Logistics L3 Flashcards
Inventory
A stock or store of goods
Inventory Models
Independent demand
● Finished goods, items that are ready to be sold
● Uncertain
○ Example: a computer
Dependent demand
● Components of finished products
● Certain
○ Example: parts that make up the computer
5 types of Inventories
- Raw materials purchased parts
- Partially completed goods called: work in progress
- Finished-goods inventories (manufacturing firms, merchandise, retail stores)
- Replacement parts, tools & supplies
- Goods-in-transit to warehouses or customers
8 functions of inventory
- To meet anticipated demand
- To smooth production requirement
- To decouple operations
- To protect against stock-outs
- To take advantage of order cycles
- To help hedge against price increases
- To permit operations
- To take advantage of quantity discount
Objective of Inventory Control
To achieve satisfactory levels of customer service, while keeping inventory costs within reasonable bounds
• Level of customer service
• Costs of ordering and carrying inventory
Inventory turnover
is the ratio of “average cost of goods sold” to
average inventory investment.
Cost of goods sold
direct costs attributable to the production of good sold by a company
Includes:
◆ Cost of materials used in creating the good
◆ Direct labor costs used to produce the good
cogs Calculation
- Beginning inventory costs (begin of the year)
- additional inventory costs (inventory purchased during the year)
- ending inventory (end of the year)
- COGS
Calculate Cost of Goods Sold (COGS)
Revenues - COGS = Gross Profit
Gross Profit Margin = Gross Profit : Revenues
effective inventory management
● System to keep track of inventory ● A reliable forecast of demand ● Knowledge of lead times ● Reasonable estimates of Holding costs, Ordering costs, Shortage costs ● A classification system
4 inventory counting systems
Periodic system ➔ Physical count of items made at periodic intervals
Perpetual inventory system ➔ System that keeps track of removals from inventory continuously, thus monitoring current levels of each item
Two-bin system ➔ Two containers of inventory; reorder when the first is empty
Universal bar code ➔ Bar code printed on a label that has information about the item to which it is attached
periodic system
physical count
perpetual inventory system
keep tract of removals => monitor current level
two-bin system
2 containers, reorder when 1st empty
universal bar code
printed bar code on an item has information on it
key inventory terms
Lead time ➔ Time interval between ordering and receiving the order
Holding (carrying) costs ➔ Costs to carry an item in inventory for a length of time, usually a year
Ordering costs ➔ Costs of ordering and receiving inventory
Shortage costs ➔ Costs when demand exceeds supply
lead time
time interval between ordering and receiving
holding cost
cost to carry an item in inventory
ordering cost
cost of ordering and receiving
shortage cost
cost when demand exceeds supply
ABC classification system
Classifying inventory according to some measure of importance and allocating control efforts accordingly ◆ A - very important
◆ B - moderate important
◆ C - least important
Three Economic Order Quantity (EOQ) Models
- Economic Order Quantity (EOQ) model
- Economic Production Quantity (EPQ) model
- Quantity discount model
Economic order quantity (EOQ) model
● minimizes total annual cost
● minimize inventory costs and the cash tied up in inventory
Assumption of EOQ model
- Only one product is involved
- Annual demand requirements known
- Demand is even throughout the year
- Lead time does not vary
- Each order is received in a single delivery (completely) and immediately after ordering
- no quantity discounts
Economic Production Quantity
EPQ) model (an extension of EOQ model
- Production done in batches or lots
- Capacity to produce a part exceeds the part’s
usage or demand rate - Assumptions of EPQ are similar to EOQ except
that in EPQ the orders are received incrementally
during production
Assumptions Economic Production Quantity
(EPQ) model
- Only one item is involved
- Annual demand is known
- Usage rate is constant
- Usage occurs continually
- Production rate is constant
- Lead time does not vary
- No quantity discounts
When to Reorder
Re-order Point - When the quantity on hand of an
item drops to this amount, the item is reordered
Safety Stock - Stock that is held in excess of expected
demand due to variable demand rate and/or lead
time.
Service Level - Probability that demand will not
exceed supply during lead time.
Determinants of the Reorder Point
The rate of demand
The lead time
Demand and/or lead time variability
Stock-out risk (safety stock)
Fixed-Order-Interval Model
Definition : Stock levels are reviewed regularly at fixed intervals (not continuously) and when it falls below a certain level, an order to replenish it to required level is placed
Orders are placed at fixed time intervals
Order quantity for next interval?
Suppliers might encourage fixed intervals
May require only periodic checks of inventory levels
Risk of stockout
Fill rate – the percentage of demand filled by the stock on hand
Fixed-Interval Inventory Model Benefits
Tight control of inventory items
Items from same supplier may yield savings in:
• Ordering
• Packing
• Shipping costs
May be practical when inventories cannot be closely
monitored
Fixed-Interval Disadvantages
Requires a larger safety stock
Increases carrying cost
Costs of periodic reviews
Single period model
for ordering of perishables and other items with limited useful lives
1 selling season & only 1 purchase opportunity
Purchase must be done in advance
ex: Bakery or short-life dairy products
Single period model
Shortage costs ➔ The unrealized profits per unit
Excess costs ➔ Difference between purchase cost and salvage value of items left over at the end of a period
Continuous stocking levels
● Identifies optimal stocking levels
● Optimal stocking level balances unit shortage and excess cost
Discrete stocking levels
● Service levels are discrete rather than continuous
● Desires service level is equaled or exceeded
Consequences of too much inventory
Tends to hide problems
Easier to live with problems than to eliminate them
Costly to maintain
Wise strategy
- Reduce lot sizes
* Reduce safety stock
SIX Inventory Types
- Cycle stock
- Safety stock
- Anticipation inventory
- Hedge inventory
- Transportation inventory
- Smoothing inventory
Cycle stock
Components or products that are received in bulk by a downstream partner, gradually used up and then replenished again in bulk by an upstream partner
Safety stock
Extra inventory that a company holds to protect itself against uncertainties in either demand or replenishment time
Anticipation inventory
Inventory that is held in anticipation of customer demand
Hedge inventory
A form of inventory buildup to cover some events that may happen
Transportation inventory
Inventory that is moving from one link in the supply chain to another
Smoothing inventory
Inventory that is used to smooth out differences between upstream production levels and downstream demand
Inventory drivers
Business conditions that force companies to hold inventory
Uncertainty in supply or demand
Safety stock, hedge inventory
Mismatch between downstream partner’s demand and the most efficient production or shipment volumes for an upstream partner
Cycle stock
Mismatch between downstream demand levels and upstream production capacity
Smoothing inventory
Mismatch between timing of customer demand and supply chain lead times
Anticipation inventory, transportation inventory
Independent demand inventory
Inventory items whose demand levels are beyond a company’s complete control
◆ Example: kitchen table - need 500 tables five weeks from now
Dependent demand inventory
Inventory items whose demand levels are tied directly to a company’s planned production of another item
◆ Example: kitchen table legs - need 4 per table or 2000 legs, calculation of dependent demand
inventory control : Periodic Review System
used to manage independent demand inventory
inventory level for an item is checked at regular intervals and restocked to some predetermined level
inventory control: Continuous review system
used to manage independent demand inventory where the inventory level for an item is constantly monitored and when the reorder point is reached, an order is released
Periodic Review System
Calculating the order quantity (Q) Q = R-I where R = restocking level I = inventory level at the time of review
Continuous Review System
When the demand rate and lead time are constant: Reorder point (R)= demand (d) x lead time (L) (R = d x L)
CRS - key features
● Inventory levels are monitored constantly and a replenishment order is issued only when the reorder point is reached
● The size of a replenishment order is typically based on the trade-off between holding costs and ordering costs
● The reorder point is based on both demand and supply considerations, as well on how much safety stock managers want to hold
CRS - assumptions
Constant demand and lead time
Holding and Ordering cost known and fixed
Price of each unit is fixed.
Bullwhip effect (or whiplash effect)
Extreme change in supply chain generated by small change of its “downstream” customer
Inventory positioning
Cost and value increases and flexibility decreases down the supply chain
Transportation, packaging, material handling
factors in choosing appropriate supplier and distribution process?
Physical size and quantity
how it is packaged
equipment needed
disposal of packaging
What contributes to the Bullwhip Effect ?
- Disorganization between each supply chain link
- Lack of communication
- Free returns policies
- Order batching (companies may order
weekly/monthly) - Price variations (upsetting regular buying
patterns) - Demand information (relying on past demand does
not take into account demand-fluctuations)
How to minimize the Bullwhip Effect
- Improve your SC- processes => reduction of
delivery lead times and pipeline inventory - The re-order point and desired inventory levels
are a direct function of delivery lead time
Conclusion: a reduction of lead time -> a reduction
of total amount of inventory in process
