Chapter 7 - Inventory

Question 1

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Answer 1

-Economies of scale
  Purchasing advantages
  Transportation advantages
  Manufacturing advantages
-Balancing supply and demand
  Seasonality/Speculative
  Maintaining supply sources
-Buffering against uncertainty
  Uncertainty in demand
  Uncertainty in supply

Question 2

Factors influencing inventory levels
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Answer 2

Average inventory
Number of products
Service level objectives
Supply chain structure
Financial implications of inventory

Question 3

**Inventory cost components
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Answer 3

Taxes- on inventory held in warehouses
Insurance- is based on estimated risk or loss over time and facility characteristics
Obsolescence- results from deterioration of product during storage
E.g. food and pharmaceutical sell-by dates
Storage- is facility expense related to product holding rather than product handling

Question 4

**Demand uncertainty can be managed using _____

Planning ________ requires 3 steps

Answer 4

…..safety stock

Planning safety stock requires three steps:

• Determine the likelihood of stockout using a probability distribution
• Estimate demand during a stockout period
• Decide on a policy concerning the desired level of stockout protection

Question 5

**Number of ____ is reduced from two to one when order quantity is ______

Answer 5

Number of stockouts is reduced from two to one when order quantity is increased

*Increased order size can be used to compensate for decreasing the safety stock
(figure)

Question 6

**Three approaches to introduce safety stock into dependent demand situations

Answer 6

-Put safety time into the requirements plan
E.g. order a component earlier than needed to assure timely arrival
-Over-planning top-level demand is a procedure to increase the requisition by a quantity specified by some estimate of expected plan error
E.g. assume plan error will not exceed 5 percent
-Utilize statistical techniques to set safety stocks directly for a component rather than to the item of top-level demand

Question 7

**Approaches to implementing inventory management policies
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Answer 7

• *-Reactive approach responds to customer demand to pull the product through the distribution channel
• *-Planning approach proactively allocates inventory on the basis of forecasted demand and product availability
• Hybrid approach uses a combination of push and pull

Question 8

**Managerial considerations when developing an inventory policy

Use planning logic under conditions of:
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Use reactive logic under conditions of:
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Answer 8

(figure)
Use planning logic under conditions of:
-Highly profitable segments
-Dependent demand
-Economies of scale
-Supply uncertainty
-Source capacity limitations
-Seasonal supply buildup

Use reactive logic under conditions of :

• Cycle time uncertainty
• Demand uncertainty
• Destination capacity limitations

Question 9

**Planning approaches coordinate requirements across multiple locations in the supply chain (two approaches)

Answer 9

(Two approaches)

• Fair share allocation provides each distribution facility with an equitable distribution of available inventory
  
  • Limited ability to manage multistage inventories
• Requirements planning integrates across the supply chain taking into consideration unique requirements
  
  • Materials requirements planning (MRP) is driven by a production schedule

Question 10

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Answer 10

• Requires accurate and coordinated forecasts for each warehouse
• Requires consistent and reliable product movement between warehouse facilities
• Subject to frequent rescheduling (system nervousness) because of production breakdowns or delivery delays

Question 11

**Assumptions of classical reactive inventory logic
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Answer 11

• All customers, market areas, and product contribute equally to profits
• Infinite capacity exists at the production facility
• Infinite inventory availability at the supply location
• Performance cycle time can be predicted and that cycle lengths are independent
• Customer demand patterns are relatively stable and consistent
• Each distribution warehouse’s timing and quantity of replenishment orders are determined independently of all other sites, including the supply source
• Performance cycle length cannot be correlated with demand

Question 12

**Inventory control using reactive approaches

Inventory control definition
Two types of reviews

Answer 12

• Inventory control defines how often inventory levels are reviewed to determine when and how much to order
  
  • Perpetual review continuously monitors inventory levels to determine inventory replenishment needs
  • Periodic review monitors inventory status of an item at regular intervals such as weekly or monthly