Ch. 4 Inventory Management

Question 1

What are the two big questions in inventory management

Answer 1

When to order goods

How much to order

Question 2

What costs influenced the decisions of inventory ordering?

Answer 2

1) Setup/Order cost
2) Stockout COst
3) Holding Cost
4) Material costs- quantity discount

Question 3

Setup/Order costs
Make & Buy Costs

Answer 3

Make costs: cost of setup time and admin costs of each production order

Buy: admin costs that come from each purchase order

Question 4

Stockout costs

Answer 4

the costs that comes from having not enough invenootry, LOST PROFIT COST

Customer will go elsewhere and may never come back

Question 5

Holding costs 2 Types

Answer 5

1) Opportunity cost of havign money tied up in inventory

2) storage space, material handling costs, obsolesence, theft

Question 6

Material Costs- Quantity Discount

Answer 6

Discount on the per unit cost if order quantity exceeds minimum

If 20/unit usually, and you order 100+ it will be 18/unit

Question 7

How are the cost factors related to successful inventory management

Answer 7

succesful inventory management= balancing all 4 costs

Question 8

why is control of inventory expensive

Answer 8

controlling has admin costs!!!!

Question 9

2 types of invenemtnary management systems

Answer 9

1) Periodic: low cost and smaller items (Screws ties)

2) Continuous: high cost and bigger items

Question 10

Periodic inventory management

Answer 10

1) no computer tracking
2) order quantity: fill the bin (VARIED QUANTITY)
3) order trigger: whenever you check periodically (FIXED TIMING)

Question 11

Continuous inventory system

Answer 11

1) use computer tracking every time it is uesd
2) order quantity: analyze and calculate an exact amount (fixed quantity)
3) order trigger: warning level in computer (varied timing)

Question 12

What has fixed timing, and varied quantity

Answer 12

periodic review systems:

Question 13

what has fixed quantity and various timing

Answer 13

Continuous revieq

Question 14

In periodic review, what formula is used to determine the quantity that is ordered

Answer 14

Q= Order up to level- quantity on hand

Question 15

In continous review how is it determined when to buy

Answer 15

when inventory positon (on hand inventory+ on order inventory) falls to reorder point (r) or lower

Question 16

In the P-model, what is fixed and what varies

Answer 16

Q varies (the height ordered changes)
T is fixed, in the same intervals you order

Question 17

In the Q model, what is fixed and what varies

Answer 17

T varies, because you dontknow when exactly it will run out

Q is fixed because you know how much you need to get

Question 18

What are the two systems that combine the continuous tracking (continuous) and low admin of (periodic systems)?

Answer 18

1) Fast “usage” recording
2) “backflusihing”

Question 19

Fast Usage Recording

Answer 19

Press button on shelf each time an item is taken (low admin)

button tied to software sustems taht detemines how mcuh inventory is on hand (constant tracking)

Question 20

Backflushing

Answer 20

• record only that the product was completed in the software
• software will use bill of materials to automatically reduce those materials in the system (constant tracking)

Question 21

what is independant demand

Answer 21

demand for items is not related to each other (like in a store, if you buy one thing you wont for sure buy another)

Question 22

What are the cost components of inventory

Answer 22

A) item costs
B) setup /replenishment costs
C) Holding Costs

Question 23

Inventory Costs components: item costs

Answer 23

Simplest casE: for each replenishment, cost is C*Q

C= unit variable cost ($/unit)
Q= order quantity (units)

Question 24

inventory costs components : Setup Costs (S)

what are the 2 types

Answer 24

1) outside ordering (purchase order)
-> purchasing analysis, receiving, inspection
-> a/p

2) In-House Supply (production order)
-> production set up cost: labour cost, learning effect (Time and scrap), lost production time
0> cleical: recording labour time and materials used

Question 25

inventory costs components : holding costs (H)

Answer 25

Simplest case- for each year holding cost is H per unit

holding cost: expressed as a % of the cost of an item per year: H=iC (i= % carrying cost per year)

EX: if i=30%, implies that carrying a $10 unit in invetory for a year will cost $3

Question 26

What is the total annual cost of inventory?

how to find quantity?

Answer 26

TAC= DC + (D/Q)S + (Q/2)H

DC: Annual demand *unit cost

(D/Q)*S: Annual Demand/ Quantity * Set up cost

(D/Q): # of orders

(Q/2)*H: Average inventory * Holding Cost

Total annual cost= annual purchase cost + annual ordering cost + annual holding cost
_____________________________________________

use the EOQ to calculate quantity

Question 27

what it the eonomic order quantity

Answer 27

how much you should order under stable and known conditions!!

Question 28

How do you fin dthe EOQ

Answer 28

balance two types of costs:
1) Setup cost (replenishment costs) [incentive to make large purchase decisison]
2) Holding costs (carrying csots) [incentive to make small pruchase decisions]

Question 29

What is the optimal quantity GRAPHICALLY

Answer 29

where the total actual cost is flat OR where the holding cost crosses the ordering cost

Q/2 * H = D/Q *S

Question 30

What is the optimal quantity (EOQ) MATHEMATICALLY

Answer 30

Q= SQRT(2DS/H)

Question 31

EOQ= SQRT(2DS/H) FORMULA ANALYSIS

Answer 31

eoq= ECONOMIC ORDER QUANTITY
D= Demand rate in units/YEAR
S= setup cost per order in ($)
H= Holding cost (in $unit/year) = iC= cost of carrying one unit in inventory for a year

Question 32

Why do we care about EOQ

Answer 32

answers first inventory question: how much to order

Question 33

Reorder point formula

Answer 33

R= dhat * L

dhat= demand on an average daily level
L= replenishment lead time in days

Question 34

wHAT does reorder point formula mean>

Answer 34

when is the reorder point?ho

Question 35

how to use the R=dL formula

Answer 35

we use it to find out how much avearage daily demand is needed to cover the lead time

1) figure out how much inventory is decreasing per day
2) figure out the lead time
3) calculate the reoder point

Question 36

new pricing policy, discount if over x amount of goods- how to solve?

Answer 36

calculate total costs for both scenarios- if it is cheaper then go with that alternative

Question 37

what are assumpitons of eoq

Answer 37

1) demand is constant and knwon
2) replensihment lead time is known
3) no shortages are allowed

EOQ is good theory but not practice

Question 38

how to apply eoq to irl?

Answer 38

we create safety stock!!!!

Question 39

If demand uncertainty increases, safety stock..

Answer 39

increases

Question 40

If supply uncertainty decreases, safety stock…

Answer 40

DECREASES

Question 41

If STOCKOUT increases, safety stock..

Answer 41

INCREASE

Question 42

How does uncertainty move safety stock?

Answer 42

same directons

Question 43

does keeping extra stock solve the problem

Answer 43

increases holding costs

Question 44

how does safety stock impact the total actual cost calcuaitons

Answer 44

TAC= DC + (D/Q)S + (Q/2)H

change the AVERAGE INVETORY PART to

(Q/2 + SS)*H

Question 45

how does safety stock change the demand graphically?

Answer 45

pushing the diagram outwards!!

lead time becomes higher
demand demanded beceomes higher

Question 46

How does safety stock impact the reorder point

Answer 46

Reorder point= dL + safetystock

Reorder point new formula=

dL+ Zscore (sqrt (lead time(sd of demand)))

Question 47

Id the inventory graph is getting cut off at the bottom

Answer 47

repeated stockout!! too low reorder point

Question 48

if the inventory graph is always leaving space at the bottom

Answer 48

excess inventory holding costs!! too high reorder point

Question 49

What is the ABC Classfication

Answer 49

orgs have very large number of distinct items in inventory, so they split it up unti 3 classifications

based on unit cost * annual demand

Question 50

Class A

Answer 50

Top 15% ; these are 70-80% of total dollar usage]

MANAGERS NEED TO MONITOR THIS

Question 51

Class B

Answer 51

next 35%; intermediate items account for 15-25%

automatied controls

Question 52

Class C

Answer 52

last 50%, simple inventory controls for stock that rep only 5% anual dollar volume

Question 53

How to classify things into class ABC

Answer 53

multiply n amount of units

15% by n= A
35% by n =B
50% by n= C

Question 54

A items characteristscs

Answer 54

Supplier relations need to be collaborative, sophisticated forecasting model, physical invetory control, lots of inventory counts

Question 55

B item characteristics

Answer 55

physical inventory control

Question 56

C item charactersitcs

Answer 56

arms length suppliuer relationships, very rare inventory counts

Question 57

Cycle counting is used to continuously
reconcile inventory with inventory records.
 Rather than shutting down the business for
a full inventory count, items are randomly
chosen to be counted, based upon their
classification

Answer 57

Cycle counting is used to continuously
reconcile inventory with inventory records.
 Rather than shutting down the business for
a full inventory count, items are randomly
chosen to be counted, based upon their
classification

Question 58

To achieve a lower order quantity

Answer 58

reduce set up/ordering costs

Question 59

to achieve a lower reorder point

Answer 59

L : reduce lead time
Safeyy stock: reduce uncertainty