Chapter 9: Inventory Management

Inventory Reduction Tactics (2 of 2)

• Anticipation inventory
• Match demand rate with production rates

• Add new products with different demand cycles
• Provide off-season promotional campaigns
• Offer seasonal pricing plans

• Pipeline inventory
• Reduce lead times

• Find more responsive suppliers and select new carriers
• Change Q in those cases where the lead time depends on the lot size

Example 1 (1 of 3)

• A plant makes monthly shipments of electric drills to a wholesaler in average lot sizes of 280 drills. The wholesaler’s average demand is 70 drills a week, and the lead time from the plant is 3 weeks. The wholesaler must pay for the inventory from the moment the plant makes a shipment. If the wholesaler is willing to increase its purchase quantity to 350 units, the plant will give priority to the wholesaler and guarantee a lead time of only 2 weeks. What is the effect on the wholesaler’s cycle and pipeline inventories?

Example 1 (2 of 3)

• The wholesaler’s current cycle and pipeline inventories are

• Sum of Inventory = 140 + 210 = 350

Example 1 (3 of 3)

• The wholesaler’s cycle and pipeline inventories if they accept the new proposal

• Sum of Inventory = 175 + 140 = 315

Exercise: Inventory Game

• Let’s play an inventory game.
• You need to decide how much and when to order for the product.
• The student who gets the lowest total cost will get a gift from the instructor.
• Starbucks coffee and cake

How Much To Order?

• Economic Order Quantity:
• The lot size that minimizes total annual inventory holding and ordering costs
• Five assumptions

• The demand rate is constant and known with certainty.
• No constraints are placed on the lot size.
• The only two relevant costs are the inventory holding cost and the ordering cost per lot or setup.
• Decisions for one item can be made independently of decisions for other items.
• The lead time is constant and known with certainty.