OM Week 12

What are the four reasons to hold inventory?

• Meet customer demand immediately

• Buffer against supplier or demand uncertainty

• Order or produce in larger, cheaper batches

• Prepare for predictable peaks

What are the four reasons to reduce inventory?

• Cash gets trapped in stock

• Storage, handling, and insurance cost money

• Products can expire or become obsolete

• Excess inventory can hide bad forecasts and bad processes

What are the four types of Inventory?

• Pipeline

• Safety Stock

• Cycle Inventory

• Seasonal Inventory

Pipeline Inventory

Items moving though transportation or processing

Safety Stock

Extra inventory held because demand or lead time is uncertain

Cycle Inventory

Inventory created because we replenish in batches rather than one unit at a time

Seasonal Inventory

Inventory built in advance of a known future surge

Bigger orders mean fewer setups but also

More inventory sitting around

Purchasing Cost Formula

Purchasing Cost = Cost x Demand

Purchasing Cost

If the unit price does not depend on order size then you still buy the same annual demand D no matter what Q is and PC does not change with Q

Ordering Cost Formula

Annual ordering cost depends on how many orders you place in a year

• Each order costs S

Holding Cost

Which two costs does EOQ balance?

• Ordering Cost

• Holding Cost

If unit price is constant, purchasing constant is

Flat in Q

Why does Average Inventory = Q/2

In the basic EOQ model, inventory falls steadily from Q to 0 and is then replenished instantly

• The average over the cycle is therefore:

Average Inventory = Q + 0 / 2 = Q /2