Increment Analysis: Inventory Problem Classification

MANAGEMENT OF PRODUCTION SYSTEMS

Assignment 2

Inventory Problem Classification

Submitted to: VinayPanikar Sir

Submitted by: Aravind Babu

Reg no: B130369ME

ME A-batch

1.Introduction

Inventory refers to stock of any item held by an organisation for future usage.It may be 1.raw materials 2.purchased parts 3.components 4.work in process 5.sub-assmeblies or 6.supplies. An inventory system is the system of policies and controls that monitor levels of inventory in order to minimise the inventory cost and to guarantee a smooth operation of the organisation.

An inventory problem or inventory system can be quantitatively modelled based on demand pattern.They are:

● Deterministic inventory model in which inventory

2.1.Single-period inventory model with probabilistic demand

Increment analysis is used for determination of optimal order quantity of a single-period inventory model with probabilistic demand. In increment analysis “the how-much-to-order” question is dealt with by comparing the cost or loss of ordering one additional unit with the cost or loss of not ordering one additional unit. Notation used in this model is listed below:

• Co : Cost per unit of overestimating demand. It represents the loss of ordering one additional unit that may not sell.

• Cu : Cost per unit of underestimating demand. It represents the loss of not ordering one additional unit for which demand existed otherwise.

LetP(D >y) be the probability of the demand of inventory being more than a certain level “y”

P(D y)

Following which the optimal order quantity (y∗) can be found as follows:

EL(y∗ + 1) = EL(y∗)

The purchasing cost (D ∗ C) becomes large, when the order size is large. The ordering cost represents the fixed charge incurred when an order is placed. Thus, frequent smaller orders will result in a higher ordering cost than less frequent larger orders. The holding cost, which represents the costs of carrying inventory in stock (eg., interest on invested capital, storage, handling, depreciation, and maintenance), normally increases with the level of inventory. Shortage of an item leads to two situations; either it shall be a lost business or a back order,when the order is accepted with a promise to deliver at the next time period. Both incur a penalty, the major component being the loss of customer’s goodwill. It is very difficult in any business setup to deduce the monetary equivalent of loss of customer goodwill. What can be approximately quantified is shortage cost.

3.1.Single-item static (EOQ) model with no shortages

This is a popular and the most fundamental inventory model and is applicable when the demand for an item is constant or nearly constant rate has zero lead time.

Figure 1: Single-item static (EOQ) model with no