Supply Chain Inventory Management (9) Flashcards
Inventory
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
Inventory Management
planning and controlling of inventories in order to meet the competitive priorities of the organization
lot sizing
the determination of how frequently and in what quantity to order inventory.
Pressures for Small Inventory
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.
Inventory Holding Cost
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)
Pressures for Large Inventories
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)
Types of Inventory (three aggregate categories)
raw materials
work in process
finished goods
Types of Inventory (by how it is created)
cycle,
safetystock
anticipation
pipeline
Cycle Inventory
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
Safety Stock Inventory
surplus inventory that a company holds to protect against uncertainties in demand, lead time, and supply changes. (place order earlier than when typically needed)
Anticipation Inventory
inventory used to absorb uneven rates of demand or supply. (predictable, seasonal demand)
Pipeline Inventory
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
ABC analysis
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
Inventory Reduction Tactics: Anticipation
match demand rate with production rate
add new products with different demand cycles
provide off season promotional campaigns
offer seasonal pricing plans
Inventory Reduction Tactics: Pipeline
reduce lead times
find more responsive suppliers and select new carriers
change q in those cases where lead time depends on the lot size
Inventory Reduction Tactics: Cycle
reduce lot size
reduce ordering & set up costs and allow Q to be reduced
increase repeatability to eliminate the need for change over.
Inventory Reduction Tactics: Safety Stock Inventory
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.
SKU (stock keeping unit)
individual item or product that has an identifying code and is held in inventory somewhere along the supply chain.
Economic Order Quantity
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
DO Not use the EOQ
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.
Modify the EOQ
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
Use the EOQ
make to stock strategy and item has stable demand.
carry costs per unit and setup or ordering costs are known and stable
Calculating EOQ
square root of (2DS) divided by H
annual holding cost
average cycle inventory * unit holding cost
Q/2 * H
annual ordering cost
number of orders/ year * ordering or setup cost
D/Q(S)
total annual cycle inventory cost
annual holding cost + annual ordering or setup cost
C=Q/2(H) + D/Q(s)
time between orders (TBO)
average elapsed time between receiving replenishment orders of Q units for a particular lot size
EOQ/ D (12 months/year)
Continuous Review System
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.
Formula for Q System
Inventory position= on hand inventory+ scheduled receipts - backorders
IP=OH+SR-BO
if larger than R than dont need to reorder
Selecting Reorder Point when Demand is variable and lead time is constant
reorder point= average demand during lead time +safety stock
DL+ safety stock.
*d = average demand per week
*L = constant lead time in weeks
Periodic Review System
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
Calculation total Q System Costs
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)
Under a P system, an order is placed to replenish the inventory position up to the target level T every P times periods
True
