Inventory Management Flashcards
Inventory
An idle stock or store of goods
-independent demand items
(items that are ready to be sold or used. Demand is random but can be forecast. examples: retail inventories, finished goods, spare parts
Types of Inventory (based stage in supply chain)
- raw materials & purchased parts (components & subassemblies)
- work-in- process
- finished goods inventories or merchandise
- tools & supplies
- maintenance, repairs, & operating supplies
- goods-in-transit to warehouses or customers
- distribution inventories
Types of inventory (based on purpose)
- cycle inventories
- decoupling inventories
- safety inventories
- anticipatory inventories
- anticipator inventories
- hedging/speculative inventories
objectives of inventory control
- level of customer service (having the right goods available in the right quantity in the right place at the right time for the customer)
- inventory investment (total capital tied up in inventories)
- operational efficiency
Inventory Management
2 basic functions
- establish a system for tracking items in inventory
- make decisions about when & how much to order
Effective Inventory Management Requires
-A system keep track of inventory
-A reliable forecast of demand
-Knowledge of lead time and lead time variability
-Reasonable estimates of
holding costs ordering costs shortage costs
-A classification system for inventory items
Inventory Counting Systems: Periodic System
Physical count of items in inventory made at
fixed periodic intervals
Saves costs since transactions do not need to be posted immediately.
Since we do not know the status of inventory, more protection against shortages is needed (more safety stock!)
Inventory Counting Systems: Perpetual Inventory System
System that keeps track of receipts and removals of materials from inventory continuously, thus monitoring current levels of each item
Transaction intensive. Costs more than periodic system transactions have to recorded almost in real-time.
Since we have full information on the levels of inventory all the time, we can make better decisions (less safety stock!)
(Special systems – Two Bin Systems)
Forecasts
inventories are necessary to satisfy customer demands, important to have reliable estimates of the amount and timing of demand.
-point of sale (POS) systems (a system that electronically records actual sales, information enhances forecasting & inventory management)
Lead Time
time interval between ordering and receiving the order
Inventory Costs
Purchase cost
The amount paid to buy the inventory.
Holding (carrying) costs
Cost to carry an item in inventory for a length of time,
usually a year
Ordering costs/Setup costs
Costs of ordering and receiving inventory; this is independent of order size!
Shortage costs
Costs resulting when demand exceeds the supply of inventory; often unrealized profit per unit; goodwill loss
Fixed quantity models
Same amount is ordered each time and order is placed.
EOQ- Economic Order Quantity
model identifies the optimal order quantity by minimizing the sum of annual costs that vary with order size or frequency. This is one of the most widely used methods.
EOQ Model Assumptions
- Only one product is involved
- Annual demand requirements are known
- Demand is even throughout the year
- Lead time does not vary
- Each order is received in a single delivery
- There are no quantity discounts (i.e., item price is constant)
Total Annual Cost
Total Cost= Annual Holding cost (Q/2 * H) + Annual ordering cost (D/Q *S)
Q= order quanity in units
H= holding (carrying) costs per unit, usally per year
D= demand, usually in units per year
S= Ordering cost per order
When to reorder
Reorder point
When the quantity on hand of an item drops to this amount, the item is reordered.
- The rate of demand
- The lead time
- The extent of demand and/or lead time variability
- The degree of stockout risk acceptable to management
Reorder Point: Under Certainty
ROP=dxLT
D= demand rate (units per period, per day, per week) LT= Lead time (in same time units as d)
Reorder Point: Under UNcertainty
Demand or lead time uncertainty creates the possibility that demand will be greater than available supply
To reduce the likelihood of a stockout, it becomes necessary to carry safety stock
– Safetystock
• Stock that is held in excess of expected demand due to variable demand and/or lead time
ROP= Expected demand during lead time + safety Stock
Safety Stock
as the amount of safety stock carried increases, the risk of stockout decreases (this improves customer service level)
- service level (the probability that demand will not exceed supply during lead lime
- service level= 100%- stockout risk
Stockout risk= 100-service level
How much safety stock
The amount of safety stock that is appropriate for a given situation depends upon:
- Theaveragedemandrateandaverageleadtime 2. Demandandleadtimevariability
- Thedesiredservicelevel
ROP= Expected demand during lead time + ZQ (dLT)
where
z= number of standard deviations
Q(dLT)= the standard deviation of lead time demand
Fixed ORDER Interval Model
-Orders are placed at fixed time intervals
Reasons to use FOI model
-suppliers policy may encourage its use
-grouping orders from the same supplier can produce savings in shipping costs
-some circumstances do not lend themselves to continuously monitoring inventory position.
FOI Model
Amount to order= (expected demand during protection interval) + (safety Stock)-(amount on hand at reorder time)
Single Period Model Useful
When is single period model useful?
• Perishable items
• Ordering of fashion items
• Overbooking of services – airlines, hotels…. • Spare parts planning
• Any type of one-time order – souvenirs..
Single-Period Model
Single-period model
(model for ordering of perishables and other items with limited useful lives)
The goal of the single-period model is to identify the order quantity that will minimize the long-run excess and shortage costs
Two Categories of a problem:
- demand can be characterized by a continuous distribution
- demand can be characterized by a discrete distribution
Quantity Discount Model
Quantity discount
– Price reduction for larger orders offered to customers to induce them to buy in large quantities
Cycle Counting
Cycle counting
– A physical count of items in inventory
