Inventory Management

Question 1

What is inventory

Answer 1

An accumulation of a commodity that will be used to satisfy future demand

Question 2

What are the types of inventory by time

Answer 2

Raw materials (yet to add value), work-in-progress and finished goods (FGI)

Question 3

What are the types of inventory by function

Answer 3

Cycle stock, safety stock, pipeline stock and anticipation stock

Question 4

What is cycle stock

Answer 4

Active component that depletes over time and is replenished cyclically

Question 5

What is safety stock

Answer 5

Surplus held to protect against fluctuations of demand, production and supply

Question 6

What is pipeline stock

Answer 6

Stock created by the time spent to move and produce inventory

Question 7

What is anticipation stock

Answer 7

Stock held to smooth output rates by stockpiling during the slack season or overbuy before a price increase

Question 8

What are the arguments for inventory

Answer 8

Minimum inventory needed to run, bugger against uncertainty, exploitation of price fluctuations, smoothing of production

Question 9

What are the arguments against inventory

Answer 9

Depreciation of goods, quality defects due to handling, labour, warehouse rent and energy costs, insurance

Question 10

What is Little’s Law

Answer 10

Inventory in a system = production rate x time spent in a system

Question 11

What is Days of Inventory (DOI)

Answer 11

DOI is the number of days an organisation can satisfy demand using its inventory

DOI = inventory / average demand

Question 12

What is stock turns

Answer 12

Stock turns is the number of times an organisation replaces its stocks during a period

Stock turns = cost of goods sold in period / average inventory valuation

Question 13

What is the ABC analysis

Answer 13

Attention given to part depends on cost impact

A: 20% of parts = 80% of usage value
minimise stock, watch closely

B: 30% of parts = 15% of usage value
review from time to time

C: 50% of parts = 5% of usage value
automate replenishment

usage value = value x volume

Question 14

What is Fixed Order Quantity

Answer 14

The order quantity remains constant but the time between orders varies, provides quick response to stockouts

Question 15

What is Economic Order Quantity (EOQ)

Answer 15

Minimises the total cost per period

The number of units that a company should add to inventory with each order to minimise the total costs of inventory

Question 16

What is the Total Cost Formula

Answer 16

T(Q) = (Q/2) Ch + (D/Q) C0 * Purchasing Cost

T: total cost per period
Q: batch size
D: demand per period
C0: cost of placing one order
Ch: cost of holding one item per period

Question 17

How to find Economic Order Quantity (EOQ)

Answer 17

When d/dQ (T) = 0

EOQ = root(2 x D x (C0 / Ch))

at this point, holding cost = ordering cost

Question 18

What is the ReOrder Point (ROP)

Answer 18

Level of inventory which triggers an action to replenish that particular inventory stock

Question 19

What is the ReOrder Point equation

Answer 19

R = D/L * lead time + SS

R: reorder point
d: average demand per period
L: number of periods between placing order and delivery
SS: safety stock

Question 20

What is Economic Production Quantity (EPQ)

Answer 20

Optimum batch size when we are producing the batch ourselves, the batch does not arrive instantaneously

Question 21

What is the Economic Production Quantity (EPQ) equation

Answer 21

EPQ = root((2 D Cs) / (Ch (1 - D / P)))

Question 22

What is fixed time period ordering

Answer 22

Where the time period between orders remains constant but the order quantity vaires

Question 23

What is Lot-for-Lot Ordering

Answer 23

Simply passes on customer orders to the supplier as they come in, only order what is demanded by the customer

Question 24

Benefits and features of EOQ / EPQ

Answer 24

They are robust, insensitive to errors, tends to inflate batch sizes, can be adapted for different situations

Question 25

Assumptions with EOQ and EPQ

Answer 25

Demand is constant and steady, replenishment time is known, holding cost is constant, cost of ordering/setup is constant, item is independent of others

Question 26

What is Least Unit Cost (LUC)

Answer 26

Consider seeking to cover demand for next 1,2,3… periods, find cost for each case, stop before this starts to rise

Variable order quantity and variable ordering interval

Question 27

What is the maximum inventory level for EOQ and EPQ

Answer 27

For EOQ, max = Q

For EPQ, max = Q (1-D/P)

Question 28

What is a production lot

Answer 28

Same thing as a batch