managerial economics ch 8

7/23/2019 Managerial Economics Ch 8

1/31

Dr. Karim Kobeissi


2/31

Chapter 8: Inventory

Management


3/31

Inventory - Defnition

Any stored resource used to

satisfy a current or future need

(raw materials, work-in-process,

nished goods, etc.).


4/31

What Type o Businesses ee! to Manage Inventory "

Maintaining inventories is necessary for any

company dealing with physical products,

including manufacturers, wholesalers, and

retailers.

- Manufacturers

-

Wholesalers and Retailers

Inventories of RawMaterials

Inventories of Finished Products AwaitingShipment

Inventories of oods Availa!le for Purchase !y"ustomers


5/31

Why Do We ee! to Manage Inventory"

#a$es %ro&th# right inventory at the right place at

the right time Avoiding Stoc$outs % &o 'ost (eal #

)Sorry we are out of that item*.

Cost 'e!u(tion# less money tied up in inventory

+represents as much as - of invested capitol at

some companies/, inventory management,

o!solescence.

0igher Pro1t


6/31

T : Tri$$ion


7/31

0edge against uncertain demand

0edge against uncertain supply

2conomi3e on ordering costs

Smoothing

4ene1ts of Inventory

We !uild and $eep inventory in order tomatch supply and demand in the mostcost e5ective way.


8/31

Inventory Planning and "ontrol

For maintaining the right !alance !etweenhigh and low inventory to minimi3e cost


9/31

Inventory "ontrol (ecisions

6!7ective# Minimi3e 8otal Inventory"ost

(ecisions#

0ow much to order9

When to order9 0ow much stoc$ to $eep9


10/31

Basi( *(onomi( +r!er ,uantity *+,:(etermining 0ow Much to 6rder

6ne of the oldest and most well $nown

inventory control techni:ues

2asy to use

4ased on a num!er of assumptions


11/31

Assumptions of the 26; Model

-- units ? day @ --- units ?

month.

. 8he lead time +the delay !etween the initiation of an order

and the completion of its ful1lment/ is $nown and

constant.

>. 8he order :uantity to replenish inventory arrives all at

once 7ust when desired.

B. Purchase cost per unit is constant +no :uantity discount/.

. Planned shortages +inventory C -/ are not allowed.


12/31


13/31

*(onomi( +r!er ,uantity/ormu$a

*+, 0 !ai$y !eman! 1 $ea! time 0 'eor!er 2oint


14/31

Applied 2=ample on 26;'et )Atlantic "ost 8ire % A"8* !e a 1rm that sell tires with#

Dearly demand C E--- units

'ead time C days

8he num!er of wor$ing days per year or 34CT5C - days

%"ompute the 26; for )A"8*

(aily (emand C yearly demand ?num!er of wor$ing days per

year

C E---?- C B tires sold per day

26; C !ai$y !eman! 1 $ea! time 0 67 1 0 69 tires

*a(h time the inventory $eve$ !rops !o&n to having 69

tires remaining; 4CT a


15/31

69


16/31

Inventory Manager Software


17/31

The Optimal Inentory !olicy "or the #asic $O%

To fn! an optima$ inventory po$i(y;

managers o(us on Minimi=ing the

Tota$ >ariab$e Inventory Cost per

?ear /in!ing the +ptima$ +r!er


18/31

Finding the 6ptimal 6rder ;uantity +;G/

Parameters#;G C 6ptimal order :uantity +the26;/

( C Annual demand"oC 6rdering cost per order

"hC 0olding +or carrying /cost per unit

per year

P C Purchase cost per unit

C t th T t $ > i b$


19/31

Components o the Tota$ >ariab$eInventory Cost

Annual setup cost C +&um!er of orders per year/ = +6rdering cost per order/

C +(?;/ = "o

Annual holding cost C +Average inventory/ = +0olding cost per unit per year/

C +;?/ = "h

08ota l Har ia!le Inventory "ost per Dear

&ote#

,A6 is the average inventory $eve$

2ur(hase (ost !oes not !epen! on ,


20/31

8wo Methods for "arrying "ost

"arry cost +"h/ can !e e=pressed either#


21/31

*+, Mo!e$ Tota$ Cost

At optimal order :uantity +;G/#

"arrying cost C 6rdering cost


22/31

Finding the 6ptimal 6rder ;uantity+con/

8here is a simple square root formula that

gives the optimal order :uantity +;G/ that

minimi3es the total varia!le inventory

cost per year for any application of the

!asic 26; model.


23/31

Finding the 6ptimal 6rder ;uantity +;G/

Recall that at the optimal order :uantity +;G/#

"arrying cost C 6rdering cost +(?;G/ = "oC +;G?/

= "h

Rearranging to solve for ;G#

;G C

Where,( C Annual demand

"oC 6rdering cost per order

"hC 0olding cost per unit per year

)/2( hCDCo


24/31

2=ample# Sumco Pump "o.Sumco Pump "o. !uys pump housing from a manufacturer and

sells to retailers

( C Annual demand C


25/31

26; With Planned Shortages6ne of the !anes of any inventory manager is the

occurrence of an inventory shortage. 8his causesa variety of headaches, including dealing with

unhappy customers and having e=tra record

$eeping to arrange for 1lling the demand later

+ba(or!ers/ when the inventory can !e

replenished. 4y assuming that planned shortages

are not allowed, the !asic 26; model satis1es the

common desire of managers to avoid shortages

as much as possi!le.

26; Wi h Pl d Sh


26/31

26; With Planned Shortages0owever, there are situations where permitting

limited planned shortages ma$es sense from amanagerial perspective. 8he most important

re:uirement is that the customers generally are

a!le and willing to accept a reasona!le delay in

1lling their orders if need !e. If the cost of holding

inventory is high relative to these shortage costs,

then lowering the average inventory level !y

permitting occasional !rief shortages may !e a

sound !usiness decision.


27/31

26; with Planned Shortages

4ssumptions (emand occurs at a constant rate of D items?year.

6rdering cost# Jkper order.

0olding cost# Jhper item in inventory per year.

4ac$order cost# Jp unit shortage cost+!ac$ordered/ per year.

Purchase cost per unit is constant +no :uantitydiscount/.

Set%up time +lead time/ is constant. Planned shortages are permitted +!ac$ordered

demand units are withdrawn from a replenishmentorder when it is delivered/.

nder these assumptions the I l l


28/31

nder these assumptions, the

pattern of inventory levels over

time has the appearance

shown !eside. &ow theinventory levels e=tend down

to negative values that reNect

the num!er of units of the

product that are !ac$ordered.

'etting the inventory level is

allowed to go down to +%S/, at

which point an order :uantity

+;/ is placed. +S/ units out of

the +;/ are used to 1ll the

!ac$orders, so the ma=imum

inventory level is +; % S/.

Q- S

Q- S

0

- S

Time

Inventory level

Q

S


29/31

The +bEe(tive o the Mo!e$

8his model has two decision varia!les the

order :uantity +Q) and the ma=imum shortage+S).8he o!7ective in choosing +Q)and +S)is to#

Minimi3e 8H" C total varia!le inventory cost

per year

8his 8H" needs to include the same $inds of costsas for the !asic 26; model plus the cost of

incurring the shortages. 8hus,8H"C Annual setup cost Annual holding cost Annual

shortage cost

26; ith Pl d Sh t


30/31

26; with Planned Shortages

/ormu$as 6ptimal order :uantity#

Q G C KD?h +h+ p/?p

Ma=imum num!er of !ac$orders#

S G C Q GQh?+h p/- Ma=imum inventory level C QG % SG

- Reorder Point C % SG +daily demand/ +lead time/

&um!er of orders per year# D?Q G

8ime !etween orders +cycle time/# Q G?Dyears

8otal annual cost#

Qh +Q G%S G/?Q G QDk?Q G QS Gp?Q G

+holding ordering !ac$ordering/

Application to the A"8 "ase Study


31/31

Application to the A"8 "ase Study DC J

managerial economics ch 8

Documents