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Lecture 14

MAN3504 Lecture Notes - Lecture 14: Economic Order Quantity, Operations Management, Lead Time

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Operations Management Inventory Management: Introduction and Economic Order Quantity
o A stock of materials used to satisfy customer demand or to support the production
services or goods
o Why Inventory
Supplies and deliveries can be variable
o Inventory Management
The planning and controlling of inventories in order to meet the competitive
priorities of the organization
o Inventory level trade off
The appropriate inventory level is a result of a trade off between two competing
Small inventory and lower cost or large inventory and better services
o Pressures for small inventories
Lower inventory holding cost
Cost of capital, storage and handling costs, taxes and insurance,
obsolescence, pilferage, deterioration.
o Pressures for large inventories
Better customer service, allows building p anticipation inventory, lower order
cost, lower transportation cost, higher labor and equipment utilization
Forms of Inventory
o Cycle inventory
Inventory resulting from the ordering cycle
Depends directly from the order quantity Q
Order quantity principles
Order quantity Q varies directly with time between orders TBO
The longer the time between orders, the larger the cycle inventory must
be Q/2
o Safety stock inventory
Suplus inventory protecting against uncertainties in demand, lead time and
Reduces risk of stock out
Involves significant cost
Surplus inventory can hide problems
Examples: Late deliveries, too much space, poor qualities, missed due
dates, scrap and rework, etc.
o Anticipation inventory
Building up inventory in prevision of future peaks of demand (Supply option)
Used to absorb uneven rates of demand or supply
Typical for seasonal demand patterns
o Pipeline Inventory
Inventory created when order released but not yet received
Longer lead time increases pipline inventory
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