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
