7.5 Inventory Management Flashcards
Why is Inventory Held
- For Customers
- Protect against Vendor Supply Uncertainty
- Protect against Fluctuation of Demand (To capitalize on unexpected spikes in demand. Make sure operations are not interrupted by inventory shortages)
What are the costs related to inventory
Purchasing Costs: Actual amount paid plus shipping
Carrying Cost: SIIIS, DOO
Storage, Insurance, Security, depreciation OR rent of facilities, interest, obsolescence and spoilage, opportunity costs of investment in inventory
(Calculation: Beg Inv + End Inv/2 or Average Inv Size>total Inv Qty/2
Ordering Costs: Independent of Qty ordered. Internally Produced = cost of set up. Discounts Lost from qty order size.
Stockout Cost: Expediting cost if not on-hand. Opportunity cost of lost sale.
Per unit purchase and Carrying Cost
Cost \+Shipping Cost ---------------- Per Unit PURCHASE X COST OF CAPITAL % --------------- = Opportunity Cost \+ Insurance on Inventory = Per Unit Carrying Cost
Note: Handling and Order Cost are ignored here
Per Unit purchase and Carrying Cost> Unknown Beg/End Inventory
Avg per month x monthsx$ /2 (Normally bought)
Special Order: Qty x $per unit/2
Incremental Average Inventory: Special Order Avg - Normal Order Average $$
Interest Cost of this special order is $$ x % (Cost of Capital) /2
Safety Stock
What happens when carried
What to consider
What happens when demand is highly variable
Safety Stock increases carrying costs
Balance: Customer Demand, Variability in Lead Time, Level of risk of stockout the company is willing to accept
High variability in daily sales mean more Safety Stock
Inventory Management Graph
Y = Cost, X = Order Qty
Stockouts can be minimized by incurring high carrying costs.
Carrying Costs can ONLY be minimized by incurring High fixed cost of placing many small orders.
Ordering Costs can only be minimized but ONLY at cost of storing large quantities
Just In Time
Inventory Storage is treated as non-value added. Minimizes inventory by having it arrive just in time.
All inventories (and related carrying costs) are reduced or eliminated.
JIT is a demand driven system. production does not begin until Order received. Inventories eliminated.
Kanban
TICKET that states quantity to be pulled from from earlier process (in mfg). Vendor Kanban user tells vendor what, how much and when.
Lead Time
The time between placing an order and receipt.
When demand is uniform, goods can be timed to arrive just as inventory is exhausted.
Reorder Point
(Average Demand x Lead Time) + Safety Stock
Determining SAFETY STOCK uses probabilities
Balances Variability Of Demand with acceptable risk of stock out
Reorder Point; Lead time before safety stock is consumed.
Cost of Carrying Safety Stock
- Calc Expected Stock at a given level
Safety stock unit : resulting Stock out x Probability % = Qty expected Stockout
- Qty Stockout x Unit Cost x orders lost = Stock out Cost
Now you have the stock out cost. Next you calculate Carrying costs at the various safety levels.
3 Safety Stock x Unit Carrying Costs = total carrying
You now have all needed
Saftey stock level> Stockout Cost + Carry Cost = total Cost of Safety Stock
Determining EOQ
K
a = Fixed cost per order D = Demand in Units k = Carrying Cost per Unit
EOQ Model ASSUMPTIONS
DDSS, CLAP
- Demand is UNIFORM
- Carrying Costs are Constant
- Purchasing Costs unaffected by Qty Ordered
- Sales are PERFECTLY PREDICTABLE
- Same Qty Ordered at each reorder point
- Lead Time is known with Certainty
- Deliveries are consistent
- Adequate Inventory is Maintained to avoid Stockouts.
Any change, changes SOLUTION. More Demand or Order Costs Rise= Each order must contain more units.
If Carrying Cost Rise, each order must contain fewer Units.
Annual carry cost
Average inventory x carry cost
If you have monthly orders of 50 lbs
