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Inventory Management. Ross L. Fink. EOQ Models. For continuous replenishment systems Family of models using cost minimization approach Will look at only the simplest model, but approach can be applied to a variety of situations. Simple Model. Holding Cost. Let Q = order size
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Inventory Management Ross L. Fink
EOQ Models • For continuous replenishment systems • Family of models using cost minimization approach • Will look at only the simplest model, but approach can be applied to a variety of situations
Holding Cost • Let Q = order size • Average inventory size = (max.-min.)/2 • =(Q-0)/2 = Q/2 • Let H = cost to hold one unit for one year • Average annual inventory cost =(Q/2)H
Ordering Cost • Let D = annual demand • Let S = cost per order • Average number of orders per year = D/Q • Average annual ordering cost = (D/Q)S
Shortage Cost • In simple model = 0
Purchase Cost • Let P = price per unit • Average annual purchase cost = PD
Assumptions • Constant known demand • Constant known lead time • Instantaneous replenishment • Fixed known cost per order • Constant fixed price per unit--no quantity discounts
Solution Methods • Spreadsheet • Calculus
ROP Perpetual inventory system Each item has different order interval Uses less safety stock Fixed Time Period Periodic inventory count Can group ordering periods--order multiple items Uses more safety stock ROP v. Fixed Time Period
Safety Stock Requirements • Variability of demand during lead time for ROP. Variability of demand during lead time and order interval for fixed time period. • Lead time • Variability of lead time • Service level
ABC Inventory Analysis • Classifies inventory items to determine level of control needed • Rank items by annual dollar volume (annual purchase cost) • A = top 15% -- substantial control • B = next 35% -- some control • C = bottom 50% -- little control (generally)
