Materials Management and Inventory Systems Richard J.Tersine Old Dominion University 'C & North-Holland PUBLISHING COMPANY NEW YORK AMSTERDAM
Contents Preface Chapter 1 INTRODUCTION 1 Inventory 4 Types of Inventory 5 Organizational Categories and Inventory Problems 6 Functions of Inventory 8 Inventory Problem Classifications 10 Properties of Inventory 13 Inventory Costs 15 Conflicting Goals 17 Financial Considerations 20 Business Cycle Influence 22 Conclusion 24 Questions 25 Chapter 2 FORECASTING 27 Time Series Analysis 29 Last Period Demand, 31. Arithmetic Average, 32. Moving Average, 32. Regression Analysis, 35. Exponentially Weighted Moving Average (EWMA), 39. EWMA with Trend Correction, 44. EWMA with Seasonal Correction, 46. EWMA with Trend and Seasonal Corrections, 48. EWMA Overview, 52. Soliciting Opinions 54 Economic Indicators 55 Econometric Models 60 The Forecasting Function 61 Conclusion 63 Questions 65 Problems 66 Nomenclature 69
Chapter 3 PURCHASE ORDER QUANTITIES 71 Fixed Order Size System (Q-System) 72 Economic Order Quantity (EOQ) Single Items, 72. Economic Order Quantity (EOQ) Multiple Items, 77. Quantity Discounts, 78. Backordering, 81. Known Price Increases, 85. Fixed Order Interval System (T-System) 88 Economic Order Interval (EOI) Single Items, 90. Economic Order Interval (EOI) Multiple Items, 93. Quantity Discounts on Individual Items, 95. Quantity Discounts on Joint Orders, 99. Sensitivity 101 EOQ Sensitivity, 102. EOI Sensitivity, 106. Sensitivity Overview, 109. Variable Demand Order Size Systems 110 Lot-for-Lot Ordering, 111. Wagner-Whitin Algorithm, 111. Silver-Meal Heuristic Algorithms, 112. Part-Period Algorithm, 117. Conclusion 122 Questions 123 Purchase Order Quantity Problems 124 Nomenclature 129 Appendix A Determination of Single Variable Maximum and Minimum Points 130 Appendix B EOQ Quantity Discount Approximation 131 Appendix C Derivation of EOQ with Backordering 132 Chapter 4 PRODUCTION ORDER QUANTITIES 135 Independent versus Dependent Demand 136 Continuous and Independent Demand Items 138 Economic Production Quantity (EPQ) Single Items, 139. Economic Production Quantity (EPQ) Multiple Items, 143. Make or Buy Decisions, 146. Critical Ratio Scheduling, 148. Aggregate Production Planning, 152. Discrete and Dependent Demand Items 156 Material Requirements Planning (MRP) Systems, 157. Time Cycle Charts, 169. In-Process Inventory 172
An Isolated Incident 174 Conclusion 175 Questions 176 Production Order Quantity Problems 176 Nomenclature 182 Chapter 5 INVENTORY SYSTEM CHANGES AND LIMITATIONS 185 Inventory System Redesign 186 Inventory System Constraints 189 Working Capital Restrictions, 191. Storage Space Restrictions, 194. Working Capital and Storage Space Restrictions, 197. Overview of Constraints, 200. Questions 201 Problems 202 Nomenclature 202 Appendix A Optimizing Constrained Functions 203 Chapter 6 RISK AND UNCERTAINTY: FIXED ORDER SIZE SYSTEMS 209 Safety Stock 210 Statistical Considerations 214 Normal Distribution, 217. Poisson Distribution, 218. Negative Exponential Distribution, 218. Known Stockout Costs 219 Constant Demand and Constant Lead Time, 219. Variable Demand and Constant Lead Time, 220. Constant Demand and Variable Lead Time, 236. Variable Demand and Variable Lead Time, 238. Unknown Stockout Costs 240 Service Level: Service per Order Cycle, 242. Service Level: Service per Year, 247. Service Level: Fraction of Units Demanded, 248. Service Level: Fraction of Operating Days, 251. Imputed Service Level Stockout Costs, 252. Conclusion 254 Questions 255 Risk and Uncertainty Problems 256 Nomenclature 261 Appendix A Chl-Square Goodness-of-FIt Test 262 vii
Appendix B Order Quantity and Reorder Point Dependency 266 Appendix C Probability Distribution Convolutions 272 Appendix D Joint Probability Distributions 274 Chapter 7 RISK AND UNCERTAINTY: FIXED ORDER INTERVAL SYSTEMS 283 Known Stockout Costs 287 Backordering Case: Stockout Cost per Unit, 288. Backordering Case: Stockout Cost per Outage, 292. Lost Sales Case: Stockout Cost per Unit, 294. Lost Sales Case: Stockout Cost per Outage, 295. Variable Demand and Variable Lead Time, 297. Unknown Stockout Costs 300 Service Level: Service per Order Interval, 301. Service Level: Service per Year, 302. Service Level: Fraction of Units Demanded, 303. Service Level: Fraction of Operating Days, 305. Imputed Service Level Stockout Costs, 306. Conclusion 307 Questions 309 Risk and Uncertainty Problems 309 Nomenclature 312 Chapter 8 SINGLE ORDER QUANTITIES 313 Known Demand, Known Lead Time 315 Known Demand, Variable Lead Time 315 Variable Demand, Known Lead Time 317 Marginal Analysis, 320. Cost Analysis, 322. Variable Demand, Variable Lead Time 327 Conclusion 327 Questions 327 Problems 328 Nomenclature 333 Chapter 9 INVENTORY VALUATION 335 Flow of Costs 337 viii FIFO, 338. LIFO, 340. Average Cost, 342. Specific Cost, 345.
Inventory Records 347 Periodic Count Method, 349. Cycle Count Method, 350. Inventory Security 352 Questions 353 Problems 353 Chapter 10 SIMULATION 357 Simulation Categories 358 Monte Carlo Simulation 359 Perpetual Inventory Simulation Problem 363 Periodic Inventory Simulation Problem 368 Simulation of Joint Probability Distributions 370 Length of Simulation Run 373 Conclusion 374 Questions 376 Simulation Problems 376 Nomenclature 380 Chapter 11 INVENTORY CONTROL SYSTEMS 381 Types of Control Systems 383 Perpetual Inventory System, 384. Two-Bin Inventory System, 386. Periodic Inventory System, 386. Optional Replenishment Inventory System, 388. Material Requirements Planning Inventory System, 390. Overview of Inventory Systems, 390. Selective Inventory Control 393 Inventory System Development 397 Surplus Materials 401 Inventory System Improvement 402 Aggregate Inventory Measurement 405 Conclusion 406 Questions 408 Inventory Control System Problems 409 Nomenclature 409 Bibliography 410 Index 417 ix