Chapter 13 Inventory Management Flashcards
What is inventory?
A stock or store goods
why are inventories (both finished and semi-finished products or raw materials, parts) are vital part of business?
- Necessary for operations
2. Contribute to customer satisfaction
What are the types of inventory?
- Raw materials and purchased parts
- Partially completed goods, called work-in-progress (WIP)
3.Finished goods inventories (manufacturing firms) or merchandize (retail stores)
Goods-in-transit to warehouse, distributors, or customers (pipeline inventory) - Maintenance and repairs (MRO) inventory
- Tools and supplies
Give me 6 reasons for keeping inventory:
- Meetanticipatedcustomerdemand
- Smoothproductionrequirements
- Providebuffersandprotectionagainstany unexpectedeventsinthesystem,likemachine breakdown,disruptionsofsuppliers,etc
- Takeadvantageofordercycle Avoidtoofrequentorderingtosaveorderingcost
- Hedgeagainstpriceincrease
- Takeadvantageofquantitydiscounts
Inventorymanagementhastwomainconcerns:
- Levelofcustomerservice
- Havingtherightgoodsavailableintherightquantity in therightplace attherighttime 2.Costsoforderingandcarryinginventories
Theoverallobjectiveofinventorymanagementisto
achievesatisfactorylevelsofcustomerservice whilekeepinginventorycostswithinreasonable bounds
Inventorymanagementhastwobasicfunctions concerninginventory:
- Establishasystemfortrackingitemsininventory
- Makedecisionsabout
- Whentoorder
- Howmuchtoorder
Effective inventory management requires:
- Asystemkeepstrackofinventory
- Areliableforecastofdemand
- Knowledgeofleadtimeandleadtimevariability
‐Leadtime:thetimeintervalbetweenplacinganorder andreceivingtheorder
4.Reasonableestimates of
- holdingcosts
- orderingcosts
- shortagecosts 5.Aclassificationsystemforinventoryitems
what are the type inventory counting system
- Periodic system
2. Perpetual Inventory system
What is Periodic System?
- Physical countofitemsininventorymadeatperiodic intervals;oftenusedbysmallretailers
What is Perpetual Inventory System
Systemthatkeepstrackofremovalsfrominventory continuously,thusmonitoringcurrentinventory levelsofeachitem
Examples of Perpetual Inventory:
‐Anorderisplacedwheninventorydropstoa predeterminedminimumlevel
-Physicalcountofinventoriesstillneededperiodicallyto verifyeffectiveinventory(why?)
What is demand forecasts inventory?
- inventoriesarenecessarytosatisfycustomerdemands,soitis importanttohaveareliableestimatesoftheamount and timing ofdemand
- Point‐of‐sale(POS)systems
What is point-of-sale (POS) system?
1.A system that electronically records actual sales 2.Such sales/demand information is very useful for enhancing demand forecast and inventory management
what is Lead Time?
Timeintervalbetweenorderingandreceivingtheorder ‐Longand/orgreatvariabilityofleadtimerequiremoreinventory
What are the basic costs associated with inventory?
- Purchased Cost which is the amount paid to buy the inventory.
- Holding (carrying) costs which carry items in inventory for a length of time, usually a year.
3.Ordering Costs:
-Costsoforderingandreceivinginventory,includingshippingcost,
costofinspectionsgoodsuponarrival,preparingforinvoice,etc.
-Fixedamountperorder Ifacompanyproducesitsowninventoryinsteadoforderingfromasupplier,
therearesetupcosts,whichisthecostinvolvedin preparingequipmentforproduction,alsofixedamountperrun
- Shortagecosts Costsresultingwhendemandexceedsthesupplyofinventoryon hand;includecostoflostsales,lossofcustomergoodwill, backordercosts,etc.
A-B-C Approach
- Classifyinventoryaccordingtosomemeasureofimportance(i.e.,annual dollarvalues),andallocatingcontroleffortsaccordingly
- Aitems(veryimportant) 10 to 20 of the number of items inventory and about 60 to 70 percent of the annual dollar value.
- Bitems(moderatelyimportant)
- Citems(leastimportant) 50to60percentofthenumber ofitemsininventorybutonly about10to15percentofthe annualdollarvalue
What is Inventoryturnover?
‐Ratioofaveragecostofgoodssoldtoaverageinventory investment
1. Indicateshowmanytimesayeartheinventoryissold 2. Generally,thehigher theratio,thebetter
Measures of Inventory Performance:
- Days of inventory on hand
Alsocalleddaysofsupply,
theexpectednumberofdaysofsales/operationsthatcanbesupportedbytheexisting inventoryonhand
Economic Order Quantity Model:
Economicorderquantity(EOQ)modelidentifiesthe optimalorderquantitybyminimizingthesumof certainannualcoststhatvarywithordersizeand frequency
what are the economic order quantity model?
- The basic EOQ model.
- The economic production quantity (EPQ) model
- The quantity discount model
what is the basic EOQ model?
ThebasicEOQmodelisusedtodecideafixedorder quantity thatwillminimizethesumofcertainannual costs,whichincludeinventoryholdingcostand orderingcost
what are the basic EOQ model Assumptions?
- Onlyoneproductisinvolved
- Demandisknown andconstant throughouttheyear
- Leadtimeisconstant
- Eachorderisreceivedinasingledelivery
- ThereareNO quantitydiscounts
what is the objective of the basic EOQ model?
TheobjectiveofthebasicEOQmodelistodetermine anorderquantityQ* thatminimizestotalcost
TheoptimalorderquantityQ*
Q* 2DS/H = square root of the total of: 2(annual demand)(ordering cost per order) annual/ holding cost per unit
Ordercyclelength
L=Q*/D =optimal order quantity/ annual demand
what is economic production quantity (EPQ) model?
Thebatchproductionmodeiswidelyused.Incertain instances,thecapacitytoproduceajob(batchsize) exceedsitsusage(demandrate)
EPQ Assumptions:
- Onlyoneproductisinvolved
- Annualdemandrateisknown andconstant
- Productionrateisknownandconstant
- Productionrateislarger thandemandrate
- Demandoccurscontinually,butproductionoccurs periodically
the objective of EPQ is?
TheobjectiveofEPQ modelistodetermine aproductionquantity, Qp* tominimizethe totalcost
Economic productionquantity
Qp* = square root of 2DS/H square root P/ p-D
Production cycle length
Qp*/D
Productiontime withinacycle
Qp*/p
what is quantity discount?
Pricereductionforlargerordersofferedtocustomersto inducethemtobuyinlargequantities
Total cost= Carrying cost + Ordering costs + purchasing costs
Totalcostformulain basicEOQmodeldoes NOTincludepurchasing cost.Why?
BecauseQ* does notchangewhen purchasingcostis included
the total cost curve in the basic EOQ model
BasicEOQmodeldoes NOTconsiderquantity discount,thepurchase priceisthesame regardlessofQ.
the total cost curve in quantity discount model?
Thetotal‐costcurvewith quantitydiscountiscomposed ofaportionofthetotal‐cost curveforeachprice
what is reorder point?
Whenthequantityonhandofanitemdropstothis amount,theitemisreordered.
Determinantsofthereorderpoint
- Demandrateanditsvariability
- Theleadtimeanditsvariability
- Thedegreeofstock outriskacceptabletomanagement
reorder point under certainty is?
Whendemandrateandleadtimeareconstant
Reorderpointistheamountthatisabletosatisfy demandduringtheleadtimeperiod
ROP = d*LT
d= Demand rate (units per period, per day, per week)
LT= Lead time (in same time units at d)
reorder point under certainty are:
- Demandand/orleadtimeuncertaintycreatesthe possibilitythatdemandwillbegreaterthanavailable supply
- Toreducethelikelihoodofastock out,itbecomes necessarytocarrysafetystock
a) Safetystock
ii) Stock is held in excess of expected demand due to variable demand and/or lead time.
iii) As the amount of safety stock increase, the risk of stock out will decrease, which improves customer service
ROP = Expected demand during lead time / Safety stock
Fixed‐order‐interval(FOI)model?
1.Ordersareplacedatfixedtimeintervals,widelyusedby retailers
2.Orderquantitiesusuallyvary,unlikeEOQ
ReasonsforusingtheFOImodel:
- Supplier’spolicymayencourageitsuse
- Groupingordersfromthesamesuppliercanproducesavings inshippingcosts
- Somecircumstancesdonotlendthemselvestocontinuously monitoringinventoryposition
FixedQuantity
Eachorder cyclemaybe different, safetystockis typicallower
FixedInterval
Eachorder quantitymay bedifferent, safetystockis typicalhigher
