Ch. 4 Inventory Management Flashcards
What are the two big questions in inventory management
When to order goods
How much to order
What costs influenced the decisions of inventory ordering?
1) Setup/Order cost
2) Stockout COst
3) Holding Cost
4) Material costs- quantity discount
Setup/Order costs
Make & Buy Costs
Make costs: cost of setup time and admin costs of each production order
Buy: admin costs that come from each purchase order
Stockout costs
the costs that comes from having not enough invenootry, LOST PROFIT COST
Customer will go elsewhere and may never come back
Holding costs 2 Types
1) Opportunity cost of havign money tied up in inventory
2) storage space, material handling costs, obsolesence, theft
Material Costs- Quantity Discount
Discount on the per unit cost if order quantity exceeds minimum
If 20/unit usually, and you order 100+ it will be 18/unit
How are the cost factors related to successful inventory management
succesful inventory management= balancing all 4 costs
why is control of inventory expensive
controlling has admin costs!!!!
2 types of invenemtnary management systems
1) Periodic: low cost and smaller items (Screws ties)
2) Continuous: high cost and bigger items
Periodic inventory management
1) no computer tracking
2) order quantity: fill the bin (VARIED QUANTITY)
3) order trigger: whenever you check periodically (FIXED TIMING)
Continuous inventory system
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)
What has fixed timing, and varied quantity
periodic review systems:
what has fixed quantity and various timing
Continuous revieq
In periodic review, what formula is used to determine the quantity that is ordered
Q= Order up to level- quantity on hand
In continous review how is it determined when to buy
when inventory positon (on hand inventory+ on order inventory) falls to reorder point (r) or lower
In the P-model, what is fixed and what varies
Q varies (the height ordered changes)
T is fixed, in the same intervals you order
In the Q model, what is fixed and what varies
T varies, because you dontknow when exactly it will run out
Q is fixed because you know how much you need to get
What are the two systems that combine the continuous tracking (continuous) and low admin of (periodic systems)?
1) Fast “usage” recording
2) “backflusihing”
Fast Usage Recording
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)
Backflushing
- 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)
what is independant demand
demand for items is not related to each other (like in a store, if you buy one thing you wont for sure buy another)
What are the cost components of inventory
A) item costs
B) setup /replenishment costs
C) Holding Costs
Inventory Costs components: item costs
Simplest casE: for each replenishment, cost is C*Q
C= unit variable cost ($/unit)
Q= order quantity (units)
inventory costs components : Setup Costs (S)
what are the 2 types
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
inventory costs components : holding costs (H)
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 $3
What is the total annual cost of inventory?
how to find quantity?
TAC= DC + (D/Q)S + (Q/2)H
DC: Annual demand *unit cost
(D/Q)*S: Annual Demand/ Quantity * Set up cost
(D/Q): # of orders
(Q/2)*H: Average inventory * Holding Cost
Total annual cost= annual purchase cost + annual ordering cost + annual holding cost
_____________________________________________
use the EOQ to calculate quantity
what it the eonomic order quantity
how much you should order under stable and known conditions!!
How do you fin dthe EOQ
balance two types of costs:
1) Setup cost (replenishment costs) [incentive to make large purchase decisison]
2) Holding costs (carrying csots) [incentive to make small pruchase decisions]
What is the optimal quantity GRAPHICALLY
where the total actual cost is flat OR where the holding cost crosses the ordering cost
Q/2 * H = D/Q *S
What is the optimal quantity (EOQ) MATHEMATICALLY
Q= SQRT(2DS/H)
EOQ= SQRT(2DS/H) FORMULA ANALYSIS
eoq= ECONOMIC ORDER QUANTITY
D= Demand rate in units/YEAR
S= setup cost per order in ($)
H= Holding cost (in $unit/year) = iC= cost of carrying one unit in inventory for a year
Why do we care about EOQ
answers first inventory question: how much to order
Reorder point formula
R= dhat * L
dhat= demand on an average daily level
L= replenishment lead time in days
wHAT does reorder point formula mean>
when is the reorder point?ho
how to use the R=dL formula
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
new pricing policy, discount if over x amount of goods- how to solve?
calculate total costs for both scenarios- if it is cheaper then go with that alternative
what are assumpitons of eoq
1) demand is constant and knwon
2) replensihment lead time is known
3) no shortages are allowed
EOQ is good theory but not practice
how to apply eoq to irl?
we create safety stock!!!!
If demand uncertainty increases, safety stock..
increases
If supply uncertainty decreases, safety stock…
DECREASES
If STOCKOUT increases, safety stock..
INCREASE
How does uncertainty move safety stock?
same directons
does keeping extra stock solve the problem
increases holding costs
how does safety stock impact the total actual cost calcuaitons
TAC= DC + (D/Q)S + (Q/2)H
change the AVERAGE INVETORY PART to
(Q/2 + SS)*H
how does safety stock change the demand graphically?
pushing the diagram outwards!!
lead time becomes higher
demand demanded beceomes higher
How does safety stock impact the reorder point
Reorder point= dL + safetystock
Reorder point new formula=
dL+ Zscore (sqrt (lead time(sd of demand)))
Id the inventory graph is getting cut off at the bottom
repeated stockout!! too low reorder point
if the inventory graph is always leaving space at the bottom
excess inventory holding costs!! too high reorder point
What is the ABC Classfication
orgs have very large number of distinct items in inventory, so they split it up unti 3 classifications
based on unit cost * annual demand
Class A
Top 15% ; these are 70-80% of total dollar usage]
MANAGERS NEED TO MONITOR THIS
Class B
next 35%; intermediate items account for 15-25%
automatied controls
Class C
last 50%, simple inventory controls for stock that rep only 5% anual dollar volume
How to classify things into class ABC
multiply n amount of units
15% by n= A
35% by n =B
50% by n= C
A items characteristscs
Supplier relations need to be collaborative, sophisticated forecasting model, physical invetory control, lots of inventory counts
B item characteristics
physical inventory control
C item charactersitcs
arms length suppliuer relationships, very rare inventory counts
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
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
To achieve a lower order quantity
reduce set up/ordering costs
to achieve a lower reorder point
L : reduce lead time
Safeyy stock: reduce uncertainty
