Order Quantity (EOQ)
In the "old" days, inventory management required workers to monitor sales and stock-on-hand, then to mail or phone orders for new supplies when it "seemed" to be advisable. This system frequently resulted in excess inventories or stockouts (i.e., the empty-shelf syndrome).
Information management, however, has transformed inventory management into a process allowing the service to meet customer demands without incurring the expense of excess inventory. Use of computer-based information systems in inventory management represents one of the earliest and most successful applications of information technology.
All of us are familiar with the bar codes, that are found on nearly every inventory item purchased in retail stores. The bar code supplies information that allows management to track where inventory is located and how fast it is moving.
For example, most supermarkets use computerized inventory systems to maintain automatically records of inventory balances based on point-of-sale (POS) scanning of the bar codes on items.
When stock levels are depleted (or reach a predetermined reorder point), a purchase order to a preap-proved vendor is initiated automatically using electronic data interchange (EDI).
When the order is received, the inventory balance is adjusted accordingly.
Such use of information technology saves costs by avoiding paperwork, facilitating cash management, and creating a system that responds quickly to inventory needs among suppliers, service providers, and customers
Economic Order Quantity
The simple economic order quantity (EOQ) model, which assumes a constant rate of demand and no stockouts, is a surprisingly accurate model .In this situation, demand appears to be constant, because a large number of customers make periodic purchases in small amounts and stockouts of these necessities are not permitted.There are no costs associated with stockouts, because they do not occur. Also, we will exclude the annual cost of purchasing the item, because we assume that the unit cost is constant and, therefore, not affected by the size of the order quantity
The simple EOQ formula does not consider uncertainties in demand rate or in replenishment lead time. Each time an order is placed, these uncertainties pose a risk of stockouts occurring before the replenishment order arrives. To reduce the risk of stockouts during this time, extra inventory can be held in excess of expected demand during the lead time. A tradeoff exists between the cost of investing in and holding excess inventory and the cost of stockouts, however. In any event, except by good luck, either some stock remains in inventory or stockouts have occurred and the shelves are bare when the replenishment order arrives
The key to inventory management under uncertainty is the concept of a service level. This is a customer-oriented term and is defined as the percentage of demand occurring during the lead time that can be satisfied from inventory
The service level is used to determine a reorder point (ROP), which is the level of inventory on hand when a replenishment order is initiated. The reorder point is set to achieve a prosperities service level. This, of course, requires information on the frequency distribution of demand during the replenishment lead time.
When we set the reorder point, we also are determining the safety stock level (SS) which is the excess inventory that is held during the reorder lead time to achieve the desired service level. The reorder point equals the safety stock level plus the average demand during the lead time (dL).
Continuous Review System
The inventory level decreases in a variable fashion because of uncertainty in demand until it reaches a predetermined trigger level, the reorder point ROP. When the inventory balance reaches the ROP, an order for replenishment is placed with the vendor. For this inventory system, the order quantity EOQ is fixed (i.e., EOQ units always are ordered each time an order is placed). An example of this "two bin" system is the Hallmark greeting card stand that has a reorder card, con¬taining the stock number, placed near the back of the card display to remind the retailer to reorder the item before the remaining cards are sold.
From the time the reorder point is reached until the replenishment is re¬ceived, the inventory level continues to decline. Generally, there will be some in¬ventory remaining just before the replenishment is received.
The average in¬ventory balance just when the replenishment arrives is the safety stock level SS. This inventory is maintained to protect against stockouts that might result from unusually high levels of demand and/or longer-than-expected replenishment lead time- On occasion, however, a stockout does occur. For this system, unsat¬isfied demand during the lead time period is backordered until the replenish¬ment order is received, in which case the backordered items are set aside and the remaining part of the EOQ placed in stock.
Note that for the continuous review system, the order quantity is fixed, but the cycle time between orders varies. A computerized information system using bar codes for each SKU can track inventory balances continuously to indicate when the reorder point is reached
Information management, however, has transformed inventory management into a process allowing the service to meet customer demands without incurring the expense of excess inventory. Use of computer-based information systems in inventory management represents one of the earliest and most successful applications of information technology.
All of us are familiar with the bar codes, that are found on nearly every inventory item purchased in retail stores. The bar code supplies information that allows management to track where inventory is located and how fast it is moving.
For example, most supermarkets use computerized inventory systems to maintain automatically records of inventory balances based on point-of-sale (POS) scanning of the bar codes on items.
When stock levels are depleted (or reach a predetermined reorder point), a purchase order to a preap-proved vendor is initiated automatically using electronic data interchange (EDI).
When the order is received, the inventory balance is adjusted accordingly.
Such use of information technology saves costs by avoiding paperwork, facilitating cash management, and creating a system that responds quickly to inventory needs among suppliers, service providers, and customers
Economic Order Quantity
The simple economic order quantity (EOQ) model, which assumes a constant rate of demand and no stockouts, is a surprisingly accurate model .In this situation, demand appears to be constant, because a large number of customers make periodic purchases in small amounts and stockouts of these necessities are not permitted.There are no costs associated with stockouts, because they do not occur. Also, we will exclude the annual cost of purchasing the item, because we assume that the unit cost is constant and, therefore, not affected by the size of the order quantity
The simple EOQ formula does not consider uncertainties in demand rate or in replenishment lead time. Each time an order is placed, these uncertainties pose a risk of stockouts occurring before the replenishment order arrives. To reduce the risk of stockouts during this time, extra inventory can be held in excess of expected demand during the lead time. A tradeoff exists between the cost of investing in and holding excess inventory and the cost of stockouts, however. In any event, except by good luck, either some stock remains in inventory or stockouts have occurred and the shelves are bare when the replenishment order arrives
The key to inventory management under uncertainty is the concept of a service level. This is a customer-oriented term and is defined as the percentage of demand occurring during the lead time that can be satisfied from inventory
The service level is used to determine a reorder point (ROP), which is the level of inventory on hand when a replenishment order is initiated. The reorder point is set to achieve a prosperities service level. This, of course, requires information on the frequency distribution of demand during the replenishment lead time.
When we set the reorder point, we also are determining the safety stock level (SS) which is the excess inventory that is held during the reorder lead time to achieve the desired service level. The reorder point equals the safety stock level plus the average demand during the lead time (dL).
Continuous Review System
The inventory level decreases in a variable fashion because of uncertainty in demand until it reaches a predetermined trigger level, the reorder point ROP. When the inventory balance reaches the ROP, an order for replenishment is placed with the vendor. For this inventory system, the order quantity EOQ is fixed (i.e., EOQ units always are ordered each time an order is placed). An example of this "two bin" system is the Hallmark greeting card stand that has a reorder card, con¬taining the stock number, placed near the back of the card display to remind the retailer to reorder the item before the remaining cards are sold.
From the time the reorder point is reached until the replenishment is re¬ceived, the inventory level continues to decline. Generally, there will be some in¬ventory remaining just before the replenishment is received.
The average in¬ventory balance just when the replenishment arrives is the safety stock level SS. This inventory is maintained to protect against stockouts that might result from unusually high levels of demand and/or longer-than-expected replenishment lead time- On occasion, however, a stockout does occur. For this system, unsat¬isfied demand during the lead time period is backordered until the replenish¬ment order is received, in which case the backordered items are set aside and the remaining part of the EOQ placed in stock.
Note that for the continuous review system, the order quantity is fixed, but the cycle time between orders varies. A computerized information system using bar codes for each SKU can track inventory balances continuously to indicate when the reorder point is reached
