Lecture 6 - Inventory Management Flashcards
What are the 6 objectives of “Inventory management”?
- Improve customer service: delivery reliability
- Shorten delivery time
- Reduce inventory investment
- Increase capacity utilization
- Reduce purchasing money
- Increase flexibility
What is “Inventory Management”?
The planning and controlling of inventories to meet the competitive priorities of the organization.
There are 4 types of inventories, which ones and what to they mean?
1) Anticipating stock - depends on the type of product and strategy. Produce what is possible but to a certain limit. Have a certain anticipation of the future - create stock in advance to be ready.
2) Cycle stock - is the most important type of inventory - is the inventory we have because we are working in a kind of batches, not a single item, but batches. Depends on the set-up cost of the production or administration costs.
3) Safety stock - have this due to our forecasts, they can never be accurate, therefore we safe up with stock
4) Pipeline stock -depends on our transportation and distribution stock, on the way but we haven’t received it yet.
What is the formula for the “Average Cycle inventory”?
ACI = Q / 2
Q = Lot Size, divide lot size to get the average. Is based upon the start of the period and the end of it.
How do you calculate the average demand during “Lead time”?
D = d * L d = Average demand per period L = Number of periods in the item's LEAD time
What is an ABC-analysis?
This shows us which product that we have to put a lot of effort in in terms of Inventory Management.
In Inventory Management Policy, there are 2 questions that we want to answer, which ones?
1) How much do we need to order?
2) When do we need to order?
What is meant by “Economic Order Quantitiy” and what are the 5 assumptions of it?
it is the lot size, Q, that minimizes total annual inventory holding and ordering costs.
- Demand rate is constant and known with certainty.
- No constraints are placed on the size of each lot.
- The only two relevant costs are the inventory holding cost and the fixed cost per lot for ordering or setup.
- Decisions for one item can be made independently of decisions for other items.
- The lead time is constant and known with certainty.
How do we calculate the EOQ?
EOQ = [ (2DS) / (H) ]^(1/2)
where:
D = Annual Demand
S = Ordering or Set Up costs per Lot
H = Holding Cost per Unit per Year
We take the derivative of the formula for the “Total annual cycle-inventory cost”.
How do we calculate the “Total annual cycle-inventory cost”?
C = ( Q/2 ) * H + ( D/Q ) * S
C = Total Annual cycle-inventory cost Q = Lot size (in units) D = Annual Demand S = Ordering or Set Up costs per Lot H = Holding Cost per Unit per Year
How do we calculate the “Annual Holding Cost”?
Average cycle inventory * unit holding cost
The unit cost is the same for everyone we order
How do we calculate the “Annual Ordering Cost”?
(number of orders/year) * (Ordering or Set up costs)
Larger Q –> lower costs/unit
How do we calculate the “Total Cost”?
Annual Holding Cost + Annual Ordering Cost
How much we should order
How do we calculate “Time Between Orders (TBO) “?
TBO = EOQ / D * ( amount of Months or weeks / year)
What kind of costs should be included in the “Holdings Costs”?
- Costs of capital - opportunity cost of storageing something
- Storage & handling costs
- Insurance costs
- Taxes
- Shrinkage costs - lots of inventory - some parts may deteroriate - inventory that deteroriates after a while - products becomes less good with time.
What happens to the EOQ if D increases?
EOQ will increase since there is an increase in lot size.
What happens to the EOQ if S decreases?
EOQ will decrease since weeks of supply decreases and inventory turnover increases instead, because lot size decreases.
What happens to the EOQ if H decreases?
EOQ will increase since larger lots are justified when holding costs decrease.
What is meant by deterministic demand?
Demand can be forecasted with preciscion
What is meant by stochastic demand?
Demand is random rather than constant
What is meant by “Continuous Review Systems” and how do we use it?
CRS are used for selecting a reorder point with the complement of a safety stock due to variation in Lead time. We need some safety.
Reorder point with safety = d*L + safety stock
How do we go about to decide the size of the safety stock?
1) Service Level - Find out what probability of not running out of stock in any on order cycle
2) We have to specify the mean and standard deviation during Lead Time
3) Safety stock = z * sigma
- Z = Number of standard deviations needed to achieve the cycle-service level (critical value of CI-level)
- sigma = standard deviation of demand during lead time
What are the 2 definitions of Service Level?
1) The probability of no stockout during an order cycle: Number of order cycles with stockout / total number of ordercycles
2) Percentage of demand deliverable from stock:
number of units delivered / total demand in units
How do we calculate the Target Service Level?
Service Level Target = Cost of shortage / (Cost of shortage + Cost of excess)
- Cost of shortage = value of the item IF demanded-item cost
- Cost of excess = item cost + disposal cost - salvage value
(1-p) * Cost of shortage = p * Cost of excess
What is meant by a periodic Review System?
it is a fixed interval reorder system or periodic reorder system
What are some Inventory reduction tactics?
1) Cycle inventory:
– Reduce the lot size
• Reduce ordering and setup costs and allow Q to be reduced
• Increase repeatability to eliminate the need for changeovers
2) Safety stock inventory
– Place orders closer to the time when they must be received
• Improve demand forecasts
• Cut lead times
• Reduce supply uncertainties
• Rely more on equipment and labor buffers
3) Anticipation inventory
– Match demand rate with production rates
• Add new products with different demand cycles
• Provide off-season promotional campaigns
• Offer seasonal pricing plans
4) Pipeline inventory
– Reduce lead times
• Find more responsive suppliers and select new carriers
• Change Q in those cases where the lead time depends on the lot size
