Materials and inventory Management Lecture Flashcards
Weeks of supply
= average aggregate inventory value in $ / weekly sales in $
Inventory turnover
= annual sales / average aggregate inventory value in $
Strategic purpose of inventory
to provide a set of advantages that reflect a business’s needs
Annual inventory turns
= annual cost of goods sold / average inventory (at cost)
number of times inventory is cycled through in a year
higher (more) turns is better management of inventories (theoretically) though there could be a better level of inventory to maintain
Days of inventory
= 365 (days in a year) / annual inventory turns
approximate number of days inventory is held
lower is better!
Inventory strategy trade offs
Between customer service levels and inventory related costs
Between customer service levels and operational performance
Between inventory related costs and operational performance
Affect of inventory on return on assets
High inventory levels reduces return on assets. Lower levels increases return
Corporate inventory
essentially strategic reserves - segregated inventory held aside from regular stock for specific uses
as opposed to mainstream inventory
types of mainstream inventory
- pipeline
- cycle
- buffer (safety)
- capacity (anticipation)
- de-coupling
Pipeline inventory
in- transit inventory
inventory currently moving between stages in the supplychain
Cycle inventory
Portion of total inventory that varies with lot size - helps gain advantages of reduced set-ups
Buffer inventory
safety stock to address uncertainty
Capacity or anticipation inventory
Preparing for seasonal variations
De-coupling inventory
inventory held to allow one set of processes to not wait on the other
Characteristics to consider in choosing an inventory model
- number of items to track
- nature of demand (independent vs dependent, deterministic vs stochastic)
- number of periods
- lead time (deterministic vs stochastic)
- stock out (is result of stock out a backorder or a lost sale?)
ABC analysis
Separating inventory into classes depending on their dollar value
Class A items: 80% of the dollar value (about 20% of items), manage closely
Class B items: 15% of dollar value (about 50% of items)
Class C items: 5% of dollar value (about 30% of items). Do not require careful management and may be cheap enough to hold more inventory)
VED analysis
Independent of the dollar value: what is the penalty for lacking the item in stock? options
Vital
Essential
Desirable
Can create a matrix between ABC and VED analysis. AV and BV require most careful consideration and forecasting
lower importance/ lower cost items can be de-emphasized
lot sizing models
models to assist in quantity decisions
Static models for items that have regular demand to the horizon
dynamic models (DLS) for items with lumpy demand
Controllable variables for inventory management
- what to order?
- how much to order?
- when to order?
Variety, quantity, timing
uncontrollable variable for inventory management
demand
When is demand considered lumpy?
V= variance of demand per period/ square of the average demand per period
if V<0.25 then EOQ is appropriate (demand is regular). V> 0.25 then DLS
EOQ model assumptions
- single item under continuous review
- entire quantity ordered arrives at one point in time
- demand rate and lead time are known and constant
- stock outs are not allowed
Variables for determining EOQ
D = annual demand in units per year
S = cost of ordering or setting up one lot (does not change if order changes)
H = cost of holding one unit of inventory for a year (may be expressed as “I”(Inventory factor)*“C”(cost of unit)
LT or L = lead time
Q = lot size in units
C= unit cost of item
Cycle time
interval of time between the arrive of two consecutive orders
= lot size/ annual demand (=Q/D)
Number of cycles per year
= annual demand / lot size (=D/Q)
Average inventory per cycle
= Lot size /2 (= Q/2)
Holding cost per year
= holding cost/cycle * cycles/year
aka
= ((lot size/2)holding cost(lot sizes/annual demand))(annual demand / lot size)
OR = average cycle inventory (Q/2)annual holding cost
order cost per year
= order cost*annual demand / lot size
Total cost per year
= holding cost per year + order cost per year
EOQ
Economic order quantity
(where annual holding cost = annual ordering cost)
=square root of ((2order costannual demand)/holding cost)
Optimal number of orders per year
= annual demand / EOQ
If lead time is 0
EOQ order placed when stock hits 0
If lead time demand is less than or equal to EOQ
Have to determine reorder point = lead time demand * average demand for period (possibly + safety stock if lead times vary)
idea is that inventory reaches 0 when the new inventory arrives
If lead time demand is greater than EOQ
generally happens with items with very long lead times (raw materials)
likely to have multiple orders outstanding at once
Additional applications for EOQ
Cash management
HR (balance training cost vs salary to determine minimum employees)
What are the constraints on EOQ
- budgetary limitations
- limitations on number of orders
- limitations of storage space
Lead time demand distribution
- observe average demand for a give period over many periods to plot frequency distribution
- this can be used to determine standard deviation of demand
Using service level to determine required safety stock
- need to know standard deviation of demand
- assuming a normal distribution can estimate the probability of having the necessary stock to meet demand during lead time (aka service level, = 1-chance of stock out)
- using normal distribution table can determine the number of standard deviations required to be at required service level
Safety stock = z for required service level * standard deviation of demand during lead time
inventory position
= inventory on hand + outstanding orders - back orders
ROP
expected demand during lead time aka reorder point
continuous review system
aka Fixed Order Quantity (Q) system
- when inventory position hits reorder point, an order is placed for fixed quantity Q
- time between orders fluctuates with demand changes
Periodic Review
aka Fixed time Period (P) system
- orders are placed at fixed time intervals
- quantity ordered at each reorder point varies
Protection interval for periodic review systems
= time between orders + lead time
Order quantity for periodic review systems
= expected demand during protection interval + safety stock - inventory on hand
= average demand * (time between orders + lead time ) + (service level * standard deviation of demand during lead time) - inventory
Primary lever to reduce cycle inventory
reduce order lot size
secondary lever to reduce cycle inventory
- reduce ordering and set up costs (reduces EOQ)
- increase repeatability
Primary lever to reduce safety stock
Place orders closer together
Secondary levers to reduce safety stock
- improve forecasting
- reduce lead-time
- reduce supply uncertainties
- increase labor & equipment buffers
Primary and secondary levers to reduce anticipation inventory
Primary: use chase strategy
Secondary: level out demand rates
Primary lever to reduce pipeline inventory
cut production to distribution lead time
Secondary levers to reduce pipeline inventory
- forward placement
- selection of suppliers & carriers
- reduce Q
