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CHAPTER6InventoryManagementCopyright©2001byTheMcGraw-HillCompanies,Inc.Allrightsreserved.McGraw-Hill/Irwin6-2PurposesofInventory•Enablesthefirmtoachieveeconomicsofscale•Balancessupplyanddemand•Enablesspecializationinmanufacturing•Providesprotectionfromuncertaintiesindemandandordercycle•ActsasabufferbetweencriticalinterfaceswithinthesupplychainCopyright©2001byTheMcGraw-HillCompanies,Inc.Allrightsreserved.McGraw-Hill/Irwin6-32004000Days102030405060InventoryOrderplacedOrderarrivalOrderplacedAveragecycleinventoryA.Orderquantityof400unitsOrderarrivalTheEffectofReorderQuantityonAverageInventoryInvestmentwithConstantDemandandLeadTimea6-3aCopyright©2001byTheMcGraw-HillCompanies,Inc.Allrightsreserved.McGraw-Hill/Irwin6-4InventoryOrderplacedOrderarrivalAveragecycleinventoryDays1020304050600100200B.Orderquantityof200unitsTheEffectofReorderQuantityonAverageInventoryInvestmentwithConstantDemandandLeadTimeb6-3bCopyright©2001byTheMcGraw-HillCompanies,Inc.Allrightsreserved.McGraw-Hill/Irwin6-5AveragecycleinventoryOrderarrivalOrderplacedC.Orderquantityof600unitsDays102030405060Inventory0300600TheEffectofReorderQuantityonAverageInventoryInvestmentwithConstantDemandandLeadTimec6-3cCopyright©2001byTheMcGraw-HillCompanies,Inc.Allrightsreserved.McGraw-Hill/Irwin6-6AverageInventoryInvestmentUnderConditionsofUncertaintyA.WithvariabledemandInventoryAveragecycleinventorySs(afetytock50)yAverageinventor(150)200100810203040Days{{a6-4aCopyright©2001byTheMcGraw-HillCompanies,Inc.Allrightsreserved.McGraw-Hill/Irwin6-7AverageInventoryInvestmentUnderConditionsofUncertaintyB.WithvariableleadtimeInventoryAveragecycleinventoryyAverageinventor(140)2001001012{203040DaySs(afetytock40)s{b6-4bCopyright©2001byTheMcGraw-HillCompanies,Inc.Allrightsreserved.McGraw-Hill/Irwin6-8C.WithvariabledemandandleadtimeInventoryAveragecycleinventoryyAverageinventor(200)2001001012{203040DayySs(afet0tock10)s{8AverageInventoryInvestmentUnderConditionsofUncertaintyc6-4cCopyright©2001byTheMcGraw-HillCompanies,Inc.Allrightsreserved.McGraw-Hill/Irwin6-9EOQ=2PDCVwhere:P=Theorderingcost(dollarsperorder)D=Annualdemandorusageoftheproduct(numberofunits)C=Annualinventorycarryingcost(asapercentageofproductcostorvalue)V=AveragecostorvalueofoneunitofinventoryTheEOQModel6-5Copyright©2001byTheMcGraw-HillCompanies,Inc.Allrightsreserved.McGraw-Hill/Irwin6-10SizeoforderAnnualcost(dollars)Lowesttotalcost(EOQ)TotalcostInventorycarryingcostOrderingcostCostTrade-offstoDeterminetheMostEconomicOrderQuantity6-6Copyright©2001byTheMcGraw-HillCompanies,Inc.Allrightsreserved.McGraw-Hill/Irwin6-11OrderQuantityNumberofOrders(D/Q)OrderingCostPX(D/Q)InventoryCarryingCost1/2QXCXVTotalCost406080100120140160200300400120806048403530241812$4,8003,2002,4001,9201,6001,4001,200960720480$5007501,0001,2501,5001,7502,0002,5003,7505,000$5,3003,9503,4003,1703,1003,1503,2004,4604,4705,480CostTrade-offsRequiredtoDeterminetheMostEconomicOrderQuantity6-7Copyright©2001byTheMcGraw-HillCompanies,Inc.Allrightsreserved.McGraw-Hill/Irwin6-12SymptomsofPoorInventory•Increasingnumbersofbackorders•Increasingdollarinvestmentininventorywithbackordersremainingconstant.•Highcustomerturnoverrate.•Increasingnumberofordersbeingcanceled.•Periodiclackofsufficientstoragespace.•Widevarianceininventoryturnoveramongdistributioncentersandmajorinventoryitems.6-8

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