Quantitative Analysis for Management

Thirteenth Edition, Global Edition

Chapter 6
Inventory Control Models

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

Learning Objectives (1 of 2)
After completing this chapter, students will be able to:
6.1 Understand the importance of inventory control.
6.2 Understand the various types of inventory related
decisions.
6.3 Use the economic order quantity (EOQ) to determine
how much to order.
6.4 Compute the reorder point (ROP) in determining when
to order more inventory.
6.5 Handle inventory problems that allow noninstantaneous
receipt.
6.6 Handle inventory problems that allow quantity
discounts.
Copyright © 2018 Pearson Education, Ltd. All Rights Reserved
Learning Objectives (2 of 2)
After completing this chapter, students will be able to:
6.7 Understand the use of safety stock.
6.8 Compute single period inventory quantities using
marginal analysis.
6.9 Understand the importance of ABC analysis.
6.10 Describe the use of material requirements planning in
solving dependent-demand inventory problems.
6.11 Discuss just-in-time inventory concepts to reduce
inventory levels and costs.
6.12 Discuss enterprise resource planning systems.

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

Introduction (1 of 3)
• Inventory is an expensive and important asset
• Any stored resource used to satisfy a current or future
need
– Raw materials for instance : Wood ,metal ,Gibson …
– Work-in-process Semi-finished goods
– Finished goods Ready for sales
• Balance high and low inventory levels to minimize costs
• We are looking for EOQ=economic order of quantity .

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

Types of assets
• Assets
• A. Current assets =short term < 1 year
• B. Fixed assets =long term assets = PPE ( CAPEX)
• C. Intangible assets
• 1. Goodwill
• 2. Copyrights
• 3. Franchise
• 4. Patents

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

Is it better to have high level or low level of
inventory ? Why?
• High level of inventory: high level of cost
• Low level of inventory : loss of sale ,clients will shift to
other competitors
• Demand and Supply ???????
• Demand (BUYER) : price and quantity demanded.
• Demand : Price Quantity demanded
• Supply (Seller / producer) : price and quantity supplied
• Supply : Price Quantity Supplied

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

Introduction (2 of 3)
• Lower inventory levels
– Can reduce costs
– May result in stockouts and dissatisfied customers
• All organizations have some type of inventory planning and
control system
• Determine what goods/services are produced or
purchased

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

Introduction (3 of 3)
FIGURE 6.1 Inventory Planning and Control

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

Economic Order Quantity (1 of 2)
• Economic order quantity (EOQ) model
– One of the oldest and most commonly known inventory
control techniques
– Easy to use
– A number of important assumptions
• Objective is to minimize total cost of inventory
• JIT technique

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

Inventory Costs in the EOQ Situation (1 of 3)
Q = number of pieces to order
EOQ = Q* = optimal number of pieces to order
D = annual demand in units for the inventory item
Co = ordering cost of each order
Ch = holding or carrying cost per unit per year
Annual  Number of 
   Ordering cost 
Ordering   orders placed    
   per order 
cost  per year 
 
 Annual demand   Ordering cost  D
    Co
 Number of units   per order  Q
 in each order 
 
Copyright © 2018 Pearson Education, Ltd. All Rights Reserved
Inventory Costs in the EOQ Situation (2 of 3)
Q = number of pieces to order
EOQ = Q* = optimal number of pieces to order
D = annual demand in units for the inventory item
Co = ordering cost of each order
Ch = holding or carrying cost per unit per year
Annual  Carrying cost 
 Average   
holding   
  per unit 
 inventory   
cost  per year 
Order quantity
  (Carrying cost per unit per year)
2
Q
 Ch
2
Copyright © 2018 Pearson Education, Ltd. All Rights Reserved
Finding the EOQ (1 of 2)
• When the EOQ assumptions are met, total cost is
minimized when
Annual ordering cost = Annual holding cost
D Q
Co  Ch
Q 2 Thus
Solving for Q
Q 2Ch  2DCo
2DCo
2DCo EOQ  Q  *

Q 
2
Ch
Ch
2DCo
Q
Ch
Copyright © 2018 Pearson Education, Ltd. All Rights Reserved
Finding the EOQ (2 of 2)
• Equation summary

D
Annual ordering cost  Co
Q
Q
Annual holding cost  Ch
2
2DCo
EOQ  Q * 
Ch

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

Sumco Pump Company (1 of 5)
• Sells pump housings to other companies
• Reduce inventory costs by finding optimal order quantity
Annual demand = 1,000 units
Ordering cost = $10 per order
Average carrying cost per unit per year = $0.50

2DCo 2(1,000)(10)
Q 
*
  40,000  200 units
Ch 0.50

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

Sumco Pump Company (2 of 5)
• Total cost

D Q
TC  Co  Ch
Q 2
1,000 200
 (10)  (0.5)
200 2
 $50 + $50  $100

Number of orders per year = (D÷Q) = 5

Average inventory (Q÷2) = 100

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

 Reorder Point: Determining When To Order
• Next decision is when to order
• Time between placing an order and its receipt is called the
lead time (L) or delivery time
• On hand and on order inventory must be available to meet
demand during lead, the inventory position
• Generally expressed as a reorder point (ROP)

ROP  (Demand per day)  (Lead time for a new order in days)
 d L

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

Procomp’s Computer Chips (1 of 2)
• Annual demand = 8,000
• Daily demand = 40 units
• Delivery in three working days

ROP  d  L  40 units per day  3 days

 120 units

• An order for the EOQ (400) is placed when the inventory

reaches 120 units
• The order arrives 3 days later just as the inventory is depleted

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

Procomp’s Computer Chips (2 of 2)
• Annual demand = 8,000
• Daily demand = 40 units Now 12 days
• Delivery in three working days
ROP  d  L  40 units per day  12 days
 480 units
 Inventory   Inventory   Inventory 
   
 position   on hand   on order 
480  80  400
• New order placed when inventory = 80 and one order is in
transit
Copyright © 2018 Pearson Education, Ltd. All Rights Reserved
Case-Study
•[[NADEC has a Annual demand of 1200 units .The selling price per unit is SAR 12 and the holding
cost is 30% from the selling price .The ordering cost is SAR 3 . The total operations days is 270 days.
The lead time (delivery days) is 12 days.

1. What is the importance of EOQ in operations management ?

2. Compute Economic order of quantity

3. Total ordering cost

4. Total holding cost
5. Total cost
6. Average quantity

7. Number of orders

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved