Lecture 5 & 6 - Inventory Management Flashcards
Define inventory
stock of any item or resource used in an organisation
(e.g. raw materials, components WIP, finished goods)
Define an inventory system
set of policies and controls that:
- monitors levels of inventory
- determines when stock needs to be replenished, the size of orders, and what level stock should be maintained at
Key characteristics in inventory modelling
- demand
- lead time
*replenishment
–> uniform or in batches
- review
–> continuous or periodical (know inventory all the time or at discrete points)
*excess demand
*changing inventory
- single vs multiple items being sold
two different types of lead time
- external order
- time between placement of an order until arrival of goods
*internal production
- amount of time required to produce a batch of items
two different types of demand in inventory management
*constant (deterministic)
- random (stochastic)
REVISION QUESTION: Different types of costs in inventory modelling
- handling
- storage
- transportation
- obselence
- insurance
- opportunity cost
- production
- fixed cost
- variable cost
- penalty costs
(cost associated with stockouts)
flashcard below
Two types of service level in inventory modelling
*Type 1 service
- probability of not stocking-out during the lead time of an order cycle
- represented by alpha
*Type 2 service (fill rate)
- proportion of demand that can be immediately met from stock
- represented by beta
Relationship between penalty costs and service level
*Service level is a target for inventory (desired probability of fulfilling customer demand without stock-outs)
- Failing to meet target service level incurs penalty costs (tangible and intangible consequences)
examples of penalty costs
- loss of sales
- loss of goodwill (value of brand)
- backordering costs if can’t fulfil orders
Define order cycle
time between two replenishments
Type 1 and Type 2 service example calculation
*Fraction of order cycles with no stock-out = 8/10 = 80%
Type 1 service = 80%
*Total demand - stock outs
= 1450 - 55 = 1395
1395/1450 = 96%
*Higher Type 1 service level is stronger service than a higher Type 2 though
–> depends on firm
Two basic questions in inventory policies
Provide 2 typical answers
Q1 : When should we order from supplier / produce our own supplies?
- when inventory drops to R (re-order point) aka ‘s’
- or every time T units (e.g. weekly)
Q2 : How much?
- order fixed amount (Q)
- order so that inventory position is at target level (S)
Two types of inventory review and what the another name for these models (in letters)
- Continuous review
(R, Q) and (s, S) - Periodic Review
(T, Q) and (T, S)
MAIN FOCUS: Explain the (R, Q) model
- continuous review
order Q units when inventory level reaches R
Order Q units arrive in stock after lead time
black line = stock on hand
green dotted line = inventory position
difference between inventory position and stock on hand
inventory position = stock on hand + ordered stock in transit - back orders
whereas, stock on hand = inventory at warehouse
Explain the s, S model
*continuous review
- when inventory position reaches s order an amount that brings inventory to target level, S
Explain the (T, Q) model
- periodic review
- beginning of review period T, order Q units
- Q units arrive in stock after lead time
Explain the (T, S) model
- periodic review
- beginning of review period, T, order an amount to bring inventory position to target level, S
symbol for lead time
𝜏
Define ABC analysis
classification method used in inventory management to categorise items based on their revenue contribution
- can distinguish between important and less important items
–> may implement more control and sophisticated models for the more important inventory
What is aka… and why
- Pareto analysis
because, the Pareto effect is the idea that a large portion of wealth in the 19th century was owned by a small segment of population
Describe ABC analysis
- Groups inventory items into three categories: A, B, and C
- A items
- high-value items that represent a small % of total items but contribute to a significant % of total revenue.
- e.g. 20% of items, 80% of revenue
- B items
- a larger portion of total items but contribute to less % of sales revenue
- e.g. 30% of items, 15% of revenue
- C items
- majority of total items but small % of sales revenue
- e.g. 50% of items, 5% of revenue
What are the two deterministic models for order quantity
- Economic Order Quantity (EOQ model)
- Production Order Quantity (POQ model)
Assumptions of the EOQ
- demand is high, constant and known
*zero lead time
*assume no shortages