Chapter 9: Inventory Management

Example 2 (1 of 3)

• A museum of natural history opened a gift shop which operates 52 weeks per year.
• Top-selling S K U is a bird feeder.
• Sales are 18 units per week, the supplier charges $60 per unit.
• Cost of placing order with supplier is $45.
• Annual holding cost is 25 percent of a feeder’s value.
• Management chose a 390-unit lot size.
• What is the annual cycle-inventory cost of the current policy of using a 390-unit lot size?
• What is EOQ? What is the annual cycle-inventory cost at EOQ?

Example 2 (2 of 3)

• We begin by computing the annual demand and holding cost as

• The total annual cycle-inventory cost for the alternative lot size is

• The EOQ is

• C = (Q/2) H + (D/Q) S = (75/2) * 15 + (936/75) * 45
• = $562.50 + $561.60 = $1124.10

Example 2 (3 of 3)

• Below shows that the total annual cost at EOQ is much less than the $3,033 cost of the current policy of placing 390-unit orders.

• Total Annual Cycle-Inventory Costs Based on 390 unit orders and E O Q.

• Note that annual ordering cost and annual holding cost at EOQ is almost equal.

How to Compute the TBO

• TBO = Time Between Orders
• When the E O Q is used, the T B O can be expressed in various ways for the same time period.

• TBO (for month) = ( EOQ / D ) * 12 months = 0.96 month
• TBO (for week) = ( EOQ / D ) * 52 weeks = 4.17 weeks
• TBO (for day) = ( EOQ / D ) * 365 days = 29.25 days

Managerial Insights from the E O Q

• Table 9.1 Sensitivity Analysis of the E O Q

When to Order?

• Continuous review (Q ) system
• Reorder point system (ROP) and fixed order quantity system
• Tracks the remaining inventory of a SKU each time a withdrawl is made to determine if it is time to reorder.
• When the inventory position (IP) reaches the reorder point (R), a new order is made.

• Question: When should we order to meet the demand in time?

• 50 Units

• TBO = time b/w orders