Ch.11 Inventory

Question 1

Inventory is stocks/items used to

Answer 1

1. Support Production
   Raw Materials & WIP items
2. Supporting Activities
   MRO: maintenance, repair & operating supplies
3. Cx Srv
   finished goods & spare parts

Question 2

___ is
- One of the most $$$ assets
- > 10% of Revenue or 20% of Assets
- Reduce Inv. yet avoid Stockouts

Answer 2

Inventory Mngt

Question 3

6 Types of Inventory

Answer 3

1. Cycle Stock
   prod. received/replenished in bulk
2. Safety Stock
   extra held against uncertainties
3. Anticipation Inventory
   for anticipated Cx demand
4. Hedge Inventory
   buffer against events might not happen
5. Transportation Inventoy
   moving
6. Smoothing Inventory
   smooth out diff. btw up/down-stream prod./demand

Question 4

Business conditions that force companies to hold inventory

Answer 4

Inventory Drivers

Question 5

Inventory Driver #1

Uncertainty in Supply or DD
which impacts

Answer 5

• Safety Stock
• Hedge Inv.

Question 6

Inventory Driver #2

Mismatch between downstream DD & Most Efficient Prod./Shipment for upstream

Answer 6

Cycle Stock

Question 7

Inventory Driver #3

Mismatch between downstream DD level & upstream Prod. Capacity

Answer 7

Smoothing Inventory

Question 8

Inventory Driver #4

Mismatch between Timing of Cx DD & SC Lead Times

Answer 8

• Anticipation Inv.
• Transportation Inv.

Question 9

2 Uncertainties

1. Risk of Interruptions from upstream
2. Risk of Fluctuations in downstream

Answer 9

1. Supply Uncertainty
2. Demand Uncertainty

Question 10

Inventory items whose DD level are
1. beyond ctrl
2. tied to planned prod. of another item

Answer 10

1. Independent DD Inv
   e.g. tables
2. Dependent DD Inv
   e.g. table legs for tables

Question 11

Inventory Turnover

Answer 11

. COGS
= —————
. Avg Inventory

. Annual DD
= —————
. Order Qty

Question 12

A Ratio of how fast SKU Inventory is being replaced

Answer 12

Inventory Turnover
an indicator of SKU Velocity

Question 13

2 Operational Decisions for High Velocity SKU

Answer 13

1. Location in Warehouse
   closest to shipping
2. Inventory Count Interval
   count regularly

Question 14

___ is required to achieve Inventory Accuracy

Answer 14

Counts
- Annual count
- Cycle count
by area/ subsets of inv on planned cycles
- Open/ Blind/ Dbl Blind count

Question 15

A System to determine which inventories should be counted/ managed more closely

Answer 15

ABC Inventory Ctrl Sys

A: Very Important
20% TotalQty w/ 80% TotalCost
B: Mod. Important
C: Least Important

Question 16

4 Inventory Models

Answer 16

1. Periodic Review Sys.
   ind DD inv checked at regular intervals
2. Continuous Review Sys.
   ind DD inv constantly monitored if reaching reorder point
3. Economic Order Qty Model
   order Qty min. annual holding/ordering costs
4. Qty Discount Model
   $ ↓ for larger Qty order

Question 17

Periodic Review Sys.

calculate

Answer 17

Q = R - I
Q: Order Qty
R: ReStocking Level
I: Inventory at Review

R = μ + z·σ
R: ReStocking Level
μ: Avg DD
σ: St. Dev. of DD
z: Safety Stock factor of Srv Level

Question 18

Reorder Period =?
Order Lead Time =?

Question 19

A term of Amt of DD to be met under DD/Supp uncertainty

Answer 19

Service Level

98% Srv Level = 98/100 times that Cx DD is in-stock
⇒ 2% of the time out-of-stock

Question 20

Service Level ↑
⇒ Inventory Amt ___

Answer 20

↑ Exponentially

Question 21

In Cont. Review Sys.
calculate annual

Total Holding
& Ordering Costs
=Total Cost of Inventory

Answer 21

= Total Holding Cost
+ Total Ordering Cost

= (Avg Inv. Qty)×(Hld. Cost/unit)
+ (# of Orders/yr)×(Cost/order)

= (Q/2) × H
+ (D/Q) × S

Q: Order Qty ; H: Hld Cost/unit
D: Annual DD; S: Ording Cost

Question 22

the Order Qty that minimizes Annual Holding & Ordering Costs of an item

Answer 22

Economic Order Qty

EOQ

=sqrt( 2DS/H )
. 2xDD/yrxOrd. Cost
=sqrt (——————————)
. Annual Hld. Cost/unit

Question 23

5 Factors to Decide Safety Stock SS

& calculate

Answer 23

SS = z ·sqrt(L σₐ²+d² σₗ²)

σₐ : Variability of DD
σₗ : Variability of Lead Time
L : Avg Lead Time
z : Desired Srv Level
d : Avg DD

Question 24

Reorder Point (ROP)
when
DD Qty d & Lead Time L
1. remain constant
2. both vary

Answer 24

1. ROP = dL =μ
2. ROP = dL + SS =μ+zσ

SS = z ·sqrt(L σₐ²+d² σₗ²)
. = z ·st dev of DD

Question 25

Qty Discount

calculate

Answer 25

= (Q/2) × H
+ (D/Q) × S
+ DP (item costs)

Q: Order Qty ; H: Hld Cost/unit
D: Annual DD; S: Ording Cost
P: $/unit (now vary)

Question 26

Extreme change in SC upstream generated by a small change in downstream dd

Answer 26

Bullwhip Effect

Question 27

As Materials move down SC, reaction of
1. Cost & Value of Inv
2. Flexibility of Inv

Answer 27

1. Cost & Value ↑
2. Flexibility ↓

Inventory Pooling