9 - inventory mgment 2

Question 1

what kinds of service level can be chosen in terms of inventory management? when may they be used?

Answer 1

optimal - or profit maximising - generally assumed to be used

imposed - e.g. by management, or required by contract, or if true underage costs are larger than p-c and simple CR calculation may not actually give optimal solution

Question 2

how is the ideal order quantity calculated when a desired service level has been given?

Answer 2

Q = mu + Zbeta*sigma

where mu = mean demand, sigma = sd of demand, and beta = target service level

Question 3

what factors derive optimal order quantity under a specified service level?

Answer 3

formula is Q = mu + Zbeta*sigma

this is essentially average demand + safety stock

mu = average demand

Zbetasigma = phi^-1(CR)sigma = safety stock.

Question 4

what does the optimal service level as defined by the critical ratio suggest?

Answer 4

it depends only on cost situation, so suggests that you should order more if its a high margin product

Question 5

how does the forecast error (sigma) affect safety stock?

Answer 5

more volatile demand = more safety stock needed.

if you want less safety stock, improve your forecasting where possible!

Question 6

what is inventory pooling?

Answer 6

sharing inventory between regions in a centralised warehouse.

Question 7

what is the impact of inventory pooling?

Answer 7

inventory is lower in a central warehousing scenario due to pooling effect - if one warehouse is out of stock, stock from another can be used.

Question 8

what key difference does inventory make to the ideal order quantity?

Answer 8

decentralised Qnetwork = nmu + Zbetan*sigma

centralised Qnetwork = nmu + Zbetasqrt(n)*sigma

i.e. get to square root the n, can reduce level of inventory to large extent, especially if forecast error (sigma) is high. can free up significant amount of room.

Question 9

what is the main tradeoff consideration in multi-period inventory models?

Answer 9

holding vs ordering costs

Question 10

what are ordering costs?

Answer 10

cost of placing order and receiving goods

transportation costs, supplier setup costs, loading and unloading costs, customs tax and duties

Question 11

what are holding costs?

Answer 11

costs of holding or carrying inventory over time. AKA carrying cost.

housing costs, material handling costs, labour cost, investment costs (e.g. insurance on inventory), pilferage/space/obsolescence costs.

Question 12

what is the EOQ model?

Answer 12

An inventory model to determine the order size and frequency of ordering

Aims to choose the ordering quantity and frequency such that it minimizes the sum of ordering and holding costs

It is more of a macro level inventory model, i.e., to identify the overall level of inventory and ordering frequency, thus mainly useful in strategic and tactical decisions

Businesses with steady demand can also directly use this model

Question 13

what are the assumptions of EOQ?

Answer 13

multi period

constant and deterministic demand

no lead time

no quantity discounts

no backorders - shortages not allowed

Question 14

what are the costs considered in EOQ?

Answer 14

fixed order cost = K: setup cost for ordering, which is independent of order size. e.g. transportation cost from supplier to our place

holding cost = H: per unit and time, usually per year

Question 15

what decision is being made in EOQ?

Answer 15

what order quantity, Q/number of units, to order per batch

Question 16

what is the objective of EOQ?

Answer 16

minimise overall inventory costs

can assume actual objective is to maximise revenue, however since model will assume you are serving all demand, no need to include revenue in optimisation model and focus is on minimising cost.

Find optimum order quantity (Q), which minimizes the total inventory cost

Total inventory costs = ordering costs + holding costs

ordering frequency can be derived from optimal ordering quantity once calculated.

Question 17

what is the cycle time?

Answer 17

time between orders, defined as T and = batch size/demand rate. e.g. for bath of 70 units and demand rate of 10 units a day, cycle time = 70/10 = 7 days.

Question 18

how is holding cost expressed in EOQ?

Answer 18

per-unit basis for some period of time. assume H is holding cost of 1 unit of inv. in year.

Question 19

given a fixed demand rate, what is the average inventory in warehouse over a year?

Answer 19

Q/2 – also referred to as cycle inventory.

Question 20

what is the annual holding cost in EOQ?

Answer 20

= avg inv level * holding cost per unit per year

= order quantity/2 * holding cost per unit per year

= H*Q/2

Question 21

how is annual order cost defined in EOQ?

Answer 21

= order cost per order * orders placed per year

= order cost per order * (annual demand/number of units per order)

=K*D/Q

Question 22

what are the 4 implications of EOQ?

Answer 22

total ordering and holding costs are relatively stable around the economic order quantity

if demand increases by factor of k, optimal lot size increases by a factor of sqrt(k).

If the ordering cost increases (decreases) by a factor of k, the optimal order quantity increases (decreases) by factor sqrt(k)

If the holding cost increases (decreases) by a factor of k, the optimal order quantity decreases (increases) by factor sqrt(k).

Question 23

what makes the optimal order quantity increase in EOQ?

Answer 23

holding cost decreases
order cost increases

Question 24

how is EOQ adapted to deal with known and fixed lead times?

Answer 24

calculate optimal order size as before

order LT unit before the inventory level reaches 0

Question 25

what is pipeline inventory?

Answer 25

inv required for time from ordering until replenishing, i.e. during lead time.

Question 26

why have safety stock?

Answer 26

safety inventory = average inventory that helps before replenishment order shows up due to uncertainty in demand and lead time

Question 27

what is the role of safety stock in EOQ?

Answer 27

EOQ model can be used by businesses with stable operations, or by many other businesses as a base for developing their general inventory policy

However, it may not be proper to use EOQ model to determine the exact timing or lot sizing of the orders.

Usually, there is uncertainty in both demand rate and supply (mainly lead time).

Safety inventory is inventory carried to satisfy demand that exceeds the expected demand forecast.

Safety inventory helps a supply chain provide customers with a high level of product availability despite demand (and supply) uncertainty.

Question 28

what are the consequences of raising the level of safety inventory?

Answer 28

increases product availability (woo)

reduces stockouts and backorders (woo)

increases holding costs (boo)