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Operations And Process Management > Week 3 - EOQ, EBQ and VMI > Flashcards

Week 3 - EOQ, EBQ and VMI Flashcards

1
Q

Graphical representation of EOQ (Economic order quantity) (2)

A

• The total cost is the sum of the carrying costs and ordering costs
• The economic ordering cost is when the total is a minimum

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2
Q

Draw the basic model 1 for Economic order quantities

A
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3
Q

What are the assumptions for the basic model 1 for Economic order quantity? (6)

A

• Inventory of quantity Q is delivered in one lot according to an ordering schedule
• Delivered inventory is used at a linear rate
• When the last item of inventory is used, a new lot arrives instantly
• There is no safety stock
• The purchase cost for inventory is constant. There are no quantity discounts
• The lead time between ordering and delivery is known and constant

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4
Q

List the terms used in the basic EOQ model (5)

A

• D is the annual demand for material in units/year
• Q is the quantity of material ordered in units/purchase order
• C is the cost of carrying one unit in inventory for one year
• S is the average cost of placing a purchase order
• TSC is the total stocking cost

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5
Q

Formula for Average inventory

A

(Beginning inventory + ending inventory) / 2

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6
Q

What is the formula for the annual carrying cost?

A

• (Average inventory x unit carrying cost) / 2
• QC/2
• This figure gives the value for the carrying cost curve

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7
Q

What is the formula for the number of order made per year?

A

• Annual consumption / order quantity
• D/Q

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8
Q

What the formula for the annual ordering cost?

A

• Number of orders x ordering cost
• DS/Q
• Gives the annual ordering cost curve on the graph

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9
Q

What is the formula for the total stocking cost?

A

TSC = QC/2 + DS/Q

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10
Q

What does the total stocking cost formula show? (2)

A

• It shows that when one cost is decrease the other is decreasing (this is in terms of carrying and order costs)
• Total costs are a minimum when the total carrying cost and the purchasing costs are equal

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11
Q

What is the formula for the EOQ? (Economic order quantity)

A

Is the square root of: 2DS/C

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12
Q

What is meant by the EOQ? (Economic order quantity)

A

Is the quantity to order to make inventory related costs a minimum

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13
Q

Draw the model 2 of Economic order quantity

A
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14
Q

Where might model 2 for economic order quantity be applied? (2)

A

• Can be applied in distribution where inventory items are being delivered to a distribution centre and put into storage and throughout the day those items are being sold
• Factory production lines where workstations rely on previous operators providing batches of materials (w.I.p)

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15
Q

Characteristic Maximum inventory in model 2

A

• The inventory very rarely reaches the maximum Q
• Max value would be: Net build up rate (input-output) x time taken to deliver Q

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16
Q

Formula for max inventory

A

p-d x Q/p

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17
Q

The assumptions for model 2 (7)
D,Q,C,S,p,d,TSC

A

• D is the annual demand for material in units/year
• Q is the quantity of material ordered in units/purchase order
• C is the cost of carrying one unit in inventory for one year
• S is the average cost of placing a purchase order
• p is the delivery rate of the material units per time
• d is the usage rate of the material in units per time period
• TSC is the total annual inventory stocking cost

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18
Q

Average inventory formula (model 2)

A

• Is one half the maximum and minimum inventory
• (p-d)Q/2p

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19
Q

Annual carrying cost formula (model 2)

A

• average inventory x unit stocking cost
• (p-d)QC/2p

20
Q

Formula for the number of order made per year (model 2)

A

• Annual consumption / order quantity
• D/Q

21
Q

Formula for annual ordering cost

A

• Number of orders x ordering cost
• DS/Q

22
Q

Formula for the total stocking cost

A
23
Q

Draw a graph which represents Economic batch quantity (EBQ)

A
24
Q

Explain what’s happening in an economic batch quantity graph (4)

A

• One process will produce w.I.p in a steady stream (p) into an inventory point
• During this time inventory is increasing because downstream is processing at a lower rate (d)
• After a batch has been produced machine A must be switched to produce a different part/product
• Decision made about what the EBQ is - must balance ordering with carrying but ordering is the machine set up cost

25
Q

Formula for the Economic batch quantity (EBQ)

A
26
Q

What are the criticisms of the EOQ approach? (3)

A

• Assumptions - e.g demand being based of last year sales and an added percentage and carrying costs can vary depending on the product
• The real cost of stock in operations
• The use of a modal as a prescriptive device - should only change costs depending on what the customer wants (whilst keeping costs to a minimum)

27
Q

Formula for usage value

A

Unit value x annual usage

28
Q

What is vendor management inventory? (VMI)

A

VMI gives your supplier primary responsibility for maintaining stocks of his product at the premises of your choosing

29
Q

What does domestic vendor managed inventory require? (3)

A

• The capturing of raw data - need to know the current stock level
• Communicating the raw data to the vendor
• An inventory management system that turns data into information and actions

30
Q

What are the two methods for domestic grocery data capture?

A

• Profiling
• Monitoring

31
Q

What is profiling?

A

Is where the vendor collects data on the consumers buying habits (e.g store cards)

32
Q

What is a limitation of profiling?

A

Buying habits does not represent actual consumption so orders can be mistaken as forecasts

33
Q

What is monitoring?

A

Is where actual consumption of items is logged

34
Q

What is the benefit of monitoring over profiling?

A

Monitoring provides far better information regarding actual consumption but requires some form of data capture in the home

35
Q

What are the two forms of monitoring?

A

• Flow control based data capture - data collect on an ongoing basis on the flow of material
• Inventory count based data capture - Where periodic stock takes are captured

36
Q

2 Real life examples of flow control data capture

A

• Electrolux fridges - they have bar code scanners and internet connections to scan items
• Matsushita fridges - voice recognition controlled item identification

37
Q

Why might flow control be more effective than inventory count data capture?

A

Easier as it is relatively simple to implement and use can be made with bar code technology which makes it very cheap

38
Q

What are the limitations with flow control data capture (2)

A

• The method replaces the ‘consumer ordering’ process with a ‘consumer notifying data capture’ process
• Prone to errors/omissions which are difficult to detect

39
Q

Real life example of Inventory count data capture

A

Smart fridges - RF tags attached by the e-grocer who then delivers the goods

40
Q

What are the benefits and drawbacks of Inventory count data capture?

A

• Benefit - Requires no consumer activity and will correct any errors at the next inventory count
• Drawback - expensive e.g RFID readers much more expensive than bar code readers

41
Q

What is the hybrid solution?

A

Is a combination of consumer profiling with data capture with an easy means for consumers to inform e-grocers of exceptions such as holidays and guests

42
Q

What are the advantages to the e-grocer for consumer VMI? (5)

A

• Increased customer satisfaction
• Increased customer loyalty
• Customers less sensitive to price as purchase decision is taken at a time of need
• Demand stability and visibility - reduced safety stocks
• Better consumer understanding - marketing opportunities

43
Q

Why might retailers not want to use VMI?

A

Customers may potentially resist it as they no longer get to shop for themselves

44
Q

What are the two forms of industrial VMI?

A

• Consigned inventories
• Purchased inventories

45
Q

What are consigned inventories? + example

A

• Is where the vendor retains ownership until consumption
• Tyres used in a car assembly line belong to the tyre manufacturer until it is used on the car

46
Q

What are purchased inventories? + example

A

• Is where the customer assumes ownership of the material but the material is managed by the supplier
• Coco cola manufacturing through label and printing machine only being useful to Coca Cola and not any other fizzy drinks company

Operations And Process Management (8 decks)

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