8 - inventory mgment 1 Flashcards
what is inventory? what is its main purpose?
inventory = a stock of goods/materials that an entity holds
can represent up to 50% of total invested capital. usually 20-30% of costs relate to inventory.
main purpose: compensating difference between supply and demand.
what are the types of inventory?
raw material - purchased, unprocessed
work in progress - undergone some change but not completed
finished goods - completed product awaiting shipment
maintenance/repair/operating - necessary to keep machinery and processes productive. makes operations work, e.g. at uni might be staplers/paper etc.
what is inventory management? why is it important?
controlling and overseeing the orders, maintaining the stock level
why important?
inv is significant source of cost and capital for business, and impacts overall performance and revenue of the business.
locks up a lot of capital so if not well managed, negatively impacts ability to run business efficiently.
not having enough inv to satisfy order can lead to: missing orders (missed revenue, backlog cost); negative impact on customer retention (word of mouth, reputation damage); under-utilisation of staff and machines (and costs thta come with this).
too much inv: unsold items, obsolescence, higher damage and theft rate — i.e. profit loss.
what are the benefits of holding inventory?
protecting from variability/uncertainty - in demand and supply
economies of scale in ordering in batches
speculation and hedging - price inc/dec from suppliers. more common with commodities with high price fluctuations.
what are the downsides of holding inventory?
products may be perishable
opportunity cost of capital tied up in inventory
storage costs - facilities, machineries, staff, insurance, administrative
risk of storing hazardous items
risk of inventory becoming obsolete due to new models
what is the most important stock?
those that relate to operational policies
cyclic inventory - as it decreases, reorder at certain level to ensure always have certain level. creates cyclic ordering pattern
safety stock - minimum level of stock
pipeline inv - dependent on lead time
what are the characteristics of the newsvendor model?
short selling period with no replenishment during
significant uncertainty in demand
products lose considerable value after period
what are the assumptions of the newsvendor model?
single period, single product
order quantity Q, determined before selling period and before knowing about demand. this is the decision variable.
uncertain about D at time of ordering. D follows prob distribution with cumulative function (CDF) of F(D).
objective is to maximise expected profit: expected revenue - cost.
what is the monte carlo simulation?
simulation technique used to predict possible outcomes of an uncertain event
involves generating multiple values (realisations) for uncertain variables of model, e.g. different scenarios for demand
generates different outcomes under each realisation of uncertainty
results then averaged to get estimate of output value
when is monte carlo useful/what are its applications?
useful model to compare output under diff policies in presence of uncertainty
has applications in many industries, e.g. banking, telecom
distribution of random input and parameters estimated using: historical data, data collected through special efforts, benchmarking, expert opinion.
how can the newsvendor problem be solved analytically?
find the critical ratio: CR = (p-c)/(p-s).
then take the smallest value of Q such that the CDF of demand satisfies F(Q)>=CR.
if integer, select as Q. if not, next integer is optimal.
what is underage cost?
underage cost, cu = unit cost of ordering too few
lost profit for not having enough inventory to respond to demand, i.e. cu = p-c
Decrease in profit from failing to order a unit that could have been sold during the period
If you consider all other aspects (e.g., customer lost forever, reputation loss, …), underage cost can be higher in reality
what is overage cost?
overage cost, co = unit cost of ordering too many
Loss due to ordering more than the actual demand, i.e., co = c-s
Decrease in profit due to ordering a unit that could not be sold during the period
what is the critical ratio?
CR = optimal service level that business should adopt to maximise profit. e.g. if 0.75, means that on average 75% of the time we should satisfy demand, and 25% of time should let stockout happen.
