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Inventory Management CONT, TAN XIU YUAN F20A0720, FSE 40103 FOOD SUPPLY…
Inventory Management CONT
Economic Order Quantity (EOQ)
Component of EOQ formula
D: Annual Quantity Demanded
Q: Volume per Order
S: Ordering Cost (Fixed Cost)
C: Unit Cost (Variable Cost)
H: Holding Cost (Variable Cost)
i: Carrying Cost (Interest Rate)
Ordering Cost
found by dividing the annual demand by the volume per order
annual ordering cost is found by multiplying the number of orders by this fixed cost
Holding Cost (i)
cost per unit multiplied by the interest rate
holding cost of the Inventory is calculated by finding the sum product of the inventory at any Instant and the holding cost per unit
The square root (√) of 2x (annual demand in units, multiplied by order cost per purchase order), divided by annual holding cost per unit.
Reorder Point - When the quantity on hand of an item drops to this amount, the item is reordered
Safety Stock - Stock that is held in excess of expected demand due to variable demand rate and/or lead time
Service Level - Probability that demand will not exceed supply during lead time
Fixed-Order-Interval Model
Orders are placed at fixed time intervals
Order quantity for next interval?
Suppliers might encourage fixed intervals
May require only periodic checks of inventory levels
Risk of stockout
Fill rate – the percentage of demand filled by the stock on hand
Fixed-Interval Benefits
Tight control of inventory items
Items from same supplier may yield savings in:
Ordering
Packing
Shipping costs
May be practical when inventories cannot be closely monitored
Determinants of the Reorder Point
The rate of demand
The lead time
Demand and/or lead time variability
Stockout risk (safety stock)
Out-of-stocks happen because of many reasons, including
Improper, ineffective or inaccurate inventory and operations management practices
Spikes in customer demand
Poor demand forecasting and inventory accounting
Disruptions in production process
Changes in lead time from suppliers
Internal communication challenges
Reorder point
lead time demand + safety stock
Measuring Product Availability
Product availability: a firm’s ability to fill a customer’s order out of available inventory
Stockout: a customer order arrives when product is not available
Product fill rate (fr): fraction of demand that is satisfied from product in inventory
Order fill rate: fraction of orders that are filled from available inventory
Cycle service level: fraction of replenishment cycles that end with all customer demand met
Replenishment Policies
Replenishment policy: decisions regarding when to reorder and how much to reorder
Continuous review: inventory is continuously monitored and an order of size Q is placed when the inventory level reaches the reorder point ROP
Periodic review: inventory is checked at regular (periodic) intervals and an order is placed to raise the inventory to a specified threshold (the “order-up-to” level)
TAN XIU YUAN F20A0720
FSE 40103 FOOD SUPPLY CHAIN MANAGEMENT
