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operations management > 3&4 - inventory mngmt > Flashcards

3&4 - inventory mngmt Flashcards

1
Q

what are the inventory types?

A
  • Raw materials : bought for subsequent conversion
  • Work in process (WIP): goods in the process of being converted
  • Components (purchased parts): parts used in the composition of the product
  • Finished Goods : ready to be sold to meet customer demand quickly
  • M.R.O. (Maintenance, Repairs and Operating supplies): supplies that are not usually part of the finished product themselves
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2
Q

what are the different functions of inventory ?

A
  • cyclical inventory (batching)
  • buffer inventory (decoupling)
  • anticipation inventory (seasonal or speculative)
  • transit inventory (pipeline)
  • safety inventory
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3
Q

what is the function of a cyclical inventory?

A

to minimize nb of orders or to maintain the surplus inventory generated by a predetermined lot size

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4
Q

what is the function of a buffer inventory?

A

WIP accumulating between steps of the production as a prevention of temporary breakdowns or production downtime

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5
Q

what is the function of a anticipation inventory?

A

seasonal – stocking up on beer or ice cream during summer or speculative – boost raw materials inventory to protect from possible price increase

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6
Q

what is the function of a transit inventory?

A

Transit inventory (pipeline): inventory resulting from the transportation and handling of goods

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7
Q

what is the function of a safety inventory?

A

inventory kept for uncertainty about future demand = reducing risk of shortage

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8
Q

what are the consequences of too much stock?

A
  • Very costly (warehousing, insurance, etc…)
  • Immobilization of funds
  • May cause cash-flow problems
  • Increased risks of deterioration or obsolescence of products
  • May lead to selling at a “discounted” price
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9
Q

what are the consequences of not enough stock?

A
  • Increased risks of stock-outs causing production delays
  • Disruptions in the operations (bottlenecks, overtime, rushes)
  • Causes delays and shortages and increased lead times to customers
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10
Q

what is the ABC classification?

A

This method applies to any situation where items need to be sorted by order of priority
A small number of items (20%) often represent a very important part of the total value of the inventory (80%): pareto principle. So if the small nb of items is tightly controlled, costs can be significantly reduced

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11
Q

what are the inventory related costs?

A
  • Purchasing (acquisition cost)
  • Holding (carrying) Cost
  • Ordering (set-up) Cost
  • Shortage Cost : if you don’t have something in stock, must make sure you don’t have shortage costs
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12
Q

what are the purchasing costs?

A
  • Price paid to acquire the product

- Can be subject to quantity discounts

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13
Q

what are the holding costs?

A

Total holding cost is composed of a number of costs which vary depending on the type of stocked product. It includes:

  • Cost of money / opportunity cost (3-24%)
  • Obsolescence (2-20%)
  • Spoilage / Damage / Theft (1-5%)
  • Warehousing (1-3%)
  • Administration / Maintenance (1-5%)
  • Insurance (1-2%)
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14
Q

the holding cost represents…

A

the holding cost represents
roughly 8-50% of the value of total inventory: this illustrates the importance of proper inventory mngmt and carrying only the qties necessary

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15
Q

wha are the ordering costs?

A
  • Order processing
  • Transportation
  • Monitoring
  • Reception
  • Inspection
  • Physical handling
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16
Q

wha are the impacts of shortage costs?

A

-Reputation of the company
-Loss of orders / profits
-Increase in the costs:
Overtime/ sub-contracting
Additional delivery
Idle machinery and human resources…
IMPACT ON THE CUSTOMER… DIFFICULT TO DETERMINE and quantify

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17
Q

what is the difference between an internal and an external stock out?

A
  • internal stock out = missing raw materials ou components to manufacture the product
  • external stock out = not having enough inventory to meet immediate demand
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18
Q

what are the assumptions of the basic EOQ model?

A
  • Single product
  • Known annual demand
  • Demand is spread evenly throughout the year (constant demand rate)
  • Constant lead time
  • Each order is received in a single delivery
  • Fixed unit cost
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19
Q

how to compute average inventory?

A

Q/2

20
Q

the EOQ is the point where the …

A

the EOQ is the point where the total annual holding cost curve and the total annual order cost curve meet

21
Q

TF: calculating the EOQ objective is to determine the exact order qty

A

TandF: there is a low sensitivity zone in the total cost curve: the aim of calculating the EOQ is not so much to determine the exact order qty

22
Q

how to compute the nb of orders per year

A

nb of orders per year = D/Q

23
Q

the total cost fct reaches its minimum where…

A

the holding costs and the ordering costs are equal

24
Q

when managing the uncertainty, what are the new elements that must be taken into consideration about the possibility of random variations in demand?

A
  • Stock outs are possible (similar to back order = not having stock to fulfill the demand that will have to be met eventually)
  • The company must choose the service level it wishes to offer
  • The company must decide on safety stock levels to maintain its chosen service level
  • The company must decide which model to use (reorder point model or fixed-interval model).
25
Q

what are the 2 inventory replenishment methods?

A
  • Reorder point model (continuous review system): constant amount ordered when inventory declines to predetermined lvl, takes into account lead time and demand rate
  • Fixed-interval model (periodic review system): order placed for a variable amount after a fixed review period
26
Q

with the ROP model, how much to order and when to order?

A
  • you order the same qty (EOQ)

- you order when the lvl of the inventory reaches the ROP (time between orders can vary depending on the demand rate)

27
Q

with the ROP model, how much safety stock do you keep on hold?

A

the amount of safety stock on hold depends on the desired service lvl

28
Q

what is the goal of keeping a safety stock?

A

safety stock are an additional qty kept on hand to offset variations in demand and lead time

29
Q

with the ROP model, what do you need to consider when calculation the safety stock lvl?

A

you must consider the service lvl targeted as well as demand variability

30
Q

the ROP lvl must be sufficiently high to …

A

fulfill demand during the lead time

31
Q

what is the two-bin system?

A

This approach simply involves manually dividing the lot into 2 bins upon reception and depleting one bin before placing the replenishment order and then using the second bin until the order arrives

32
Q

when using the fixed-interval model, how much to order and when to order?

A
  • you must order the qty required to reach the target lvl
  • you order at equal intervals of times (io) : the optimal time interval between 2 orders is directly related to the computation of the order qty
33
Q

how much safety stock to hold with the fixed-interval model?

A

the safety stock on hold depends on the desired service lvl

34
Q

is the safety stock higher when using the ROP or the FIM and why?

A

the safety stock is higher when using the fixed interval model because the qty ordered must be sufficiently high to fill demand during the total delay (until the next reception). Unlike the ROP method, in which the SS is used to offset demand variation during the lead time, the fixed interval model uses SS to offset demand variation throughout the entire order cycle (will give a higher nb of SS with fixed interval to cover the entire period rather than just the lead time)

35
Q

what is special about the qty ordered with the fixed-interval model?

A

With the periodic review system, the order qty is readjusted to take into account actual demand for the product in the interval since the last order. In this way, we determine a target lvl, which corresponds to a sufficient inventory lvl to meet demand until the next stock delivery. If the demand of the period is higher than usual, a stock out will happen since the order qty is adjusted based on the demand in the previous period.

36
Q

comparing the 2 models: how many to order?

A

ROP: fixed qty (EOQ)
FIM: variable (different for each order)

37
Q

comparing the 2 models: when to order?

A

ROP: when we reach the reorder point
FIM: at fixed intervals

38
Q

comparing the 2 models: inventory?

A

ROP: permanent
FIM: periodical

39
Q

comparing the 2 models: safety stock?

A

ROP: for equivalent service lvl, smaller than the periodic review system
FIM: for an equal service lvl, larger than the ROP

40
Q

comparing the 2 models: item classes?

A

ROP: classes A and B (critical and or expensive)
FIM: classes B and C

41
Q

comparing the 2 models: total annual cost calculations?

A

ROP: we use the EOQ since we always order the same qty
FIM: we use the average qty since order qty varies

42
Q

what are the advantages of lean decreasing inventory lvls?

A
  • A decrease in total inventory management costs
  • Problems are revealed
  • A decrease in storage space
43
Q

what is the challenge of lean decreasing inventory lvls?

A

-order cost will increase

44
Q

when using lean/decreasing inventory lvls, in order to reduce lot sizes, we must be able to reduce order costs. how to do so?

A
  • integration of IT systems
  • local suppliers
  • certified suppliers
  • long term agreements
45
Q

what happens to EOQ, order cost and holding cost when using lean decreasing inventory lvls?

A
  • EOQ is lower
  • holding cost is lower
  • order cost go up

operations management (4 decks)

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