Page 283 - DCOM303_DMGT504_OPERATION_RESEARCH

Operations Research

Notes
machines. The bearing cost only ` 40 and Ashok received ` 60 when the bearing sold. In
spite of its low price, the bearing was an important item as measured by 20,000 bearings
sold in 2005. These sales were fairly evenly distributed over the course of the year. Past
record indicates that an average of 25 days is required for the time the order is placed until
it is received at the warehouse. To guard against shortage, the firm maintains a 15 day’s
safety level of the part.
The firm’s cost accountant provided Ashok with some additional data to consider in
analyzing the situation with respect to bearing. It costs the firm approximately 10% of the
bearing cost to store the bearing in the warehouse. This included insurance premium for
protection against theft. Ordering the bearing including the confirmation that the bearing
was naturally running low, cost the firm sum ` 500 per order. The 2005 average inventory
of the bearing was 9,000 units and this level seemed to work fairly well.

Ashok decided to check on whether the firm really needed to store 9,000 of these bearing
on an average. He knows that the average inventory should be calculated by a formula.
Average inventory = EOQ/2 + safety stock level

If this formula gave a lower inventory than 9,000 units, it might indicate that distributor
was overstocked. In this case, a pruning of the inventory would allow the present warehouse
to handle all the items. If the formula indicated that the firm was not overstocked, it may
indicate that Ashok should begin to look for additional warehouse space. Ashok decided
to find out what was happening.
Questions
1. What is the economic quantity for bearings?
2. What is the safety level?

3. What is the Reorder point?
4. Does distributors overstock or understock the bearing?
5. How many units should it stock on the average?

13.4 Summary

 Inventory Control is the art and science of maintaining the stock level of a given group of
items, incurring the least total cost, consistent with other relevant targets and objectives
set by the management.

 Depending upon various variables, different inventory models have been developed.
Different models take different costs into account. One of the popular model developed
for items of repetitive nature (dynamic), future demands for which can be projected with
certainty is Economic Order Quantity (EOQ) model.

 EOQ model assumes that price of the material remains constant with time and also does
not vary with order quantity. This model can be developed mathematically by
differentiating total cost of inventory (ordering cost + inventory carrying cost) with respect
to Quantity.
 A-B-C Classification is on the basis of consumption value of an item and does not give any
importance to the criticality of the item and therefore, only A-B-C Classification is not
adequate.

 VED Analysis classifies items based on their criticality. Thus the items are classified items
into 3 groups called ‘Vital’, ‘Essential’ & ‘Desirable’

278 LOVELY PROFESSIONAL UNIVERSITY