Inventory Management Flashcards
At what level is the SCM decision making?
SCM decision making at company Level
What term is it?
Operational SCM decision making: (Short-term)
What is inventory?
–stored accumulation of transformed (or to be transformed) recourses such as raw material, work-in-progress and finished goods or information
Why do we hold inventory?
–Economies of scale
–Uncertainty in supply and demand
–Lead Time
Where do we hold inventory?
–suppliers and manufacturers
–warehouses and distribution centres
–retailers
What are the goals of inventory?
- Reduce Cost,
- Improve Service
1) What are the two alternative inventory plans?
AND:
2) what does Inventory policy involve?
3) what is Inventory cost made up of?
1) pic
2)
–How much to order
–When to order
3)
–Holding cost
–Order cost
What is the principle/theory that explaons the trade-off between order costs and holding costs?
Economic Order Quantity
Explain what the costs (both order and holding) consits of
- Economic Order Quantity explains the trade-offs between
- Order costs
- Fixed => for the simple inventory modelling (only the fixed cost is considered, e.g.) the commission (fixed part) for manu reps, admin, transport
- Variable
- Holding costs
- Insurance
- Maintenance and Handling
- Taxes
- Opportunity Costs
- Obsolescence (forældelse)
- Order costs
What are the assumptions of the Economic Order Quantity
And what are the goals?
- Assumptions
- Single supplier, warehouse and item
- Demand is constant per day (D)
- Order quantities are fixed per day (Q items)
- Fixed cost is incurred with every order (K) => order cost
- Inventory holding cost, incurs per item and per day (h)
- Lead time (receipt - order placement) is zero
- Goal: optimal order policy (How many?)
- Meeting all demand
- Minimizes inventory cost (order and holding cost)
What are three additional assumptions about inventory in EOQ?
What is the average Q?
- No Stockouts
- Order when no inventory
- Order Size determines policy
What is the name of the equation to calculate total cost of inventory?
Total Inventory Cost in a Cycle Time
What is the equation to calculate total Inventory Cost in a Cycle Time?
K = Fixed Cost
h=Holding Cost per Day
T = time
Q/2=average inventory level
What is the equation for Total Cost per Unit of Time (per day)
What are these lines?
What is then the optimal quantity (EOS)?
And what is the important observation?
1) pic
2)
•EOQ: Important Observations
–Tradeoff between order costs and holding costs when determining order quantity. In fact, we order so that these costs are equal per unit time
What are the assumptions of the Continuous Review Inventory Policy 1
– Normally distributed random demand
– Inventory cost is charged per item per unit time
– There is a lead-time (Fixed)
– If an order arrives and there is no inventory, the order is lost
– The distributor has a required service level. This is expressed as the likelihood that the distributor will not stock out during lead time.
– Intuitively, how will this effect our policy?
– Intuitively, how will these assumption effect our policy? (Continuous Review Inventory Policy 1 )
(s, S) Policy: Whenever the inventory position drops below a certain level, s, we order to raise the inventory position to level S.
The reorder point is a function of:
– Lead Time
– Average demand
– Demand variability
– Service level
What are the two components of the reorderpoint (Continuous Review Inventory Policy 1 )
What is the order-up-to-level of Continuous Review Inventory Policy 1?
Write the formulas for Continuous Review Inventory Policy 1 and draw the relationship between inventory level og time
What is the limitation of Continuous Review Inventory Policy 1?
In real life, however, LT can vary (random, normally distributed)
So, what is the assumptions of Continuous Review Inventory Policy 2?
Assumptions
– Normally distributed random demand
– Inventory cost is charged per item per unit time
– Normally distributed random LT
– If an order arrives and there is no inventory, the order is lost
– The distributor has a required service level. This is expressed as the likelihood that the distributor will not stock out during lead time.
What is the formulae for the re-order point?
and the order-up-to level?
What is the News vendor problem?
When customers can’t wait: When an order quantity is purchased for a specifc event or time period, after which the items are unlikely to be sold.
How do you find the quantity you look for in the Newvendors Dilemma?
–Find order quantity that maximizes weighted average profit.
- *FIRST,** Calculate profit of a given quantity (e.g. 10,000) at x (e.g. 6) different demand scenarios (eg.
1) 8,000, 2) 10,000, 3) 12,000, 4) 14,000, 5) 16,000, and 6) 18,000)
Profit = Revenue - Variable Cost (C) - Fixed Cost (F) + Salvage (V)
Each demand scenario has individual probability attached. Weight them accordingly and sum the weighted profits to calculate expected profit for the production quantity (e.g 10,000)
SECOND, calculate expected profits for the different production quantity, let’s say (8,000 to 20,000), PLOT IT (not shown here - but at 270,000 when 8,000, peaks at 12,000 and falls down to 90,000 at 20,000)
–>
Optimal production quantity 12,000
Maximum expected profit $370,700
When will quantity be less than, equal to, or greater than average demand? (in newsvendors dilemma)
Look at marginal cost Vs. marginal profit
- if extra swimmingsuit sold, profit is 125-80 = 45
- if not sold, cost is 80-20 = 60
SO WHEN, Marginal cost > Marginal Profit –> we will make less than average
Is the optimal order quantity equal to average forecast demand (newsvendor dilemma)
•The optimal order quantity is not necessarily equal to average forecast demand
–What does The optimal quantity depends on? (newsvendor dilemma)
–The optimal quantity depends on the relationship between marginal profit and marginal cost
What happens to average profit when order quantity increases? (newsvendor dilemma)
–average profit first increases and then decreases
–Question: 9000 and 16000 units
lead to about the same average profit, so which do we prefer?
(newsvendor dilemma)
–As production quantity increases, risk increases. In other words, the probability of large gains and of large losses increases
