Sec 7- Item Inventory Management Flashcards
describe Lot-for-lot ordering
Items ordered when needed and for exact amount needed
order quantities change as requirements change
describe “order n periods of supply”
Ordering the quantity based on estimated demand for n periods of time.
4 assumptions for Economic Order Quantity (EOQ)?
Demand is relatively constant and known
Items are produced or purchased in lots/batches
5 logic/calculation steps for EOQ?
1) Calculate annual ordering cost
2) Calculate annual inventory carrying cost
3) Calculate total annual cost
4) Evaluate alternative order quantities if necessary
5) Calculate EOQ
What is formula for Annual Ordering Cost?
= number of orders X cost per order
What is formula for annual inventory carrying cost?
average inventory = order quantity / 2
Inventory carrying costs = (inventory / 2) X cost per unit x inventory carrying cost rate
What is formula for Economic Order Quantity?
= square root {(2 x annual units x order cost) / (inventory carrying cost rate x item cost)}
EOQ Log-size control changes for
Annual demand
Cost of carrying inventory
Unit cost
Ordering cost
Annual demand increases then EOQ increases
Cost of carrying inventory decreases then EOQ increases
Unit cost decreases then EOQ increases
Ordering cost decreases then EOQ decreases
What 2 systems help determine when to order independent demand items?
Order point system
Periodic review system
How does order point work?
When quantity falls to a predetermined level called the order point a replenishment order is placed
What 3 assumptions does the order point system use?
1) Order quantities are usually fixed
2) Intervals between replenishments are not constant
3) Demand is stable and shows random variation
3 systems to determine when order point is reached?
1) two-bin system- low value items needing minimal management attention
2) kanban
3) perpetual inventory record system
What is the periodic review system?
aka – fixed reorder cycle inventory model
fixed interval order system
Fixed and constant intervals between orders
Quantity of the order varies
2 rules for controlling ABC classified items
1) Stock plenty of low-value C items
2) Focus on reducing the inventory of high-value items
