Supply Chain Inventory Management (9)

Question 1

Inventory

Answer 1

a stock of materials used to satisfy customer demand or to support the production of services or goods. (need for the perfect balance of inventory, not too much because expensive and takes up room, but not too little because causes shortages and ruins customer confidence

Question 2

Inventory Management

Answer 2

planning and controlling of inventories in order to meet the competitive priorities of the organization

Question 3

lot sizing

Answer 3

the determination of how frequently and in what quantity to order inventory.

Question 4

Pressures for Small Inventory

Answer 4

reason: inventory represents a temporary monetary investment.
the inventory holding cost (carrying cost)
cost of capital
storage and handling costs
taxes
insurance
shrinkage-> 3 forms
pilferage-theft of inventory by customers or employees
obsolescence-can’t be used or sold at full value.
deterioration-physical spoilage or damage due to rough or excessive material handling results in lost value.

Question 5

Inventory Holding Cost

Answer 5

cost of capital + variable costs to hold inventory,
*state as cost per period of time as a percent of its value.
ex. 20% holding cost, 20% sales, annual cost
(.20)(.20)

Question 6

Pressures for Large Inventories

Answer 6

customer service-> reduce potential for stockout and backorder
ordering cost-
setup cost-to change over machine
labor and equipment utilization
transportation cost
payments to suppliers (quantity discounts)

Question 7

Types of Inventory (three aggregate categories)

Answer 7

raw materials
work in process
finished goods

Question 8

Types of Inventory (by how it is created)

Answer 8

cycle,
safetystock
anticipation
pipeline

Question 9

Cycle Inventory

Answer 9

the portion of total inventory that varies directly with lot size.
varies with the time between orders for a given item, the greater the cycle inventory must be.
Q divided by 2

Question 10

Safety Stock Inventory

Answer 10

surplus inventory that a company holds to protect against uncertainties in demand, lead time, and supply changes. (place order earlier than when typically needed)

Question 11

Anticipation Inventory

Answer 11

inventory used to absorb uneven rates of demand or supply. (predictable, seasonal demand)

Question 12

Pipeline Inventory

Answer 12

inventory that is created when an order for an item is issued but not yet received (longer lead times or higher demands create more pipeline inventory)
average demand during lead time =DL
average demand per period * number of periods in the item’s lead time

Question 13

ABC analysis

Answer 13

planning and controlling of inventories in order to meet the competitive priorities of the organization
process of dividing SKU into three classes according to dollar usage, so managers can focus on items that have the highest dollar value.
Class A 20% of SKU but 80% of Dollar usage
Class B 30% of SKU but 15% of dollar usage
Class C 50% of SKU and 5% of dollar usage

Question 14

Inventory Reduction Tactics: Anticipation

Answer 14

match demand rate with production rate
add new products with different demand cycles
provide off season promotional campaigns
offer seasonal pricing plans

Question 15

Inventory Reduction Tactics: Pipeline

Answer 15

reduce lead times
find more responsive suppliers and select new carriers
change q in those cases where lead time depends on the lot size

Question 16

Inventory Reduction Tactics: Cycle

Answer 16

reduce lot size
reduce ordering & set up costs and allow Q to be reduced
increase repeatability to eliminate the need for change over.

Question 17

Inventory Reduction Tactics: Safety Stock Inventory

Answer 17

place orders close to the time when they must be received
improve demand forecast
cut lead times
reduce supply chain uncertainty
rely more on equipment & labor buffers.

Question 18

SKU (stock keeping unit)

Answer 18

individual item or product that has an identifying code and is held in inventory somewhere along the supply chain.

Question 19

Economic Order Quantity

Answer 19

the lot size that minimizes total annual inventory holding and ordering costs
assumptions:
demand rate constant.
no constraints are placed on the size of lot
only two relevant costs are inventory holding costs and fixed cost per lot for ordering or setup.
decisions for one item can be made independently of decisions for other items
lead time is constant

Question 20

DO Not use the EOQ

Answer 20

when use…
make to order strategy and specifies entire order in one shipment
order size is constrained by capacity limitations ie. firm’s ovens, testing equip.

Question 21

Modify the EOQ

Answer 21

significant quantity discounts are given for ordering larger lots
replenishment of the inventory is not instantaneous, can happens if items must be used/ sold as soon as they are finished without waiting until the entire lot is completed

Question 22

Use the EOQ

Answer 22

make to stock strategy and item has stable demand.

carry costs per unit and setup or ordering costs are known and stable

Question 23

Calculating EOQ

Answer 23

square root of (2DS) divided by H

Question 24

annual holding cost

Answer 24

average cycle inventory * unit holding cost

Q/2 * H

Question 25

annual ordering cost

Answer 25

number of orders/ year * ordering or setup cost

D/Q(S)

Question 26

total annual cycle inventory cost

Answer 26

annual holding cost + annual ordering or setup cost

C=Q/2(H) + D/Q(s)

Question 27

time between orders (TBO)

Answer 27

average elapsed time between receiving replenishment orders of Q units for a particular lot size
EOQ/ D (12 months/year)

Question 28

Continuous Review System

Answer 28

Q system.
a system designed to track the remaining inventory of a SKU each time a withdrawal is made to determine whether it is time to reorder.
reorder point system
for independent demand items
tracks inventory position (IP)
includes scheduled receipts, on hand inventory and back orders
when inventory position reached the min. level, called reorder point, a fixed Q is ordered.

Question 29

Formula for Q System

Answer 29

Inventory position= on hand inventory+ scheduled receipts - backorders
IP=OH+SR-BO
if larger than R than dont need to reorder

Question 30

Selecting Reorder Point when Demand is variable and lead time is constant

Answer 30

reorder point= average demand during lead time +safety stock
DL+ safety stock.
*d = average demand per week
*L = constant lead time in weeks

Question 31

Periodic Review System

Answer 31

a system in which an item’s inventory position is reviewed periodically rather than continuously.
*a new order is always placed at the end of each review, and the TBO is fixed at P.
4 assumptions: 1. no constraints on lot size 2. relevant costs are holding and ordering costs 3. decisions for one SKU are independent of others 4. lead times are certain and supply is known
convenient, orders can be combined, only need to know IP when review is made

Question 32

Calculation total Q System Costs

Answer 32

total cost= annual cycle inventory holding cost + annual ordering cost + annual safety stock holding cost
C= Q/2(H) +D/Q(S) +(H)(safety stock)

Question 33

Under a P system, an order is placed to replenish the inventory position up to the target level T every P times periods

Answer 33

True