Inventory Management in Operations Flashcards
What is inventory management?
The activity of planning and controlling ACCUMULATIONS OF TRANSFORMED RESOURCES as they move through supply networks, operations and processes
Inventory is created to compensate for the differences in timing between supply and demand
What are three examples of inventories in a process or operation?
In a hotel:
Physical inventories:
- Food items
- Drinks
- Toilet items
Queues of customers:
- At check in and check out
Information in databases:
- Customer details
- Loyalty card holders
- Catering suppliers
Why is inventory needed?
ECONOMIES OF SCALE = it probably costs less to order or produce in larger quantities than in small batches
UNCERTAINTIES = demand uncertainty, lead time uncertainty, and supply uncertainty all provide reasons for holding inventory
SPECULATION = inventories may be held in anticipation of a rise in their value or cost
SMOOTHING = inventories provide a means of smoothing out an irregular demand pattern
LOGISTICS = system constraints that may require holding inventories
How much inventory is needed?
The aim is to hold just the right amount of stock, balance too much against too little to achieve MINIMUM COST overall
Too much stock:
- Cost of storing stock (risk of obsolescence/ deterioration, higher holding cost)
- Capital cost (loss of interest of capital tied up)
- Reduced working capital available for alternative investment
Too little stock:
- Disappointed customers and lost sales
- Higher costs (making emergency orders and reordering more frequently)
What is the formula for return on assets?
Return on Assets = Profit/ Total Assets = (Revenues - Costs) / (Working capital + Fixed Assets)
What costs come from inventory?
Holding/ Carrying cost:
- the sum of all costs that are proportional to the amount of inventory physically on and at any point in time
- includes costs of providing the physical space to store the items, taxes and insurance, breakage, obsolescence and deterioration etc.
Ordering or Setup/ Production Change-over Cost:
- Includes a fixed and a variable component
- The fixed cost is incurred of the size of the order as long as it is not zero
- The variable cost is incurred on a per-unit basis
Penalty Cost:
- Not having sufficient stock on hand to satisfy a demand when it occurs (lost sales, loss of goodwill)
- Usually charged on a per unit basis
What is the total cost of inventory formula?
Total cost = holding cost + order cost
What is the Basic EOQ model?
ECONOMIC ORDER QUANTITY
- The simplest and most fundamental of all inventory models
- Decides the important trade-off between FIXED ORDER COSTS and HOLDING COSTS
- Is the basic for the analysis of more complex systems
What is the EOQ Model formula?
EOQ = (2Kλ/h)½
What are the assumptions of EOQ Model?
- Demand rate is known and is a constant λ units per unit time
- Shortages are not permitted
- No order lead time
- Costs include
- Setup cost at K per positive order placed
- Proportional order cost at c per unit ordered
- Holding cost at h per unit held per unit time
What are the limitations of EOQ theory?
- Very unlikely to find constant and KNOW DEMAND and LEAD TIME (variability and unpredictability usually occur)
- Costs are difficult to measure or estimate accurately (e.g. penalty costs - intangible components: loss of goodwill, delays etc.)
- Interactions between products in practice complicate the situation
- Unpredictable elements mean that stockouts may occur in practice
Overall, the EOQ theory has several limitations, but it provides useful guidance on batch size.
What is the two bin system of reordering?
Bin 1 = Items being used
Bin 2 = Reorder level + safety inventory
What is the three bin system of reordering?
Bin 1 = Items being used
Bin 2 = Reorder level inventory
Bin 3 = Safety inventory
