1 / 33

Inventory Management Methods for Cost Reduction

Learn about effective inventory management methods such as simulation, EOQ, and LTD models to minimize costs. Explore the advantages of keeping inventory and the different types of inventory. Discover how to calculate relevant costs using the EOQ formula, and apply these concepts in a real-world example.

dantee
Download Presentation

Inventory Management Methods for Cost Reduction

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Notes • Quiz This Friday • Covers 13 March through today

  2. MGTSC 352 Lecture 21: Inventory Management A&E Noise exampleMethods for finding good inventory policies: 1) simulation2) EOQ + LTD models Using EOQ for the Distribution Game: Multi-Echelon Systems

  3. Why Keep Inventory? • Seasonality (anticipated variation) • Provide flexibility (unanticipated variation) a.k.a.: • Economies of scale • Price speculation (not an ops reason) • Something to work on • NDR,JP

  4. Inventory By Where it IS • Raw Materials • Finished Goods • Work in Process • Or, with apologies to PS, “One man’s ceiling is another man’s floor.”

  5. Approximation 1: constant demand Therefore: We let inventory drop to zero just before an order arrives Inventory Time

  6. Acquisition Costs (pg. 142) No matter what the inventory policy, acquisition costs = Demand X Cost They don’t change, So they don’t go in the model (Unless you get quantity discounts, then it matters.)

  7. Order Costs • Number of orders per year  (3695 VCRs / year)/(80 VCRs / order) = 46.2 orders / year • Total order cost per year  (46.2 orders / year)($30 / order) = $1385.63 / year • Total Order Costs = S * D/Q

  8. Holding Costs (pg. 143) • Minimum inventory  0 for now Later = Safety Stock • Maximum inventory = Q (+SS) • Average inventory  Q/2 = (80)/2 = 40 VCRs • Total holding cost per year  (40 VCR-years)($37.5 / VCR / year) = $1500 / year • Total Holding Costs = H*Q/2

  9. Acquisition costs don’t depend on Q No shortages, by assumption pg. 144 EOQ = Economic Order Quantity Model • Given demand is constant • Find the Q that minimizes total cost Total cost = acquisition cost + order cost + carrying cost + shortage cost • Total relevant cost = order cost + carrying cost

  10. S = order cost ($/order) H = carrying cost ($/item/year) D = demand (units/year) Q = order quantity N = number of orders per year Iavg = average inventory pg. 147 EOQ Derivation Relevant cost = order cost + carrying cost RC = S  N + H  Iavg RC(Q) = S  D / Q + H  Q / 2 Note: you can change year to day, week, or any other time unit, as long as you are consistent Common mistake: inconsistent time units To Excel

  11. pg. 147 EOQ Formula Relevant cost = ordering cost + carrying cost RC = S  N + H  Iavg RC(Q) = S  D / Q + H  Q / 2

  12. The magic part (optional)

  13. pg. 147 Using EOQ for A&E Noise YNOS XD D = 10.12 VCRs/day, S = $30/order, H = $0.10/VCR/day  Q* = SQRT(210.1230/0.10) = 77.9  round to Q* = 78 N* = 10.12/78 = 0.13 orders/day = 47.4 orders/year Order every 365/47.4 = 8 days Relevant cost: RC(Q*) = S  (D/Q*) + H (Q*/2) = 30  (10.12/78) + 0.10 (78/2) = 3.90 + 3.90 = $7.80 / day = $2,847 / year

  14. Common mistake: using inconsistent time units D = 10.12 VCRs/day, S = $30/order, H = $37.5/VCR/year  Q* = SQRT(210.1230/37.5) = 4 • Off by (77.9 – 4)/77.9 = 95% • Will not be worth a lot of part marks

  15. Pg. 149 More on EOQ: Economies of Scale The Capital Health Region* operates four hospitals. Presently each hospital orders its own supplies and manages its inventory. A common item used is a sterile intravenous (IV) kit, with a weekly demand of 600 per week at each hospital. Each IV kit costs $5 and incurs a holding cost of 30% per year. Each order incurs a fixed cost of $150 regardless of order size. The supplier takes one week to deliver an order. Currently, each hospital orders 6,000 kits at a time. Question 1: Could costs be decreased by ordering more often? Question 2: Would it make sense to centralize inventory management for the four hospitals? * Fictional data

  16. Analysis for one Hospital • D = 600 / week = (600 / week) (52 weeks/year)= 31,200 / year • S = $150 / order • H = 0.3  5 = $1.50 / kit / year • Q = SQRT(2  D  S / H) = 2,498 ≈ 2,500 • Costs: • Q = 6,000: S  D / Q + H  Q / 2 = $780 + $4,500 = $5,280 • Q = 2,500: S  D / Q + H  Q / 2 = $1,872 + $1,875 = $3,747 • 29% savings

  17. Analysis for one Hospital • D = 600 / week = (600 / week) (52 weeks/year) = 31,200 / year • S = $150 / order • H = 0.3  5 = $1.50 / kit / year • Q = SQRT(2  D  S / H) = 2,498 ≈ 2,500 • Close your course pack • Active Learning: How do we change the analysis if inventory management were centralized for the four hospitals?

  18. Analysis for four hospitals managed together • D = 4  31,200 / year = 124,800 / year • S = $150 / order • H = $1.50 / kit / year • Q = SQRT(2  124,800  150 / 1.5) = 4,996 ≈ 5,000 • Costs: • Each hospital operated independently: 4  $3,747 = $14,988 / year • All four together: S  D / Q + H  Q / 2 = $3,744 + $3,750 = $7,494 / year • 50% savings • Quadrupling demand doubles the optimal order quantity and doubles the total relevant cost

  19. Four hospitals managed together • Costs: • Each hospital operated independently: 4  $3,747 = $14,988 / year • All four together: S  D / Q + H  Q / 2 = $3,744 + $3,750 = $7,494 / year • 50% savings • Quadrupling demand doubles the optimal order quantity and doubles the total relevant cost

  20. Inventory ROP demand during lead time lead time Time Determining ROP with EOQ model Lead time = 5 days Demand during lead time = (5 days) (10.12 VCRs / day)  51 VCRs  Set ROP = 51 VCRs Problem: this calculation assumes constant demand. May lead to shortages too frequently

  21. Pg. 149 What happens to Holding Cost when we Increase ROP? • EOQ: constant demand, zero safety stock • ROP = avg. demand during lead time • Iavg = (min + max)/2 = (0+Q)/2 = Q/2 • Holding cost = H  Q / 2 • If we add safety stock = SS, then: • ROP = avg. demand during lead time + SS • Iavg = Q/2 + min = SS + Q/2 • Holding cost = H  (SS + Q / 2)

  22. Pg. 152 ROP Demand during leadtime Demand that was not met Leadtime How Shortages Happen Inventory Active learning:How could we have avoided the shortage? Time

  23. ROP Inventory The demand during the lead time is uncertain. Here are 4 possibilities. We’ll see how to pick ROP so as to provide a specified fill rate … to Excel Time

  24. LTD Recap • “LTD” worksheet in A&E Noise workbook • Purpose: vary ROP (and Q, if desired) and see what happens to the fill rate • “LTD-exotic version”: can vary the lead time • Useful for comparing suppliers that provide different lead times

  25. pg. 151 Simulation versus EOQ

  26. Pg. 158 Back to the Distribution Game: Can we use EOQ here? Retailer A “multi-echelon” system Retailer Supplier Warehouse Retailer

  27. Using EOQ for a two-echelon system • Upper echelon: • Use warehouse holding cost rate • Ignore higher cost of holding inventory at retailers • Lead time = 15 (supplier  warehouse) + 5 (warehouse  retailer) = 20 days • Lower echelon: • Use incremental retailer holding cost rate • Lead time = 5 days • Coordination: warehouse order size should be a multiple of the sum of the retailer order sizes

  28. Data Assume open 250 days / year • Supplier to warehouse transit time: 15 days • Warehouse to retailer transit time: 5 days • Demand per retailer: 500 per year • Selling price: $100/unit • Purchase price: $70/unit • Supplier to warehouse order cost: $200 • Warehouse to retailer order cost: $2.75 • Warehouse holding cost: $10/unit/year • Retailer holding cost: $12/unit/year … To Excel

  29. Upper echelon: • Use warehouse holding cost rate • (Ignore higher cost of holding inventory at retailers) • Lead time = 15 (supplier  warehouse) + 5 (warehouse  retailer) = 20 days Upper echelon Retailer Retailer Supplier Warehouse Retailer

  30. Lower echelon: • Use incremental retailer holding cost rate • = retailer holding cost rate – warehouse holding cost rate • Lead time = 5 days Lower echelon Retailer Retailer Supplier Warehouse Retailer

  31. Coordination • Suppose each retailer uses QLower = 20. If all retailers order at once, the total is 60. • Active learning: you are the warehouse manager. Knowing the retailer order sizes, how would you pick the warehouse order size?

  32. Using EOQ for a 2-echelon system: the details • Upper echelon: • DUpper = 3  DRetailer • SUpper = SWarehouse • HUpper = HWarehouse • LTUpper = LTSupplier  Warehouse + LTWarehouse  Retailer • ROPUpper = DUpper  LTUpper • Lower echelon • DLower = DRetailer • SLower = SRetailer • HLower = HRetailer - HWarehouse • LTLower = LTWarehouse  Retailer • ROPLower = DLower  LTLower • Coordination: QUpper = n  SUM(QLower) • Choose n (an integer) and QLower to minimize total cost for the whole system

  33. Data Assume open 250 days / year • Supplier to warehouse transit time: 15 days • Warehouse to retailer transit time: 5 days • Demand per retailer: 500 per year • Selling price: $100/unit • Purchase price: $70/unit • Supplier to warehouse order cost: $200 • Warehouse to retailer order cost: $2.75 • Warehouse holding cost: $10/unit/year • Retailer holding cost: $12/unit/year … To Excel

More Related