Class 7 Flashcards
Define: Inventory
an idle material or product, usually in a warehouse or storeroom
Define: Inventory Management
planning and controlling the inventories
Define: Economic order quality (EOQ)
The order size that minimizes total inventory control cost
Define: ABC classification system
classifying inventory according to some measure of importance and allocating control efforts accordingly
Why is inventory important?
it is very expensive, it can be used to hide/avoid problems, and it can be used to decouple the firm from its customers
List 5 types of inventory
1) raw materials and purchased parts
2) partially completed goods (WIP)
3) finished goods
4) replacement parts, tools and supplies
5) goods-in-transit to warehouses or customers
List 7 functions of inventory
1) to meet expected sales or usage
2) to wait while being transported
3) to protect against stock-outs
4) to take advantage of economic lot size and other quantity discounts
5) to smooth seasonal production requirements
6) to decouple operations
7) to hedge against price increases
List 2 ways to measure inventory
1) inventory turnover (turns) - the ratio of annual cost of goods sold to the average inventory investment
2) days of supply (days) - the ratio of the inventory value to the average days usage
List 3 types of inventory cost
1) holding/carrying cost - the cost to keep an item in inventory
2) ordering cost and/or setup cost - includes source selection, order processing, transportation, receiving, inspection
3) shortage cost
List 3 sub categories of holding or carrying cost
1) warehousing costs (heat, cooling, light, rent, security)
2) insurance, spoilage, pilferage, breakage, taxes
3) cost of capital from 20 to 40%/year
Equation for total inventory cost
TC=annual holding cost + annual ordering cost
Equation for EOQ
EOQ=√(2DS)/H
equation for order/year
order/year=D/Q0
equation for length or order cycle
length of order cycle=Q0/D
Equation for total inventory cost (EPQ)
TC=annual holding cost+Annual setup cost
equation for cycle length
cycle length=Run Quantity/usage rate
equation for run length
run length=run quantity/production rate
equation for Imax
Imax=run quantity - (usage rate*run length)
Calculation question
answer in notes
Define Demand rate
slope of the demand line
define re-order point
when the inventory level drops to this amount, the items should be reordered
Define Safety Stock
stock that is held in excess of expected demand due to variability of demand and/or lead time
Define Service Level
lead time service level: probability that demand will not exceed supply during a lead time. Annual service level: the percentage of annual demand filled
Define Economic production quantity
order quantity determined in response to need to produce in batches or lots
List the steps required to calc EOQ in a quantity discount environment
beginning with the lowest unit price offered, calc EOQ for each price until you find a feasible EOQ (an EOQ within the quantity range on offer for that price)
-if EOQ is for the lowest unit price on offer, it is the optimal quantity. If not, calc and compare TC for the feasible EOQ and all lower price points to determine Q0 based on TC
List 2 types of inventory verification systems
1) cycle counting
2) periodic verification
Whats the difference between EOQ and periodic order model
EOQ - fixed quantity and varied time interval
Periodic order model - fixed time interval and varied order quantity
