Inventory management

Question 1

Explain what are the different models of inventory management (except the probability model)

Answer 1

1) EOQ (Economic order quantity model)
- Trade-off between fixed costs and variable costs
- Easy to implement with computers
- aims to find most economic lot size to order in order to minimize the total cost of inventory management
- Used for products with stable demand
- Whenever the inventory drops to a certain amount, it triggers a reorder by itself
- In EOQ there are assumptions:
* The demand is constant
* The lead time is constant
* Inventory is replenished instantly when order arrives
* No shortage of stock <
- Studies show that EOQ leads constantly to overestimate the stock

2) Fixed-time period
- Quantity might vary from one period to another
- Stockouts may happen
- over stock may happen
- demand is not constant

3) Safety stock
- managers balance the supply chain cost and service quality with a security stock
- we use them against variation and starvation
- We order an amount Q as soon as the level of stock falls below the reorder point

4) Newsvendor
- when only one order decision can be made
- deciding before the demand arrives
- Use historical data and learning on demand patterns over time

Question 2

What are the principles of different inventory models? In which situations are they used?

Answer 2

1) EOQ
- EOQ is easy to implement
- Usually used when demand is constant

2) Fixed period
- used when orders are placed at regular, fixed intervals
- suitable for environments with variable demand

3) Safety stock model
- when demand and lead time variability is present
- to use a buffer against uncertainty and prevent stockouts
- unpredictable supplier delivery times

4) Newsvendor model
- to use in situations involving single-period inventory decisions with uncertain demand

Question 3

What is pipeline inventory, how is it calculated? Why does pipeline hold a risk?

Answer 3

Pipeline inventory is:
- the stock that is in transit between suppliers and buyers or between different stages of the supply chain.
- they represent items that have been ordered but not yet received
- Pipeline is crucial to ensure a steady supply of products moving through the supply chains which prevents uncertainty or interruptions.
- By having inventory in transit, businesses can avoid running out of stock

How is pipeline calculated:

Pipelinde Inventory: Lead time x average demand

Risk in pipeline:
1) Lead time variability: delays in transportation or production may increase lead times

2) Demand fluctuations: changes in demand during the lead time can cause excess inventory or shortage

3) Damage or lost: Items in transit may be damaged or lost leading to shortage

Question 4

What is the bullwhip effect and how do you mitigate it?

Answer 4

Definition: When small fluctuations in demand at the consumer level cause larger fluctuations in demand at the manufacturer. This effect can lead to inefficiencies such as:

• excess inventory
• stockouts
• increased cost through the supply chain

Causes of the bullwhip effect:
1) Price fluctuations: temporary discounts or promotions can lead to surges followed by a drop after promotion ends

2) Lead time:
Longer lead time increases the difficulty of accurately forecasting

3) Order batching: when compagnies places large orders it creates variability and increases uncertainty for suppliers

How to mitigate the bullwhip effect:
1) Improve communication
- sharing accurate info along the supply chain

2) Inventory management:
- Using better inventory control practices and technologies

3) Demand smoothing:
- using strategies like smaller and more fequent orders to reduce variability

4) LT reduction:
- streamlining processes to shorten LT

Question 5

What elements compose inventory carrying costs?

Answer 5

Inventories are held and managed there are costs like:
- Cost of capital tied up
- Storage and handling cost
- Insurance
- Property taxes
- Depreciation and obsolescence

Question 6

What are the different types of stock?

Answer 6

1) Cycle stock: between tasks

2) Security stock: to secure operation

3) Pipeline stock: stuff in the chain

4) Seasonal stock: preparing for season/event

5) Speculative stock: to reduce risk

6) Investment: value increase