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COMM 225: Operations management > chapter 12 book: inventory management > Flashcards

chapter 12 book: inventory management Flashcards

1
Q

independent demand

A

The demand is unknown and has to be forecasted

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2
Q

Demand for manufacturing parts is dependent demand, why?

A

Demand for manufacturing parts and components depends on the production schedule for the finished goods

we know how much we need

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3
Q

An inventory or stock

A

any material, part, or product sitting idle, not being used, usually in a warehouse or stockroom, and kept for use or sale in the future

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4
Q

stock keeping unit (SKU)

A

A warehousing item that is unique

it must be stored and accounted for separately from other items

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5
Q

what are the 5 main types of assets than companies hold in inventory?

A

raw materials

purchased manufacturing parts and components

work-in-process (WIP)

finished goods

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6
Q

Inventory management

A

concerned with planning and controlling inventories

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7
Q

A typical company has approximately how much of its current assets in inventory?

A

approximately 50%

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8
Q

return on assets (ROA)

A

widely used measure of business performance

profit after tax divided by total assets

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9
Q

what will happen to ROA if we manage to reduce our inventory?

A

a significant increase in ROA

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10
Q

Functions (Purposes) of Inventory

A
  1. To wait while being transported (in-transit inventory)
  2. To protect against stock-outs

–> lack of supplies basically

  1. To take adνantage of economic lot size or future price increase
  2. To smooth seasonαl demand or production

–> building up inventory during off season to meet high demand during the peak season

  1. To decouple operations
  2. To meet anticipated above-average demand
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11
Q

in-transit inventory

A

Items being transported

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12
Q

safety stock

A

stock in excess of average demand

to protect against stock-outs

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13
Q

cycle stock

A

inventory that is replenished cyclically and is gradually depleted as demand occurs and is met

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14
Q

seasonal inventory

A

Inventory produced during the off season to meet peak season demand, or inventory produced during a growing season kept for later sale

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15
Q

how to decouple operations?

A

Manufacturers use decoupling inventory between successive operations in order to create independence between the two operations in case one of them breaks down temporarily

made of WIP inventory

the average supply rate and the average demand rate should be equal

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16
Q

decoupling inventory`

A

Inventory between successive operations in order to create independence between the two operations in case one of them breaks down temporarily

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17
Q

anticipation inventory

A

Additional inventory to meet higher than average demand during a sales promotion or when customers expect a future price increase, and in anticipation of a plant shutdown

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18
Q

consequences of being a dumb ass in inventory management

A

Under-stocking results in missed deliveries, lost sales, dissatisfied customers, and production stoppage

overstocking unnecessarily ties up funds that might be more productive elsewhere and also ties up storage space

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19
Q

Inventory management’s two main concerns

A

the level of customer service (item availability or fiII rate)

the inventory costs

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20
Q

the level of customer service (item availability or fiII rate)

A

to have the right goods, in sufficient quantities, in the right place, at the right time

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21
Q

The overall objective of inventory management

A

to achieve satisfactory levels of customer service while minimizing inventory costs

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22
Q

a buyer or inventory analyst must make which two decisions for each item

A

the timing and size of orders

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23
Q

inventory turnover

A

performance measure to judge the effectiveness of their inventory management

the ratio of annual cost of goods sold (COGS) to average inventory investment

indicates how many times a year the inventory is sold or used

the ratio the better

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24
Q

days of inventory

A

performance measure to judge the effectiveness of their inventory management

a number that indicates the expected number of days of sales or usage that can be supplied from existing inventory

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25
Q

Effective inventory management requires:

A
  1. Safe storage and handling of inventories
  2. Tracking inventory levels and using inventory control models
  3. Forecasting demands and lead times
  4. Estimating inventory costs
  5. Performing A-B-C classification
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26
Q

A warehouse management system (WMS)

A

a computer software that controls the movement and storage of materials within a warehouse

processes the associated transactions

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27
Q

automated storage and retrieval system (ASRS)

A

A computer-controlled system

automatically places and retrieves loads from defined storage locations

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28
Q

The required warehouse capacity depends on?

A

depends on yearly volume and frequency of inventory movements

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29
Q

the inventory position for each item

A

Quantity on hand + On order - back-ordered

On order relates to an order that has been received by a supplier but the shipment has not arrived yet

back order is a shortage that the customer has agreed to wait for; it is a future inventory committed to a customer

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30
Q

the fixed-interval/order-up-to level model

A

An inventory control model that places orders at fixed time intervals to bring the inventory position up to the order-up-to level

a replenishment model that bases the order quantity on the difference between order-up-to level and inventory position

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31
Q

order-up-to level

A

estimate on how much of the item will be demanded from now until receipt of the next delivery

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32
Q

advantage of the fixed-interval/order-up-to level model

A

items from the same supplier are ordered at the same time

results in economies in ordering, shipping, receiving, and paying

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33
Q

disadvantage of the fixed-interval/order-up-to level model

A

the possibility of stock out between reviews

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34
Q

Perpetual or continual tracking

A

keeps track of removals from and additions to inventory on a continuous basis

allows the system to provide information on the current inventory position for each item at any time

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35
Q

economic order quantity/reorder point model (EOQ/ROP)

A

Another common inventory control model

works only with perpetual tracking

When the inventory position of an item drops down to or below a predetermined minimum called the reorder point (ROP), a fixed (economic) quantity of the item is ordered

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36
Q

advantages of the economic order quantity/reorder point model (EOQ/ROP)

A

the probability or expected number of shortage can be controlled

the order quantity is fixed

–> management can determine an optimal order quantity and use it for a few months, provided that demand does not vary seasonally or have a trend

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37
Q

disadvantage of the economic order quantity/reorder point model (EOQ/ROP)

A

this model is the added cost of individual ordering

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38
Q

the two bin system

A

A simple implementation of the economic order quantity/reorder point model

does not require perpetual inventory tracking

Items are withdrawn from the first bin until its contents are exhausted

–> It is then time to reorder

The second bin contains enough stock to satisfy expected demand until the order is filled plus safety stock

–> When the order arrives, the second bin is topped off and the remainder is placed in the first bin

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39
Q

A bar code

A

a unique number assigned to an item or a location

made of a group of vertical black and white bars that are read by a scanner

has increased the speed and accuracy of transactions significantly

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40
Q

main bar code type

A

universal product code (UPC)

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41
Q

universal product code (UPC)

A

The standard grocery bar code

has 12 digits

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42
Q

the purchase lead time

A

the time interval between ordering and receiving an order

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43
Q

the manufacturing lead time

A

the time it will take for a batch of a part/product to be manufactured

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44
Q

A point-of-sale (POS) system

A

electronically records actual sales at the time and location of sale

after accumulation into daily or weekly or monthly sales, these

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45
Q

the three basic costs, other than the purchase price, associated with inventories

A

holding costs

ordering costs

shortage costs

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46
Q

holding costs

A

relate to physically having items in storage

include warehousing costs, the opportunity cost associated with funds tied up in inventory, insurance, theft, etc

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47
Q

how are holding costs stated?

A

as a percentage of unit cost or as a dollar amount per unit

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48
Q

what are the typical annual holding cost rates?

A

20 to 40% of an item’s cost

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49
Q

ordering cost

A

the cost of placing an order, receiving it, and paying for it

generally expressed as a fixed dollar amount per order, regardless of order size

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50
Q

what are the ordering costs of a company that produces its own parts instead of ordering from a supplier?

A

the cost of machine setup

51
Q

Machine setup

A

involves preparing the machine for the job by a司justing it, changing cutting tools, etc

52
Q

Shortage cost

A

results when demand exceeds supply of inventory on hand

can include the opportunity cost of not making a sale

if it is an item used for production is what were missing, the shortage costs are what we have not produced but we could have

53
Q

The A-B-C classification

A

groups inventory items into three classes according to some measure of importance, usually annual dollar value

it then allocates inventory control efforts accordingly

A: very important

B: moderately important (

C: least important

sometimes used to guide cycle counting

54
Q

the A class items ratio

A

15-20 percent of the items in inventory

about 70-80 percent of the annual dollar value (ADV)

55
Q

the C class items ratio

A

might account for about 50-60 percent of the items in inventory

only about 5-10 percent of the ADV

56
Q

cycle counting

A

counting the items in inventory on a cyclic schedule (more frequently than annually)

we want to reduce discrepancies between inventory records and the actual quantities of inventory on hand

we want to investigate the causes of inaccuracy and fix them

57
Q

physical inventory

A

Determination of inventory quantity by actual count

58
Q

allowable error limits for A, B, and C classified items

A

+ or - 0.2 percent for
A items

+ or - 1 percent for B items

+ or - 5 percent for C items

A items should be counted more frequently than C items

59
Q

The economic order quantity (EOQ)

A

the order size that minimizes the total annual inventory control cost

60
Q

the four EOQ related models

A
  1. Basic economic order quantity (EOQ)
  2. Economic production quantity (EPQ)
  3. EOQ with quantity discount
  4. EOQ with planned shortage
61
Q

the Basic economic order quantity (EOQ)

the basic one bruv

A

will minimize the sum of annual costs of holding and ordering inventory

The annual purchase price is not included because in the basic case it is assumed that unit purchase price is unaffected by the order size

based on a number of assumptions

62
Q

the Basic economic order quantity (EOQ) assumptions

A
  1. Only one item is involved
  2. Annual demand is known.
  3. Demand is spread evenly throughout the year so that the demand rate is reasonably constant
  4. Purchase lead time does not vary
  5. Each order is received in a single delivery
  6. There are no quantity discounts
  7. Shortage is not allowed
63
Q

how is annual holding cost calculated?

A

by multiplying the average amount of inventory on hand by the cost to hold one unit for one year

(Q/2) · H

Q = Order quantity (units per order)

H = Holding cost per unÎt per year

Annual holding cost is thus a linear function of Q: It increases in direct proportion to changes in the order quantity Q

64
Q

annual ordering cost will increase decrease as order quantity increases? why?

A

annual ordering cost will decrease

because for a given annual demand, the larger the order quantity, the fewer the number of orders needed

65
Q

annual ordering cost formula

A

(D/Q) · S

D = Demand (units per year)

S = Ordering cost per order

Q = Order quantity (units per order)

66
Q

The total annual inventory cost of holding and ordering inventory, when Q units are ordered each time (formula)

A

TC = ((Q/2) · H) + ((D/Q) · S)

annual holding cost + annual ordering cost

Q = Order quantity (units per order)

H = Holding cost per unÎt per year

D = Demand (units per year)

S = Ordering cost per order

67
Q

The total annual inventory cost of holding and ordering inventory curve

A

U-shaped

it reaches its minimum at the quantity where annual holding and annual ordering costs are equal

68
Q

formula for the optimal order quantity?

A

EOQ = Q0 = ((2 · D · S) / H)^(1/2)

H = Holding cost per unÎt per year

D = Demand (units per year)

S = Ordering cost per order

Q0 = the optimal order quantity

69
Q

The length of an order cycle (in years) formula

A

Q0/D

Q0 = the optimal order quantity

D = Demand (units per year)

70
Q

formula to find how many times we will order per year using EOQ

A

D/Q0

Q0 = the optimal order quantity

D = Demand (units per year)

71
Q

economic production quantity (EPQ)

A

to determine the optimal production lot size when we are producing an item in-house

the production lot size that minimizes total annual production setup and inventory holding cost

72
Q

difference between EPQ and EOQ

A

instead of shipments being received in a single delivery, units are received incrementally

73
Q

under the economic production quantity (EPQ), how do we find the inventory growth rate?

A

production - usage

ex: produced 20 units and the daily usage rate is 5 units, inventory will build up at the rate of 20 - 5 = 15 units per day

74
Q

under the economic production quantity (EPQ), what is the point where the inventory on hand will be at max?

A

when production ceases

there, inventory starts to decrease

When the amount of inventory on hand is exhausted, production is resumed and the cycle repeats itself

75
Q

the equivalent of ordering costs under the economic production quantity (EPQ)

A

setup costs

the cost to prepare the equipment for the job, such as cleaning，adjusting, and changing tools and fixtures

treated in exactly the same way, and we use the same symbol, S, to denote setup cost per production run

76
Q

setup costs

A

the cost to prepare the equipment for the job, such as cleaning，adjusting, and changing tools and fixtures

analogous to ordering costs because they are independent of the lot (run) quantity

treated in exactly the same way as ordering costs, and we use the same symbol, S, to denote setup cost per production run

77
Q

total cost under the economic production quantity (EPQ)

A

TC = Annual holding cost + Annual setup cost =

(Imax / 2) + (D/Q)S

Imax: Maximum inventory

D: Demand quantity

Q: Production run quantity

S: Setup cost per production run

78
Q

how to calculate Imax under the economic production quantity (EPQ)?

A

Imax = Q - d(Q/p)

Q: Production run quantity

d: Production rate (e.g., units per day)
p: Usage or demand rate (e.g., units per day)

79
Q

how to calculate cycle length under the economic production quantity (EPQ)?

A

Q/d

Q: Production run quantity

d: Production rate (e.g., units per day)

80
Q

how to calculate production run length under the economic production quantity (EPQ)?

A

Q/p

Q: Production run quantity

p: Usage or demand rate (e.g., units per day)

81
Q

how to calculate optimal production (Q0) under the economic production quantity (EPQ)?

A

Q0 = √(2DS/H) · √(p/(p - d))

D: Demand quantity

S: Setup cost per production run

H = Holding cost per unÎt per year

d: Production rate (e.g., units per day)
p: Usage or demand rate (e.g., units per day)

82
Q

A quantity discount

A

a price reduction for large orders

offered to customers to induce them to buy in large quantities

83
Q

Total Cost under EOQ With Quantity Discount

A

TC = Annual holding cost + Annual ordering cost + Annual purchase cost

(Q/2)H + (D/Q)S + RD

R = unit price

Q = Order quantity (units per order)

H = Holding cost per unÎt per year

D = Demand (units per year)

S = Ordering cost per order

84
Q

the rationale of holding costs under EOQ With Quantity Discount

A

because holding cost is a percentage of price, lower prices will lead to lower holding cost

85
Q

how to find the best purchase quantity under EOQ With Quantity Discount?

A
  1. Beginning with the lowest unit price, calculate the EOQ for each unit price until you find a feasible EOQ

–> until an EOQ falls in the quantity range for its unit price

  1. If the EOQ for the lowest unit price is feasible, it is the optimal order quantity

–> If not, compare the total cost at all the break quantities larger than the feasible EOQ with the total cost of the feasible EOQ. The quantity that yields the lowest total cost among these is optimum

86
Q

a planned shortage

A

When holding cost per unit is large and the customer can wait

to intentionally allow shortage

We assume that all shorted demand will be back-ordered

the back-ordered demand will incur shortage cost proportional to the length of the time a unit is back-ordered

87
Q

the average inventory on hand during the year under EOQ With Planned Shortage

A

((Q - Qb)^2) / 2Q

Qb = Quantity back-ordered per order cycle

Q = Quantity ordered

88
Q

the average level of back-orders during the year under EOQ With Planned Shortage

A

(Qb^2)/2Q

Qb = Quantity back-ordered per order cycle

Q = Quantity ordered

89
Q

the total annual inventory control cost under EOQ With Planned Shortage

A

TC = Annual ordering cost + Annual holding cost + Annual back-order cost

(D/Q)S + (((Q - Qb)^2)/2Q) · H + ((Q^2)/2Q) · B

Qb = Quantity back-ordered per order cycle

Q = Quantity ordered

H = Holding cost per unÎt per year

D = Demand (units per year)

S = Ordering cost per order

B = Back-order cost per unit per year

90
Q

how to find the Qb (Quantity back-ordered per order cycle) under EOQ With Planned Shortage?

A

Qb = Q · (H/(H + B))

Q = Quantity ordered

H = Holding cost per unÎt per year

B = Back-order cost per unit per year

91
Q

how to find the optimal quantity ordered under EOQ With Planned Shortage?

A

Q = √(((2DS)/H) · ((H + B)/B))

Q = Quantity ordered

H = Holding cost per unÎt per year

B = Back-order cost per unit per year

S = Ordering cost per order

92
Q

The reorder point (ROP)

A

the inventory position at or below which an order should be issued

inventory position = On hand + On order 一 Back-ordered

93
Q

The reorder point (ROP) formula with no safety stock

A

ROP = d · LT

d = Demand rate (units per day or week or month)

LT = Lead time (in days or weeks or months)

d and LT must have the same time units

94
Q

The reorder point (ROP) formula with safety stock

A

Expected demand during a lead time + Safety stock

95
Q

The amount of safety stock that is appropriate for an item depends on:

A
  1. Demand and lead time variability

2. The desired service level

96
Q

the main ways we focus on to define the service level when finding the amount of safety stock that is appropriate for an item

A
  1. Lead time service level

2. Annual service level

97
Q

Lead time service level

A

the probability that demand will not exceed inventory on hand during a lead time

the probability of no shortage during a cycle

equal to the fraction of cycles with no shortage

98
Q

Annual service level

A

the proportion of annual demand filled from stocks on hand

fill rate

99
Q

The formula commonly used to determine the safety stock, in the presence of demand and/or lead time variability

A

assumes that demand during a lead time is Normally distributed

Safety stock = z · σdLT

z = Safety factor; number of standard deviations above the expected demand

–> the smaller the desired stock-out risk, the greater the value of z

σdLT = Standard deviation of demand during a lead time

100
Q

The reorder point (ROP) formula when only demand is available

A

ROP = d_ · LT + z · √LT · σd

d_: average daily or weekly or monthly demand

σd: standard deviation of daily or weekly or monthly demand

LT: Lead time in days or weeks or months

z = Safety factor; number of standard deviations above the expected demand

101
Q

The reorder point (ROP) formula when both demand and lead time are available

A

ROP = d_ · LT + z · √(LT_ · (σd)^2 + (d_)^2 · (σLT)^2)

d_: average daily or weekly or monthly demand

σd: standard deviation of daily or weekly or monthly demand

LT: Lead time in days or weeks or months

z = Safety factor; number of standard deviations above the expected demand

LT_: Average lead time, in days or weeks or months

σLT: Standard deviation of the lead time, in days or weeks or months

102
Q

reorder point ROP Using Annual Service Level steps

A
  1. Calculate E(z)

–> E(z) = Standardized expected number of units short during an order cycle

  1. determine the associated z value
  2. Use the z value in the following general ROP formula or a specific one

–> ROP = Expected demand during lead time + z · σdLT

103
Q

E(z) formula in reorder point ROP Using Annual Service Level steps

A

E(z) = (Q(1 - SLannual)) / σdLT

σdLT = Standard deviation of demand during a lead time

SLannual = desired annual service level

Q = quantity ordered

104
Q

ROP formula in reorder point ROP Using Annual Service Level steps

A

ROP = Expected demand during lead time + z · σdLT

σdLT = Standard deviation of demand during a lead time

105
Q

Periodic reνiew (variation of the EOQ/ROP or Min7Max models)

A

inventory position is reviewed periodically

Min = d_ · (LT + RP) + z · σd · √(LT + RP)

Mαx = Min + EOQ

106
Q

Cαn-order model (variation of the EOQ/ROP or Min7Max models)

A

In this model, when an item’s inventory position drops to or below its ROP, all related items re investigated to see if their inventory position is at or below their can-order level

–> If so, they are ordered too (to bring their inventory level up to their Max)

107
Q

The fixed-interval / order-up-to level model

A

used when orders are placed at fixed time intervals (e.g., weekly, twice a month, etc.),

used also when inventory position is brought up to the order-up-to level

unlike the EOQIROP model, the order size tends to vary from interval to interval depending on demand during the previous interval

108
Q

Two decisions needed to apply the fixed-interval / order-up-to level model for a group of items from the same supplier

A

(1) the order interval

(2) the order-up-to level for each item

109
Q

in the fixed-interval / order-up-to level model, how can the order interval be determined

A

by minimizing the total annual holding and ordering costs of all the SKUs received from a particular supplier

OI = √((2 · (S + n · s)) / (i · E(Dj · Rj)))

S = purchase order ordering cost

s = line item ordering cost

n = Number of SKUs purchased from the supplier

Rj = Unit cost of SKU

i = Annual holding cost rate

Dj = Annual demand of SKUj

110
Q

S = purchase order ordering cost

A

Fixed ordering cost per purchase order excluding line items

111
Q

s = line item ordering cost

A

Variable ordering cost per SKU included in the purchase order

112
Q

how do we determine the amount we will purchase enough to last until the next order time under the fixed-interval / order-up-to level model

A

Qj = Dj · OI

OI = Order interval (in fraction of a year)

Dj =Annual demand of SKUj

113
Q

Total annual inventory control cost (TC) under the fixed-interval / order-up-to level model

A

TC = E(((Dj · OI)/2) · Rj) + i + (S + n · s) · (I/OI)

S = purchase order ordering cost

s = line item ordering cost

n =Number of SKUs purchased from the supplier

Rj=Unit cost of SKU

i = Annual holding cost rate

Dj =Annual demand of SKUj

OI =Order interval (in fraction of a year)

114
Q

Therefore, order-up-to level or Imax formula under the fixed-interval / order-up-to level model

A

Imax = Expected demand during an order interval plus a lead time + Safety stock

Imax = d_ · (OI + LT) + z · σd · √(OI + LT)

d_: Average daily or weekly or monthly demand

OI = Order interval (length of time between orders); in days or weeks or months

LT = Lead time in days or weeks or months

z = Safety factor; number of standard deviations above the expected demand

σd = Standard deviation of daily or weekly or monthly demand

115
Q

Order quantity Q formula under the fixed-interval / order-up-to level model

A

Q = Imax - inventory position

116
Q

The coordinated periodic review model

A

A variation of fixed interval model where an item is ordered to meet demand
for a multiple m of a common orderinterval

117
Q

steps to find the optimal amount in the coordinated periodic review model

A
  1. Find the SKU with largest annual dollar value DjRj
  2. For every other SKUj caluclate Mj
  3. calculate OI

fuck the formula im sick of writing them down

118
Q

The single period model

A

used for ordering perishables and other items that have a limited useful life

generally focuses on two costs: shortage and excess

Cshortage = Cs = Revenue per unit - Purchase cost per unit

119
Q

Excess cost in the single period model

A

pertains to items left over at the end of the period

the difference between purchase cost and salvage value

Cexcess = Ce = Purchase cost per unit - Salvage value per unit

120
Q

multi-echelon supply chain

A

A supply chain with multiple levels or stages

121
Q

methods used for coordinated control of inventories in a supply chain

A

Multi-echelon control

Distribution requirements planning

Inventory optimization

122
Q

Multi-echelon control

A

A distribution network is usually like a tree on its side

The warehouse echelon (level) is the warehouse and all the retailers it feeds

retailers transmit their point of sale (POS) data to the warehouse

123
Q

Distribution requirements planning

A

a planning method that determines time-phased replenishment schedules between a manufacturer’s facility and DCs

DRP requires:

  • Forecast of demand at each DC (usually done by the DC itself).
  • Current inventory on hand and on order.
  • Order quantities/batch sizes.
  • Lead times.
124
Q

Inventory optimization

A

a method that determines the location and optimal level of inventory in the supply chain

given customer-promised LT

probability distribution of demand at each inventory location

cost of holding inventory at each location

processing time at each location

transport times

we have determine committed LT and amount of inventory to be kept at each location in order to minimize total inventory holding cost

COMM 225: Operations management (17 decks)

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