Inventory Control (Known Demand): Choosing an Inventory Model for Industrial Security System Components

Abstract

This Data Decisions Challenge discusses two inventory models: the economic production quantity (EPQ) inventory model and the economic order quantity (EOQ) inventory model. The EPQ model is an order quantity model that is used when items are produced in-house. When employing an EPQ inventory model, parts are being used as they are being produced. The demand rate must be less than the production rate, or production would not be able to supply enough parts. Therefore, those parts produced but not immediately used are placed in inventory until the number of units in the order have been produced. At that point, production of the part will stop and the process that used the part will pull the parts from inventory until the inventory is depleted. Ideally, when there are just enough units left in the inventory to cover the time needed to set up and start producing parts, a replenishment order is placed, and the cycle of accumulation of inventory during the production phase and depletion of inventory after the production phase continues. When an EOQ inventory model is used, an order is produced by a supplier. An order is placed, and after some time, called the lead time, the entire order quantity is received and placed in inventory. The inventory is monitored, and when the inventory level reaches a reorder point, a new order is placed. The reorder point is the product of the average inventory usage multiplied by the lead time. Therefore, since demand is known, the inventory level of a given part using EOQ would be zero when the new shipment arrives.

In this Challenge, Jerry Clark, the production manager for Eureka Valley Industrial Engineering (EVIE), has been tasked with deciding which of the two inventory models EVIE should use for a given part. EVIE has the ability to produce the part, but Jerry has also identified a supplier that could produce the same part. Jerry’s job is to not only run the calculations to determine the order quantity and associated costs for each model but also discuss some managerial issues associated with each decision. After his analysis, Jerry will present his findings to Walter Gunther, the CEO of EVIE.

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