Week 3 - EOQ, EBQ and VMI Flashcards
Graphical representation of EOQ (Economic order quantity) (2)
• The total cost is the sum of the carrying costs and ordering costs
• The economic ordering cost is when the total is a minimum
Draw the basic model 1 for Economic order quantities
What are the assumptions for the basic model 1 for Economic order quantity? (6)
• 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
List the terms used in the basic EOQ model (5)
• 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
Formula for Average inventory
(Beginning inventory + ending inventory) / 2
What is the formula for the annual carrying cost?
• (Average inventory x unit carrying cost) / 2
• QC/2
• This figure gives the value for the carrying cost curve
What is the formula for the number of order made per year?
• Annual consumption / order quantity
• D/Q
What the formula for the annual ordering cost?
• Number of orders x ordering cost
• DS/Q
• Gives the annual ordering cost curve on the graph
What is the formula for the total stocking cost?
TSC = QC/2 + DS/Q
What does the total stocking cost formula show? (2)
• 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
What is the formula for the EOQ? (Economic order quantity)
Is the square root of: 2DS/C
What is meant by the EOQ? (Economic order quantity)
Is the quantity to order to make inventory related costs a minimum
Draw the model 2 of Economic order quantity
Where might model 2 for economic order quantity be applied? (2)
• 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)
Characteristic Maximum inventory in model 2
• The inventory very rarely reaches the maximum Q
• Max value would be: Net build up rate (input-output) x time taken to deliver Q
Formula for max inventory
p-d x Q/p
The assumptions for model 2 (7)
D,Q,C,S,p,d,TSC
• 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
Average inventory formula (model 2)
• Is one half the maximum and minimum inventory
• (p-d)Q/2p
Annual carrying cost formula (model 2)
• average inventory x unit stocking cost
• (p-d)QC/2p
Formula for the number of order made per year (model 2)
• Annual consumption / order quantity
• D/Q
Formula for annual ordering cost
• Number of orders x ordering cost
• DS/Q
Formula for the total stocking cost
Draw a graph which represents Economic batch quantity (EBQ)
Explain what’s happening in an economic batch quantity graph (4)
• 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
Formula for the Economic batch quantity (EBQ)
What are the criticisms of the EOQ approach? (3)
• 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)
Formula for usage value
Unit value x annual usage
What is vendor management inventory? (VMI)
VMI gives your supplier primary responsibility for maintaining stocks of his product at the premises of your choosing
What does domestic vendor managed inventory require? (3)
• 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
What are the two methods for domestic grocery data capture?
• Profiling
• Monitoring
What is profiling?
Is where the vendor collects data on the consumers buying habits (e.g store cards)
What is a limitation of profiling?
Buying habits does not represent actual consumption so orders can be mistaken as forecasts
What is monitoring?
Is where actual consumption of items is logged
What is the benefit of monitoring over profiling?
Monitoring provides far better information regarding actual consumption but requires some form of data capture in the home
What are the two forms of monitoring?
• 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
2 Real life examples of flow control data capture
• Electrolux fridges - they have bar code scanners and internet connections to scan items
• Matsushita fridges - voice recognition controlled item identification
Why might flow control be more effective than inventory count data capture?
Easier as it is relatively simple to implement and use can be made with bar code technology which makes it very cheap
What are the limitations with flow control data capture (2)
• The method replaces the ‘consumer ordering’ process with a ‘consumer notifying data capture’ process
• Prone to errors/omissions which are difficult to detect
Real life example of Inventory count data capture
Smart fridges - RF tags attached by the e-grocer who then delivers the goods
What are the benefits and drawbacks of Inventory count data capture?
• 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
What is the hybrid solution?
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
What are the advantages to the e-grocer for consumer VMI? (5)
• 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
Why might retailers not want to use VMI?
Customers may potentially resist it as they no longer get to shop for themselves
What are the two forms of industrial VMI?
• Consigned inventories
• Purchased inventories
What are consigned inventories? + example
• 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
What are purchased inventories? + example
• 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
