PROB 1 Forecasted Demand Production Employees

Month (Units) (Units) RequiredJan 80000 80000 40Feb 90000 90000 45Mar 90000 90000 45Apr 80000 80000 40May 80000 80000 40Jun 70000 70000 35Jul 60000 60000 30Aug 50000 50000 25

PROB 1 Forecasted Demand Production Employees Employees Employees

Month (Units) (Units) Required Hired FiredJan 80000 80000 40 Feb 90000 90000 45 5Mar 90000 90000 45 Apr 80000 80000 40 5May 80000 80000 40Jun 70000 70000 35 5Jul 60000 60000 30 5Aug 50000 50000 25 5

TOTAL 5 20

COST 2,500.00$ 20,000.00$

PROB 2 Forecasted Planned Beginning Ending AverageSales Production Inventory Inventory Inventory

Month (Units) (Units) (Units) (Units) (Units)

Aug 3000 2000 3000 2000 2500Sep 1500 2000 2000 2500 2250Oct 1000 2000 2500 3500 3000Nov 1000 2000 3500 4500 4000Dec 1000 2000 4500 5500 5000Jan 1000 2000 5500 6500 6000Feb 800 2000 6500 7700 7100Mar 1500 2000 7700 8200 7950Apr 2000 2000 8200 8200 8200May 4000 2000 8200 6200 7200Jun 6000 2000 6200 2200 4200Jul 4000 2000 2200 200 1200

TOTAL 58600

PROB 2 Forecasted Planned Beginning Ending AverageSales Production Inventory Inventory Inventory

Month (Units) (Units) (Units) (Units) (Units)

Aug 3000 2000 3000 2000 2500Sep 1500 2000 2000 2500 2250Oct 1000 2000 2500 3500 3000Nov 1000 2000 3500 4500 4000Dec 1000 2000 4500 5500 5000Jan 1000 2000 5500 6500 6000Feb 800 2000 6500 7700 7100Mar 1500 2000 7700 8200 7950Apr 2000 2000 8200 8200 8200May 4000 2000 8200 6200 7200Jun 6000 2000 6200 2200 4200Jul 4000 2000 2200 200 1200

TOTAL 586001,758,000.00$

Inventory ManagementInventory Management

COB 300 CCOB 300 C

BusingBusing

Purposes of InventoryPurposes of Inventory

Meet expected demand Absorb demand fluctuations Protect against unexpected

increases in demand Decouple stages in the

production process Take advantage of quantity

discounts Hedge against possible price

increases Protect against disruption in

delivery from suppliers

Types of InventoryTypes of Inventory

Raw materials Work-in-process (WIP) Finished goods Replacement parts Supplies Transportation

Dependent andDependent andIndependent DemandIndependent Demand

Dependent Demand = usually generated by a company’s own production process

Independent Demand = usually from outside sources such as customers

Types of Inventory SystemsTypes of Inventory Systems

Perpetual (Continuous Review)

» Inventory level continuously monitored

» Transactions recorded as they occur

» Maintain specific level of inventory

Periodic

» Inventory counted only at regular intervals

» Inventory depends upon demand

ABC Classification of Inventory ABC Classification of Inventory ItemsItems

123456789

10

5,000200

2,000800

1,0001,2001,3002,5003,500

500

$ 30450

102010

5421

20

$ 150,00090,00020,00016,00010,000

6,0005,2005,0003,500

1,000

306,700

48.9129.34

6.525.223.261.961.691.631.14

.33

AABBBCCCCC

Cumulative Annual Unit Annual Dollar % Annual % AnnualItem Demand Cost Usage Dollar Usage Dollar Usage Classification

48.9178.2584.7789.9993.2595.2196.9098.5399.67

100.00

Aggregate Performance Aggregate Performance MeasuresMeasures

-Average inventory investment

-Turnover ratio

- Days of inventory

Annual cost of goods soldAverage inventory investment

Days per yearTurnover ratio

Costs of InventoryCosts of Inventory

Inventory Ordering Costs» Fixed

– Staffing– Office and equipment

» Variable– Shipping

– Order placing

– Setup cost

– Lost materials

– Receiving and inspection

Inventory Holding Costs» Fixed

– Warehouse-capital– Property taxes– Warehouse-operating– Personnel

» Variable– Cost of capital– Insurance– Losses– Inventory taxes– Rental costs

EOQ Model AssumptionsEOQ Model Assumptions

1. Constant known demand rate

2. Cost per unit fixed

3. Instantaneous replenishment

4. Ordering and carrying cost known and independent

Basic EOQ Inventory PatternBasic EOQ Inventory Pattern

Total Annual Variable CostsTotal Annual Variable Costs

EOQ ModelEOQ Model

D = Annual Demand rateCo = Variable ordering costCh = Variable holding cost

QC

D

QC

QDC

C

QDC

C

h o

o

h

o

h

*

*

*

*

( )

2

2

2

2

EOQ ModelEOQ Model

D = Annual Demand rateCo = Variable ordering costCh = Variable holding cost

D = 1,000 units/yearCo = $50 per order Ch = $5 per unit per year

EOQDC

Co

h

2

EOQ 2 1 000 50

5

( , )( )

20 000 141 42, .

Total Annual Variable CostTotal Annual Variable Cost (Slide 1 of 2) (Slide 1 of 2)

Annual variable ordering cost = Co

Annual variable holding cost = Ch

Total annual variable cost = Ch + Co

D

Q

Q

QQD

2

2

Total Annual Variable CostTotal Annual Variable Cost (Slide 2 of 2) (Slide 2 of 2)

D = 1,000 Co = $50 Ch = $5EOQ = 141.42Total annual variable costs

141.42 1,000 2 141.42

140 1,000 2 140

145 1,000 2 145

200 1,000 2 200

EOQ:

140:

145:

200:

(5)

(5)

(5)

(5)

+

+

+

+

(50) = $707.11

(50) = $707.14

(50) = $707.33

(50) = $750.00

Quantity Produced During Quantity Produced During Replenishment Period vs. Maximum Replenishment Period vs. Maximum

InventoryInventory

Finite Replenishment Rate ModelFinite Replenishment Rate ModelD = annual demand rate Co = Variable ordering costCh = variable holding cost d = dally demand ratep = daily production rate

EPQDC

C d po

h

2

1( / )Total annual variable costs

Qd p C

D

QCh o2

1( / )

D = 1,000; Co = $50; Ch = $5; d = 4; p = 10

EPQ

2 1000 50

5 1 4 10182 57

( )( )

( / ).

HomeworkHomework

Problem 1 (Handout); 3,4,8 (ch. 9)