Module8 Flashcards
1
Q
What is inventory?
A
Definition:
- A set of items an organization holds for later use.
- Can be raw materials, work-in-progress, or finished goods.
- Acts as a buffer between supply and demand.
2
Q
Why do firms hold inventory?
A
Main functions:
- Permit operations (pipeline inventory)
- Meet anticipated demand (uncertainty buffer)
- Take advantage of quantity discounts
- Decouple operations (risk protection)
- Hedge against price increases
3
Q
What are potential disadvantages of holding inventory?
A
- Ties up working capital
- Risk of obsolescence
- Requires storage space
- Possible stocking costs
4
Q
What is the Economic Order Quantity (EOQ) model?
A
- A model to minimize total inventory costs
- Balances ordering and holding costs
- Assumes constant demand and fixed setup cost
5
Q
EOQ model: key variables
A
- Q: order quantity
- D: annual demand
- S: setup (ordering) cost
- h: holding cost (fraction of unit cost)
- TC(Q): total annual cost
6
Q
EOQ formula for optimal order quantity
A
Q* = √( (2 × D × S) / (h × C) )
- C: unit cost
- h: fraction of cost representing annual holding rate
- Minimizes TC(Q)
7
Q
What is cycle inventory?
A
- Average inventory from ordering in batches
- Typically = Q / 2 when demand is stable
- Lower cycle inventory → shorter flow times and lower holding costs
8
Q
What is the Newsvendor model?
A
- Single-period model with uncertain demand
- Balances overage cost (leftovers) and underage cost (lost sales)
- Finds optimal order quantity before season starts
9
Q
Newsvendor model: overage vs. underage costs
A
- Overage cost (Co): leftover product that loses value
- Underage cost (Cu): lost sales if demand exceeds supply
- Optimal Q found using critical ratio = Cu / (Cu + Co)
10
Q
Key differences: EOQ vs. Newsvendor
A
-
EOQ:
- Deterministic demand
- Infinite time horizon
- Minimizes total cost
-
Newsvendor:
- Stochastic demand
- Single selling period
- Maximizes expected profit
11
Q
When to use the Newsvendor model?
A
- Short lifecycle products (e.g., seasonal goods)
- One-time ordering opportunity
- Leftover items have reduced or no value after the period
12
Q
What are practical challenges of inventory management?
A
- Accurate demand forecasting
- Estimating holding and ordering costs
- Coordinating across the supply chain
- Managing stock-outs and overstock
- Utilizing digital tools (RFID, IoT, ML) for real-time insights
