Inventory essentially deals with materials the procurement of materials.
Materials management is to how we store the material for subsequent use.
Two important questions to ask:
How much material to order?
When to order the material?
Single Period Inventory Models - Single period inventory models assume that the planning horizon is a single period and the decision is made only once.
Multi- Period Inventory Models - Multi period models assume that there are several planning periods or multiple periods.
Three classifications of demand
Deterministic demand - Deterministic means the annual demand is known and known with certainty.
Probabilistic demand: Inventory under risk and inventory under uncertainty.
How much material to order? Order Quantity - Denoted by letter Q
When to order the material? Reorder level - Denoted by letter r
Lead time - The time between placing an order and receiving it.
When the demand is deterministic and the lead time is also deterministic and known with certainty, then the lead time demand can be computed as the product of lead time and daily demand.
But if one of them is non-deterministic, then we have to look at expected value of the lead time demand and then try and see whether the reorder level is about the expected value of the lead time demand or sometimes more than that.
Cost of item - C
Order Cost - Co
Holding or Carrying Cost - Cc
Components of Order Cost
Fourth cost is called cost of back order or cost of shortage.
Components of back order or cost of shortage.
Loss of profit
Loss of opportunity
Cost of additional capacity