Inventory Management Flashcards
What is the primary goal of inventory management?
To balance the expense of maintaining inventory with the goal of fulfilling customer needs.
Name three types of costs associated with inventory trade-offs.
Order costs, holding costs, and out-of-stock costs.
What is ABC analysis in inventory management?
A method that categorizes inventory items based on their importance and value to the business.
What is the Economic Order Quantity (EOQ) model used for?
Determining the optimal order quantity to minimize total ordering cost (gross cost associated with one order) and holding costs (keep things in your warehouse )
What factors determine the reorder point in the EOQ model?
Lead time and demand per unit of time.
What is the purpose of safety stock?
To buffer against demand and supply uncertainties, reducing the risk of stockouts.
How does the Economic Production Quantity (EPQ) differ from EOQ?
EPQ focuses on optimal production lot size for in-house production, while EOQ is for ordering from suppliers.
What does the Newsvendor Model address?
Optimal inventory levels for seasonal or perishable products under demand uncertainty.
Define salvage value in inventory management.
The value recovered from unsold inventory at the end of a sales period.
What is the formula for critical ratio (CR) in the Newsvendor Model?
CR = Underage Cost / (Underage Cost + Overage Cost).
What is the (r, Q) approach in inventory management?
An approach where reorders are triggered at a specific reorder point and a fixed quantity Q is ordered.
Why is safety stock critical in inventory management?
It helps ensure customer demand is met despite demand or supply fluctuations.
Explain the concept of decoupling in inventory.
Building inventory to ensure that stages of production do not depend entirely on previous stages.
What is the impact of quantity discounts on order quantities?
They encourage larger order quantities to take advantage of cost savings.
What does the Pareto Principle imply in inventory management?
80% of the value comes from 20% of the inventory items.
What is lead time in inventory management?
The time from order placement to the receipt of goods in inventory.
What is service level in inventory management?
The ability to meet customer demand, expressed as a percentage (e.g., 95% service level).
What are holding costs in inventory management?
Costs associated with storing and maintaining inventory, including warehousing and depreciation.
Why do we need inventory?
- Fundamental trade-off
- Expensive inventory
- Fulfillment of customer needs at any moment in time in an environment of uncertainty
Inventory classification by Location
- Raw materials : goods received from supplier
- Work in progress : at some point within the operations process
- Finished goods : goods ready for dispatch to the customer
What is the primary purpose of buffer and safety inventory?
To cope with randomness in demand and supply
What does cycle inventory help with?
Keeping supply while other products are produced in a system with multiple products from one operation
How does decoupling inventory function?
It matches the rate of processing at different points in the production process
What is the purpose of quantity game inventory?
To enable bulk and other discounts
Why is pipeline/movement inventory necessary?
To compensate for transportation and distribution times
The optimal reorder point (ROP) with a lead time of LT = 0 is:
ROP = 0, what does it mean ?
If the lead time is zero, it means that an order can be fulfilled immediately, so there’s no need to maintain any inventory level before the next order arrives.
