Inventory

Inventory Basic Model

How can it be that mathematics, being after all a product of human thought which is independent of experience, is so admirably appropriate to the objects of reality? Albert Einstein

Problem 1

A toy manufacturer uses approximately 32000 silicon chips annually. The Chips are used at a steady rate during the 240 days a year that the plant operates. Annual holding cost is 60 cents per chip, and ordering cost is $24. Determine a) How much should we order each time to minimize our total cost b) How many times should we order c) what is the length of an order cycle d) What is the total cost e) Compute the flow time

Basic Inventory Model

Ardavan Asef-Vaziri

Sep-2012

2

What is the Optimal Order Quantity

2 DS EOQ  H

D = 32000, H = 0.6, S = 24

2(32000)(24) EOQ   1600 0.6

Basic Inventory Model Ardavan Asef-Vaziri Sep-2012

3

How Many Times Should We Order

Annual demand for a product is 32000 D = 32000 Economic Order Quantity is 1600 EOQ = 1600 Each time we order EOQ

How many times should we order ?

D/EOQ 32000/1600 = 20

Basic Inventory Model

Ardavan Asef-Vaziri

Sep-2012

4

What is the Length of an Order Cycle

working days = 240/year 32000 is required for 240 days 1600 is enough for how many days? (1600/32000)(240) = 12 days

Basic Inventory Model

Ardavan Asef-Vaziri

Sep-2012

5

What is the Optimal Total Cost

The total cost of any policy is computed as

TC  (Q / 2) H  ( D / Q)S

The economic order quantity is 1600

TC  0.6(1600 / 2)  24(32000 / 1600)

TC  480  480 TC  960

This is the total cost of the optimal policy

Basic Inventory Model Ardavan Asef-Vaziri Sep-2012

6

Compute the Flow Time

Demand = 32000 per year Therefore throughput = 32000 per year Maximum inventory = EOQ = 1600 Average inventory = 1600/2 = 800 RT=I 32000T=800 T=800/32000=1/40 year Year = 240 days T=240(1/40)= 6 days We could have also said: The length of an order cycle is 12 days. The first...