Inventory Control Flashcards
inventory control methods that can be used to manage
independent-demand items such as finished goods and service parts at various points in a supply chain
Functions of Inventory
cycle stock, safety stock, anticipation stock, transit stock
cycle stock
to take advantage of economic lot sizeFixed costs, quantity discounts
safety stock
to protect against stock outsDemand uncertainty, supply uncertainty
anticipation stock
is inventory built up on purpose in anticipation of high demand in the future Seasonal demands, marketing promotion
transit stock
(or pipeline inventory) is inventory in motion from one location to another
Inventory-related Costs
acquisition costs, inventory-holding costs, production setup cost, ordering cost, shortage cost
acquisition cost
Purchase costs, variable production costs
inventory-holding(or-cost) costs
Costs of capital, physical storage costs
production setup costs
Costs of setting up production tools and equipment
ordering cost
Costs of someone placing an order
shortage cost
Lost profit, loss of goodwill
On-hand inventory:
Physical inventory held in stock
Inventory level =
On-hand inventory – Backorders Backorders are customer orders that have been received but not yet shipped because of stockouts
Inventory position =
= Inventory level + Scheduled receipts
= On-hand inventory – Backorders + Scheduled receiptsScheduled receipts are purchase or production orders that have been placed but not yet received
Stock keeping unit (SKU):
Individual inventory item that has an identifying code
Inventory control systems
Continuous review system•Also known as reorder point/order quantity system
Periodic review system•Also known as base stock system
Economic order quantity (EOQ) is the order
Economic order quantity (EOQ) is the order quantity (or lot size) that minimizes total annual inventory-holding and ordering costs under the EOQ model assumptions
EOQ is widely used for inventory control
For order quantity in the continuous review system
To select the review period (i.e., time between reviews) in the periodic review system
To determine lot sizes in MRP
EOQ Model Assumptions
Inventory is monitored continuously and orders can be placed at any time
Demand for the product is known and occurs at a constant rate
Lead time (time from order to receipt) is constant
No shortage is allowed
The objective is to minimize total annual cost
Form of Optimal Ordering Policy in EOQ Model Under the EOQ model assumptions,
The form of optimal ordering policy is to place an order of a fixed quantity whenever the inventory position drops to a fixed reorder point
The optimal reorder point is equal to the demand during lead time
Continuous Review System
Review the inventory status continuously
Place an order of a fixed quantity whenever the inventory position drops to a fixed reorder point
- This system can be used when demand and lead time are stationary over time
Continuous Review System: Decision Variables
Two decision variables
Reorder point (R): When to order
Order quantity (Q): How much to order
Assumptions
We have a target cycle-service level
Cycle-service level: Probability of not running out of stock in any one ordering cycle
We know the distribution of demand during lead time
Continuous Review System: Behavior of Inventory Position/Level
Continuous Review System: Behavior of Inventory Position/Level
Continuous Review System: Reorder Point
P(DDLT ≤ R) = SL
Reorder Point When DDLT is Normally Distributed
If DDLT is normally distributed, the reorder point can be obtained by
Periodic Review System
Review the inventory status and place orders periodically (e.g., weekly, monthly)
Order up to a fixed level T at each review time
- This system can be used when demand for the product is stationary over time
Periodic Review System: Decision Variable
Decision variable
Target inventory level (T)
Assumptions
We have a target cycle-service level
The leadtime is constantThe demand per unit time is normally distributed
Periodic Review System: Behavior of Inventory Position/Level
P = review period = time between reviews
Target inventory level, T, should cover demand during P+L periods
ABC analysis is the process of
f dividing SKUs into three classes according to their dollar usages, so that managers can focus on items that have the highest dollar usages.
ABC Analysis and Inventory Control
Classification of items
List up all the inventory items according to theirdollar usages
Classify roughly top 20% of the items into “A” class, the next 30% into “B” class, and the remaining 50% into “C” class
Use of different inventory control methods for different classes
