6 EOQ And Continuous Review (safety Stock) Model Flashcards
Where do we hold inventory
Suppliers
Manufacturers
Warehouses/distribution centers
Retailers
3 types inventory
- WIP
- raw materials
- finished goods
Reasons for holding inventory
- economies of scale
- uncertainty in demand
- uncertainty in supply
- lead time
- capacity limitations
Supply chain factors in inventory policy
- customer demand
- lead time
- number of different products
- length of the planning horizon
- costs: order cost/inventory holding cost
- service level requirement
Inventory policies + 2 examples
Variety of techniques for inventory mgt (e.g. economic lot size model, initial inventory)
Three decision models we learnt
- economic order quantity (EOQ)
- safety stocks (continuous review OR periodic review)
- newsvendor
What cost do we consider in the EOQ model? (3)
- K - ordering cost
- c - item cost
- h - holding cost
Meaning D
Yearly demand
Meaning d
Weekly demand
Meaning c
Item cost
Meaning k
Ordering cost
Meaning h
Holding cost
Meaning Lt
Lead time: time bw placing order and it arriving
Meaning Q
Order quantity
If the holding cost H isn‘t given as a total number, it can be given as h - the fraction of…
The item cost c
What part of the TC inv is the cost of placing the orders, explain the two elements
D/Q*K
- D/Q: number of orders (demand/order quantity)
- K: ordering cost
What part of the TC inv is the cost of holding inventory + explain
Q/2*h
- Q/2: average inventory
- h : holding cost
What part of the TC id purchasing cost
cD: item cost*demand
Total cost formula
TC=KD/Q+Q/2h+cD
Obsolescence (or spoilage) cost
Handling cost
Occupancy cost
Miscellaneous costs
▪ Theft, security, damage, tax, insurance
-> all examples for
Inventory holding costs
Buyer time
Transportation costs
Receiving costs
-> all examples for…
Ordering Cost
Deciding optimal lot size is a trade off between….
- setup (order) cost and holding cost
Cycle inventory
inventory a business keeps on hand to meet regular sales demand
If demand increased by 4
- what should happen to:
Batch size, how often to order, cycle inventory (in units AND days of demand)
Batch size: x2
Order twice as often
Cycle inventory (in units): x2, (in days of demand): halves
Reorder point
Inventory level at which a new order should be placed
Lead time
Time between order being placed and order arriving
Strategies to reduce fixed costs in production
- Standardization
- Simplification
- Changing the set-up of the production line
Strategies reducing fixed costs in delivery
- third party logistics
- Order multiple products at once
- various truck sizes
What is the economic order quantity (EOQ)
A inventory decision making model, which assumes constant demand
What is the safety stocks model? What two types of this model are there?
A inventory decision making model where the demand is stochastic (unpredictable, changes in each period)
- continuous review and periodic review
What are safety stocks
Buffer due to the uncertainty of demand
Stock out
No more inventory to sell
How to you calculate the reorder point R in the EOQ (constant demand)
R=D*L
How do you calculate reorder point in the continuous review model
R= D*L + SS (SS - safety stock)
How do you find the service level (CSL)
1 - probability of stock out
z
Safety factor
σ
standard deviation of demand
L
lead time
Finding z
Using service level to find it in table
Service level meaning
Prob. of no stockout during the lead time
When to order
When inventory hits R
How much to order
Order EOQ
Is EOQ and Q* the same thing
Yes
Averaged cycle inventory
EOQ/2
Pipeline inventory
Inventory in transit
Formula avg pipeline inventory
LD
Avg inventory
EOQ/2 + SS + (LD) depending on who owns pipeline inventory
Two big questions: how much to order, when to order - are answered by what
How much to order - order quantity
When to order - reorder point
What does the EPQ model assume
That production is at a constant rate
What is the POQ
Production order quantity - optimal production lot size
Tp
Production time per cycle
Td
Down-time (non-production) per cycle
Q in the EPQ
Production quantity
S in the EPQ
Setup costs
P in the EPQ
Production rate
Imax in the EPQ
Max inventory
Tp in the EPQ
