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Operations Management as a Competitive Weapon. Module:. Independent Inventory. OM Course Framework. 3. Dependability - Project Management - JIT. 1. Cost - Design & Selection. 4. Flexibility - Inventory - Supply Chain - Location - Forecasting - Aggregate Planning. 2. Quality

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  1. Operations Management as a Competitive Weapon Module: Independent Inventory

  2. OM Course Framework 3. Dependability - Project Management - JIT 1. Cost - Design & Selection 4. Flexibility - Inventory - Supply Chain - Location - Forecasting - Aggregate Planning 2. Quality - TQM - SQC

  3. Learning Objectives At the end of this module, each student will be able to: • Discuss basic functions of inventory • Describe two basic inventory systems • Calculate inventory parameter values Module: Independent Inventory

  4. 1. Functions of Inventory • Anticipate customer demand • Decouple • Quantity discounts • Inflation • WIP • Delivery variation Module: Independent Inventory

  5. Types of Inventory • Cycle inventory Module: Independent Inventory

  6. Receive order Inventory depletion (demand rate) On-hand inventory (units) Average cycle inventory Q 2 Time 1 cycle Cycle Inventory Q Module: Independent Inventory

  7. Types of Inventory • Cycle inventory • Safety Stock inventory • Anticipation inventory • Pipeline inventory Module: Independent Inventory

  8. 2. Inventory Systems • Fixed-order quantity models • Fixed-time period models Module: Independent Inventory

  9. Q Fixed amount q Variable amount T Time between orders R Reorder level Basic System Comparison Low priced Less important “C” items High-priced Critical “A” items Module: Independent Inventory

  10. Comparative Advantages Fixed-amount systems (Q systems) • Individualized review frequency • Quantity discounts • Lower safety stocks Fixed-period systems (P systems) • Convenient administration • Multiple items on single purchase order • Inventory known only at review period Module: Independent Inventory

  11. Individual Cost Elements D Demand (annual) C Unit cost S Setup cost (manufactured item) Ordering cost (purchased item) H Holding cost (annual) i Holding rate (H = iC) Q Optimal low-cost amount to order Module: Independent Inventory

  12. Inventory Cost Equations Total Annual Cost = DC + (Q/2)H + (D/Q)S Annual Purchase Cost: (DC) Annual Holding Cost: (Q/2)(H) Annual Ordering Cost: (D/Q)(S) Module: Independent Inventory

  13. C O S T Total Cost TC* Holding Costs: (Q/2)(H) Item Cost: (DC) Ordering Costs: (D/Q)S Q* Order Quantity (Q) Economic Order Quantity Module: Independent Inventory

  14. D S 2 Optimal Order Quantity = Q = H Fixed-Order Inventory Equations Total Annual Cost = DC + (Q/2)(H) + (D/Q)(S) R = dL D = Demand per year C = Unit cost S = Setup (order) cost per order H = Annual holding cost L = Lead time d = Average daily demand Module: Independent Inventory

  15. Fixed-Order Model Example D = 21,900 C = $5 L = 6 days S = $10 H = $0.50 d = 60 units Total Annual Cost = DC + (Q/2)(H) + (D/Q)(S) = (21,900)(5) + (936/2)(.5) + (21,900/936)(10) = $109, 968 Module: Independent Inventory

  16. Q = D S 2 H Fixed-Period Inventory Equations Total Annual Cost = DC + (Q/2)(H) + (D/Q)(S) q = quantity to be ordered T = time between orders I = current inventory amount D = Demand per year C = Unit cost S = Setup (order) cost per order H = Annual holding cost L = Lead time d = Average daily demand T = Q / D q = d(L + T) - I Module: Independent Inventory

  17. Fixed-Period Model Example D = 21,900 C = $5 L = 6 days S = $10 H = $0.50 d = 60 units Module: Independent Inventory

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