Lecture 3: Inventory Management Flashcards
What is inventory?
Stocks used to support production (raw materials and WIP)
, support activities (maintenance, repair)
and customer service (finished goods/spare parts)
Name the different types of inventory by function
Cycle stock: active component that is replenished cyclically
Safety stock: held to protect against fluctuations
Pipeline stock: Little’s Law and protect against lead times
Anticipation stock: Stock held to smooth output rates, overbuying before a price increase
What are the arguments for inventory?
- Little’s Law implies:
- there is a minimum inventory needed to run the factory
- Buffer against uncertainty
- Market demand
- Production throughput (breakdowns)
- Supply
- Exploitation of price fluctuations
- Smoothing or levelling production
- Enables achievement of economies of scale
Arguments against inventory
Cost involved:
- Cost of capital
- Opportunity cost
- Depreciation
- Obsolescence and deterioration
- Handling: defects and labour costs
- Warehousing: rent and energy
- Insurance and overheads
ESTIMATES ARE ALWAYS TOO CONSERVATIVE
What are the hidden costs of inventory?
- Long lead times
- Reduced responsiveness
- Problems are hidden
- Quality problems are not identified immediately
- No incentive for improvement
What is Little’s law
What is days of inventory?
Days of inventory is the number of days an organisation can satisfy demand using its inventory
What is stock turns?
Stock Turns is the number of times an organisation replaces its stocks during a period
What are the different approaches to ordering?
- Fixed Order Quantity Models
- EOQ
- ROP (re-order point)
- Fixed Time Period Models
- Fixed period ordering
- Order up to
- Variable order quantity and ordering interval
- Least unit cost
- Materials requirements planning (MRP)
- time phased requirements
Explain the fixed order quantity orderering model and explain when it should be used
- Order quantity remains constant but time between orders varies
- Preferred for important or expensive items because average inventory is lower
- Provides a quicker response to stockouts
- Expensive to maintain due to inventory record-keeping costs
What contributes to ordering costs?
- Labour processing costs
- Supplier fixed costs
- Inspection costs
- Transport costs
- Handling costs
What are the costs of setup?
Labour costs of setting up
Loss of production while set up takes place
Return of poor quality products after start up
Explain the fixed time period ordering system
- A system where the time period between orders remains constant but the order quantity varies
- Has larger average inventory to prevent stockouts
- Useful when purchasing multiple items from one vendor to save on costs
What is “Lot for Lot” ordering?
- Also called pass on orders/order up to model
- Simply passes on customer orders to the supplier as they come in
- Only order from the supplier what is demanded by the customer
- No fixed order quantity, but fixed time intervals
- Optimal solution for inventory: but ordering cost an issue
What are the problems with EOQ and EPQ?
Rigid assumptions!
- Demand is constant and steady
- EOQ assumes replenishment lot arrives at same time
- Replenishment lead time is known
- Order size not constrained by supplier
- Holding cost is constant
- Cost of ordering is constant
- Item is independent of others
- Doesn’t encourage us to decrease fixed ordering costs
