Spreadsheet Models for Managers


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Spreadsheet Models for Managers

Session 11
Inventory Modeling
Summary of Pages

In businesses in which inventory is a significant cost factor, modelers must understand the issues related to inventory and inventory maintenance. In this session, we’ll look at a simple model for inventory replenishment, the Economic Order Quantity.

We’ll learn how to apply it in the simplest case — constant price. Then we’ll explore techniques that apply when prices depend on quantity. In this instance, no analytical formula for reorder point is possible, but we’ll show you how to use a spreadsheet model to determine optimum reorder points.

This approach is instructive not only for its value in inventory modeling, but also as an illustration of the value of spreadsheets for solving problems that cannot be solved symbolically.

Below is a summary of pages for Session 11.

  1. Review of Last Time
  2. Capacity models
  3. Importance of inventory
  4. Kinds of inventory
  5. Inventory cost factors
  6. Inventory cost factors (2)
  7. Effects of demand on inventory strategy
  8. Representing constant demand
  9. Constant demand data
  10. Constant demand
  11. Economic order quantity
  12. Quantity discounts
  13. Examples
  14. The main points
  15. Reference readings
  16. Preview of Next Time

Links to other materials for Session 11.

Last Modified: Wednesday, 22-Oct-2014 06:15:56 EDT

Assuming Constant Demand

Although the assumption of constant demand is critical to justifying the derivation of the formula for Economic Order Quantity, most problems don’t satisfy that requirement in the strict sense. But EOQ is nevertheless a valuable concept in two kinds of circumstances. The first case is when the time scale of the inventory management decisions is much shorter than the time scale of the variations in demand. And the second is when the fluctuations in demand occur much more rapidly than the inventory management decisions.

These two approximations occur repeatedly in modeling problems. Watch for opportunities to apply them elsewhere.