Inventory and Order Quantity

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INVENTORY MANAGEMENT Learning Objectives: • • To understand the different types of inventory and the reasons for maintaining inventory • • To learn how to analyze inventory levels and effectiveness • • To develop strategies for managing inventory by answering the following questions I. Why do we have it II. What form should it take? III. Where do we keep it? IV. How much should we order? V. When should we order? VI. How can we reduce inventory? Journey to World Class 3 – Managing Inventory – an excellent Industry Week article on one firm’s move to become a world class organization by managing their inventory. Contents: | EOQ || EOQ with Quantity…show more content…
Total annual inventory management cost = annual inventory holding costs + annual ordering/setup costs. The formula for the economic order quantity (EOQ) is derived by developing an expression for total annual inventory management cost, then taking its derivative with respect to quantity Q to find its minimum point. Total annual inventory management cost = S (D / Q*) + H (Q* / 2) where: • Q* = optimal order quantity • D = demand per time period • S = cost of placing an order • H = cost of holding one unit in inventory for one time period Optimal order quantity Q* = square root of (2 D S/ H ) Number of orders placed per year = D / Q* Average cycle inventory = Q* / 2 Time between orders = Q*/ D (expressed in years) The optimal order quantity Q* occurs at the point where total "fixed costs" (eg., ordering costs) equal total "variable costs" (eg., inventory holding costs). Example 1. • Assumption – no lead time and constant demand • Annual demand = 20,000 units per year • Cost/unit = $30 • Order cost = $100/order • Holding cost = 12% of unit cost/per year • H = .12(30) = $3.60/unit/year – holding costs and demand must be in the same time frame

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