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)
