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LO 3
17-17
Calculations
LO 3
17-18
Multi-Period Models
There are two general types of multi-
period inventory systems
1. Fixedorder quantity models
Also called the economic order quantity, EOQ,
and Q-model
Event triggered
2. Fixedtime period models
Also called the periodic system, periodic
review system, fixed-order interval system,
and P-model
Time triggered
LO 5
17-19
Key Differences
To use the fixedorder quantity model,
the inventory remaining must be
continually monitored
In a fixedtime period model, counting
takes place only at the review period
The fixedtime period model
Has a larger average inventory
Favors more expensive items
Is more appropriate for important items
Requires more time to maintain
LO 5
17-20
FixedOrder Quantity and Fixed
Time Period Differences
LO 5
17-21
Comparison for FixedOrder Quantity
and FixedTime Period Inventory
Systems
LO 5
17-22
Fixed-Order Quantity Model
Models
Demand for the product is constant and
uniform throughout the period
Lead time (time from ordering to
receipt) is constant
Price per unit of product is constant
Inventory holding cost is based on
average inventory
Ordering or setup costs are constant
All demands for the product will be
satisfied
LO 4
17-23
Basic FixedOrder Quantity Model
Place Order
Lead time
Receive order
Use inventory
LO 4
17-24
Basic Fixed-Order Quantity (EOQ)
Model Formula
inventory of unit per cost storage and holding Annual H
time Lead L
point Reorder R
cost setup or order an placing of Cost S
quantity Order Q
unit per Cost C
Demand D
cost annual Total TC
H
2
Q
+ S
Q
D
+ DC = TC
=
=
=
=
=
=
=
=
LO 4
17-25
Annual Product Costs, Based on
Size of the Order
LO 4
17-26
Example 17.2
( )
( )
( ) ( ) ( )
81 . 611 , 12 $ 63 . 55 $ 18 . 56 $ 500 , 12 $
25 . 1 $
2
89
5 $
89
000 , 1
50 . 12 $ 000 , 1
2
7 . 13 5
365
000 , 1
4 . 89 000 , 8
25 . 1
5 000 , 1 2 2
$12.50 C
days 5 L
year per unit per $1.25 H
order per $5 S
1,000/365 d
units 1,000 D
= + + =
+ + =
+ + =
= = =
= = = =
=
=
=
=
=
=
H
Q
S
Q
D
DC TC
units L d R
units
H
DS
Q
opt
LO 4
17-27
Establishing Safety Stock Levels
Safety stock: amount of inventory carried in
addition to expected demand
Safety stock can be determined based on many
different criteria
A common approach is to simply keep a
certain number of weeks of supply
A better approach is to use probability
Assume demand is normally distributed
Assume we know mean and standard deviation
To determine probability, we plot a normal
distribution for expected demand and note where the
amount we have lies on the curve
LO 4
17-28
FixedOrder Quantity Model with
Safety Stock
LO 5
17-29
FixedOrder Quantity Model with
Safety Stock
time lead during usage of deviation Standard
y probabilit service a for deviations standard of Number z
days in time Lead L
demand daily Average d
units in point Reorder R
L
=
=
=
=
=
+ =
o
o
L
z L d R
LO 5
17-30
Example 17.4
( )
6
50 . 0 $
10 $
7
900 , 21 365 60
60
=
=
=
=
= =
=
L
H
S
D
d
d
o
( )
( )
( ) ( )
units
z L d R
L
units
H
DS
Q
L
d
L
i
d L
opt
388
15 . 17 64 . 1 6 60
15 . 17 7 6
936
50 . 0
10 900 , 21 2
2
2
2
1
2
=
+ =
+ =
= = = =
=
=
=
=
o
o o o
LO 5
17-31
Fixed-Time Period Models
order) on items (includes level inventory current = I
time lead and review over the demand of deviation standard =
y probabilit service specified a for deviations standard of number the = z
demand daily average forecast = d
days in time lead = L
reviews between days of number the = T
ordered be to quantitiy = q
: Where
I - Z + L) + (T d = q
L + T
L + T
o
o
Order quantity Average daily
demand
Vulnerable period Safety stock Inventory on hand
LO 5
17-32
FixedTime Period Inventory Model
LO 5
17-33
( )
( )
( ) ( )
( ) ( )
units
q
L T
I z L T d q
d
L T
i
d L T
L T
L T
331
150 9 . 19 05 . 2 14 30 10
9 . 19 3 14 30
150 05 . 2 14 30 10
2 2
1
2
=
+ + =
= + = + =
=
+ + =
+ + =
+
=
+
+
+
o
o o
o
o
Example 17.5
Daily demand of 10
units
Daily standard
deviation of 3 units
Review period of 30
days
Lead time of 14 days
Satisfying 98 percent
of demand from items
in stock
150 Units in inventory
LO 5
17-34
Inventory Control and Supply
Chain Management
SS
SS
+
=
+ =
2
Q
D
turn Inventory
2
Q
inventory Average
LO 6
17-35
Price Break Models
Price varies with the order size
To find the lowest-cost, need to calculate the
order quantity for each price and see if the
quantity is feasible
1. Sort prices from lowest to highest and calculate
the order quantity for each price until a feasible
order quantity is found
2. If the first feasible order quantity is the lowest
price, this is best, otherwise, calculate the total
cost for the first feasible quantity and calculate
total cost at each price lower than the first feasible
order quantity
LO 4
17-36
Curves for Three Separate Order
Quantity Models in a Three-Price-Break
Situation
LO 4
17-37
Example 17.8: The Data and Order
Quantities
D = 10,000
S = $20
i = 20 percent
Cost per unit
1-499 $5.00
500-999 $4.50
1,000 and up $3.90
( )
( )
( )
( )
( )
( )
716
90 . 3 20 . 0
20 000 , 10 2
667
50 . 4 20 . 0
20 000 , 10 2
633
00 . 5 20 . 0
20 000 , 10 2
2
000 , 1
999 500
499 1
= =
= =
= =
=
+
Q
Q
Q
iC
DS
Q
LO 4
17-38
Example 17.8: The Solution
LO 4
17-39
ABC Classification
LO 2
17-40
Inventory Accuracy and Cycle
Counting
Inventory accuracy: refers to how well
the inventory records agree with
physical count
Cycle counting: a physical inventory-
taking technique in which inventory is
counted on a frequent basis rather than
once or twice a year
LO 2