ)
Models
Models




EOQ
EOQ
◦
optimal order quantity that will minimize total
inventory costs

Basic EOQ model
Basic EOQ model

Production quantity model
Production quantity model
Assumptions of EOQ Model:
Assumptions of EOQ Model:

Demand is known with certainty and is constant
Demand is known with certainty and is constant
over time
over time

No shortages are allowed
No shortages are allowed

Lead time for the receipt of orders is constant
Lead time for the receipt of orders is constant

Order quantity is received all at once
Order quantity is received all at once

Order Inventory Cycle
Order Inventory Cycle
Demand
Demand
rate
rate
Time
Time
Lead
Lead
time
time
Lead
Lead
time
time
Order
Order
placed
placed
Order
Order
placed
placed
Order
Order
receipt
receipt
Order
Order

receipt
receipt
Inventory Level
Inventory Level
Reorder point,
Reorder point,
R
R
Order quantity,
Order quantity,
Q
Q
0
0
EOQ Cost Model
EOQ Cost Model
C
C
o
o
- cost of placing order
- cost of placing order
D
D
- annual demand
- annual demand
C
C
c
c

- annual per-unit carrying cost
- annual per-unit carrying cost
Q
Q
- order quantity
- order quantity
Annual ordering cost =
Annual ordering cost =
C
C
o
o
D
D
Q
Q
Annual carrying cost =
Annual carrying cost =
C
C
c
c
Q
Q
2
2
Total cost = +
Total cost = +
C
C

o
o
D
D
Q
Q
C
C
c
c
Q
Q
2
2
EOQ Cost model
EOQ Cost model
TC = +
C
o
D
Q
C
c
Q
2
= +
C
o
D
Q

2
C
c
2
∂TC
∂
Q
0 = +
C
0
D
Q
2
C
c
2
Q
opt
=
2
C
o
D
C
c
Deriving
Q
opt
Proving equality of
costs at optimal

point
=
C
o
D
Q
C
c
Q
2
Q
2
=
2
C
o
D
C
c
Q
opt
=
2
C
o
D
C
c
EOQ Cost Model
EOQ Cost Model

EOQ example
EOQ example
Production Quantity Model
Production Quantity Model

An inventory system in which an order is
An inventory system in which an order is
received gradually, as inventory is simultaneously
received gradually, as inventory is simultaneously
being depleted
being depleted

AKA non-instantaneous receipt model
AKA non-instantaneous receipt model
◦
assumption that
Q
is received all at once is
relaxed

p -
p -
daily rate at which an order is received over
daily rate at which an order is received over
time, a.k.a.
time, a.k.a.
production rate
production rate

d -

d -
daily rate at which inventory is demanded
daily rate at which inventory is demanded
Production Quantity Model
Production Quantity Model
Production Quantity Model
Production Quantity Model
Production Quantity Model
Production Quantity Model
Example
Example
PQ Model
PQ Model
Copyright 2006 John Wiley & Sons, Inc. 12-20
Quantity Discounts
Quantity Discounts
Price per unit decreases as order quantity
Price per unit decreases as order quantity
increases
increases
TC
TC
= + +
= + +
PD
PD
C
C
o
o

D
D
Q
Q
C
C
c
c
Q
Q
2
2
where
where
P
P
= per unit price of the item
= per unit price of the item
D
D
= annual demand
= annual demand
Quantity Discounts Model
Quantity Discounts Model
Quantity Discount example
Quantity Discount example
Copyright 2006 John Wiley & Sons, Inc. 12-23
Reorder Point
Reorder Point
Level of inventory at which a new order is

Level of inventory at which a new order is
placed
placed
R
R
=
=
d*L
d*L
where
where
d
d
= demand rate per period
= demand rate per period
L
L
= lead time
= lead time
Reorder Example
Reorder Example
Demand = 10,000 yards/year
Demand = 10,000 yards/year
Store open 311 days/year
Store open 311 days/year
Daily demand = 10,000 / 311 = 32.154
Daily demand = 10,000 / 311 = 32.154
yards/day
yards/day
Lead time = L = 10 days

Lead time = L = 10 days
R = d*L = (32.154)(10) = 321.54 yards
R = d*L = (32.154)(10) = 321.54 yards
Safety Stock
Safety Stock

Safety stock
Safety stock
◦
buffer added to on hand inventory
buffer added to on hand inventory
during lead time
during lead time

Stock-out
Stock-out
◦
an inventory shortage
an inventory shortage

Service level
Service level
◦
probability that the inventory
probability that the inventory
available during lead time will meet
available during lead time will meet
demand
demand