[completed] 10과 Order Quantities

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Introduction

the objectives of inventory management are to provide the required lefel of customer service and to reduce the sum of all costs involved. to achieve these objectives, two basic questions must be answered.

1. how much shoud be ordered at one time? -> this chapter will examine methods of answering this question.
2. when should an order be placed?

first, it must be determined what is being ordered and controlled.

• stockkeeping Unit(SKU)
  • control is exercised thought individual items in a particular inventory. these are called stockkeeping units.
• Lot-size decision rules : define a lot or batch as ' a quantity produced together and sharing the same production cost and specifications'. followings are some common decision rules for determining what lot size to order at one time.
  • lot-for-lot
    • say to order exactly what is needed : no more no less. since items are orderd only when needed, this system creates no unused lot-size inventory. because of this, it is often the preferred method for planning a itmes and is also used in a just in tiem or lean enviorment.
  • fixed order quantity
    • specify the number of units to be ordered each time and order is placed for an individual item or SKU. the advantage to this type of rule is that it is easily understood. the disadvantage is that is does not minimize the cost involved.
  • MIN-MAX system
    • a variation on the fixed order quantity system is the min-max system. in this system, an order is placed when the quantity available falls below the order point. the quantity ordered is the difference between the actual quantity available at the time of order and the maximum.
  • period order quantity
    • rather than ordering a fixed quantity, inventory management can order enought to satisfy future demand for a given period of time. the question is how many periods should be covered?
• costs
  • the cost of ordering and the cost of carrying inventory both depend on the quantity  ordered. ideally the ordering decision rule used will minimize the sum of these two costs. the best known system is the economic order quantity.

Economic Order Quantity

• assumptions
  • the assumptions on which the economice order quantity is based are follows:
    • demand is relatively constant and is known
    • the item is produced or purchased in lots or batched and not continously
    • order preparation costs and inventory carrying costs are constant and known.
    • replacement occurs all at once
  • this assumption are usually valid for finished goods whose demand is independent and fairly uniform. but there are also several rule used that are variations of the economic order quantity.
• development of the EOQ formula
  • under the assumptions given, the quantity of an item in inventory decrease at a uniform rate. 
    • the quantity of inventory decrease at a uniform rate is the order quantity at one time.
    • how many place  the order -> annual demand/ order quantity
  • notice that  the number of orders per year is rounded neither up nor down. it is an average figure, and the actual number of orders per year dill vary from year to year but will average to calcalated figure.
  • relevant costs
    • annual cost for placning orders
    • annual cost of carrying inventory.
  • as the order quantity increase, the average inventory and the annual cost of carrying inventory increase, but thre number of orders per year and the ordering cost decrease. the key is to find the particular order quantity in which the total cost of carrying inventory and the cost of ordering will be minimum.
• trial- and - error method
  • there is an order quantity in which the sum of the ordering costs and carrying costs is minimum
  • this EOQ occurs when the cost of ordering equals the cost of carrying
  • the total cost varies little for a wide range of lot size about EOQ.
    • the last point is very important for two reasons.
      • first, it is usually difficult to determine accurately the cost of carrying inventory and the cost of ordering. since total cost is relatively flat arount EOQ, it is nor critical to have exact values.
      • second, parts are often ordered in convenient packages such as palletloads, cases or dozens. and it is adequated to pick the package quantity closest to the EOQ.
• economic order quantity formula
  • the value for the order quantity is the economic order quantity. 
• how to reduce lot size
  • the EOQ formular has four variables. the EOQ will increase as the annual demand(A) and the cost of ordering (S) increase, and it will decrease at the cost of carrying inventory (i) and the unit cost (c) increase.
  • the annual demand(A) is a condition of the marketplace and is beyond the control of manufacturing. 
  • the cost of carrying inventory(i) is determined by the product it self and the cost of money to the company
  • the unit cost(c) is either the purchase costs of the SKU or the cost of manufacturing the item. ideally, both costs should be as low as possible. in any event, as the unit cost decreas, the EOQ decrese.
  • the cost of ordering (S) is either the cost of placing a purcahse order or the cost of placing a manufacturing order. the cost of placing a manufacturing order is made up from produdction control costs and set up costs. anything that can be done to reduce these costs reduces the EOQ.

Variation of the EOQ Model

there are several modification that can be made to the basic EOQ model to fit particular circumstances. two that are often used are the monetary unit lot-size model adn the non-instantaneous receipt model.

• Monetary Unit Lot Size
  • the EOQ can be calculated in monetary units rather than physical units.
• Noninstaneous Receipt Model
  • in some cases, when a replenishment order is made, the order is not all received at one time. the most common reason for this is that the ordered material is being produced over an extended period of time, yet material is received for the order as it is being produced.

Quantity Discounts

when material is purchased, suppliers often give a discount on orders over a certain size. this can be done because larger orders reduce the supplier's costs; to get larger orders, suppliers are willing to offer volume discount. the buyer must decide whether to accept the discount and in doing so must consider the relevant costs;

• purchase cost
• ordering costs
• carrying costs

when considering a quantity discount, the total cost of using the discount are usually compared with the total costs of using the EOQ method.

Order Quantities for Families of Product when costs are not known

the EOQ formula depends upon the cost of ordering and the cost of carrying inventory. in practice, these costs are not necessarily known or easy to determine. howeverm the formula can still be used to an advantage when applied to a family of items.

for a family of items, the ordering costs and the carrying costs are generally the same for each item.(for exampel, bolt, nut so on)

the carrying costs would be virtually the same(storage, capital, the risk costs)

period order quantity

the economic order quantity attempts to minimize the total cost of ordering and carrying inventory and is based on the assumption that demand is uniform. often demand is not uniform, particularly in material requirements planning(MRP), and using the EOQ does not produce the minimum cost. the order quantity will often excedd the demand expected for the next few period, which may result in inventory carried over periods of no demand to avoid the cost of placing the order.

however, the quantity ordered may not be exactly enough to cover the demand in the next few periods resulting in the placement of another order even while a remnant of the last order is available.keeping inventory to avoid placing orders is a good idea but not keeping enough inventory to avoid placing order defeats the goal of EOQ. a change in the application is required and this is demonstrated in the period order quantity method.

the period order quantity(POQ) lot-size rule is based on the same theory as the economic order quantity. it uses the EOQ formula to calculate an economic time between orders.

note that POQ does not calculate quantity but actually calculates the number of periods that are to be coverd.

the POQ is calculated by dividing the EOQ by the demand rate.

instead of ordering th same quantity(EOQ), orders are placed to satisfy requirements for the calculated tiem  interval.

the number of orders placed in a year is approximately the same as for an economic order quantity, but the amount ordered each tiem varies.

thus the ordering cost is the same as it would be using the EOQ but because the order quantities are determined by actual demand, the carrying cost is reduced

POQ = EOQ/average weekly usage

noth that although POQ calculates an order inverval say of 2 weeks, theis does not mean that there is an order placed every two weeks. it actually means that when an order needs to be placed, then enougth inventory is ordered to cover the next two weeks.

• practical consideration when using the EOQ.
  • Lumpy demand : the EOQ assumes that demand is uniform and replehishment occurs all at once. when this is not true, It is better to use the period order quantity.
  • anticipation inventory :demand is not unifor, and stock must be built ahead or period of high demand. it's better to plan a buildup of inventory based on capacity and future demand.
  • minimum order : this minimum may be based on the total order rather than on individual items. often these are C tiems where the rule is to order plenty not an EOQ.
  • transportation inventory: transportation carries give rate based on the amount shipped
  • multiples : sometimes order size is constrained by package size. for example, a supplier may ship only in skid-load lots. in these cases, the unit used should be multiple of the minimum package size.
  • order quantities and lean production  : lean production has a profound effect on the amount of inventory to be produced at one time. the replenishment quantity of an item is adjusted to match the demand of the next oepration in the supply chain. this adjustment leads to smaller lot sizes and is often determined by the frequenfy of shipments to a customrr or the size of an easily moved container rather thatn by calculation.

key term

EOQ

Fixed Order Quantity

Lot-for-lot

Min-max systme

Noninstantaneous receipt model

period order quantity

quantuty discounts

stockkepping units(SKUs)