Inventory Management Flashcards
What is inventory
An accumulation of a commodity that will be used to satisfy future demand
What are the types of inventory by time
Raw materials (yet to add value), work-in-progress and finished goods (FGI)
What are the types of inventory by function
Cycle stock, safety stock, pipeline stock and anticipation stock
What is cycle stock
Active component that depletes over time and is replenished cyclically
What is safety stock
Surplus held to protect against fluctuations of demand, production and supply
What is pipeline stock
Stock created by the time spent to move and produce inventory
What is anticipation stock
Stock held to smooth output rates by stockpiling during the slack season or overbuy before a price increase
What are the arguments for inventory
Minimum inventory needed to run, bugger against uncertainty, exploitation of price fluctuations, smoothing of production
What are the arguments against inventory
Depreciation of goods, quality defects due to handling, labour, warehouse rent and energy costs, insurance
What is Little’s Law
Inventory in a system = production rate x time spent in a system
What is Days of Inventory (DOI)
DOI is the number of days an organisation can satisfy demand using its inventory
DOI = inventory / average demand
What is stock turns
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
What is the ABC analysis
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
What is Fixed Order Quantity
The order quantity remains constant but the time between orders varies, provides quick response to stockouts
What is Economic Order Quantity (EOQ)
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
What is the Total Cost Formula
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
How to find Economic Order Quantity (EOQ)
When d/dQ (T) = 0
EOQ = root(2 x D x (C0 / Ch))
at this point, holding cost = ordering cost
What is the ReOrder Point (ROP)
Level of inventory which triggers an action to replenish that particular inventory stock
What is the ReOrder Point equation
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
What is Economic Production Quantity (EPQ)
Optimum batch size when we are producing the batch ourselves, the batch does not arrive instantaneously
What is the Economic Production Quantity (EPQ) equation
EPQ = root((2 D Cs) / (Ch (1 - D / P)))
What is fixed time period ordering
Where the time period between orders remains constant but the order quantity vaires
What is Lot-for-Lot Ordering
Simply passes on customer orders to the supplier as they come in, only order what is demanded by the customer
Benefits and features of EOQ / EPQ
They are robust, insensitive to errors, tends to inflate batch sizes, can be adapted for different situations
Assumptions with EOQ and EPQ
Demand is constant and steady, replenishment time is known, holding cost is constant, cost of ordering/setup is constant, item is independent of others
What is Least Unit Cost (LUC)
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
What is the maximum inventory level for EOQ and EPQ
For EOQ, max = Q
For EPQ, max = Q (1-D/P)
What is a production lot
Same thing as a batch
