Week 4 / Inventory Management

Question 1

ABC Analysis

Answer 1

One of the simplest Inventory methods

Question 2

ABC Classification System (ABC Analysis)

Answer 2

Classifying inventory according to some measure of importance and allocating control efforts accordingly.

A-very important
B- moderately important
C- least important

Question 3

For ABC analysis, what item should receive more attention?

Answer 3

‘A’ items should receive more attention!

Question 4

Class ‘A’ has to be higher than 70% cumulative

Class ‘B’ has to above 25% (remember to add up the % of total ADV to meet the numbers)

Class ‘C’ has to be below 25% periodic

Answer 4

Sometimes there wont be ‘C’ values if A and B are very large

Question 5

Under a periodic inventory system (also known as a fixed-time-period system)

Answer 5

a physical count of items in inventory is made at periodic, fixed intervals (e.g., weekly, monthly) in order to decide how much to order of each item

Question 6

A perpetual inventory system (also known as a continuous review and a fixed-order-quantity system)

Answer 6

Keeps track of removals from and additions to inventory of each item on a continuous basis, so the system can provide information on the current inventory position for each item at any time.

Question 7

Economic Order Quantity Model (EOQ)

Answer 7

Types of Inventory Cost / Estimating Inventory Costs:
Ordering or Setup costs
Holding (carrying) costs
Shortage costs

Question 8

Holding (carrying) costs

Answer 8

Cost to carry an item in inventory

Question 9

Holding (carrying) costs

Answer 9

Cost to carry an item in inventory

Question 10

Ordering costs

Answer 10

Costs of placing an order (not including purchase price) receiving it and paying for it

Question 11

Setup costs

Answer 11

Costs spent preparing equipment for the job by adjusting machine, changing tools, etc

Question 12

Shortage costs

Answer 12

Costs when demand exceeds supply; often unrealized profit per unit, loss of goodwill

Question 13

Assumptions of EOQ Model

Answer 13

1. Only one product is involved
2. Annual demand requirements known
3. Demand is even throughout the year
4. Lead time does not vary
5. Each order is received in a single delivery
6. There are no quantity discounts
7. Shortage is not allowed

ASSUMPTION 2-5 Secures Assumption 7

Question 14

T = 1/10 of a year

Answer 14

So if a year is 250 days, T would equal 25

250 / 10 = 10

Question 15

If you increase Q, what does this do to the periods?

Answer 15

Shorter Periods if you order more
Longer periods if you order less

Increasing Q has less N

Question 16

If you multiply Q by two, what does this do to N

Answer 16

You divide N by 2

Question 17

Total Cost =

Answer 17

Annual holding cost + Annual ordering cost

Question 18

Annual holding cost =

Answer 18

Average Inventory x Holding cost per unit

In Formula: (Q/2) x H

H = Annual holding cost per unit

Question 19

Annual ordering cost =

Answer 19

Ordering number x Ordering cost per order

In formula: N x S = (D/Q) x S

S = Ordering or setup cost per order

Question 20

Q^2 =

Answer 20

2DS / H

Question 21

Multiply D by factor four, what will be the new mue Q

Answer 21

Q will be increased by factor 2

• If you increase H, than Q will shrink (decrease)
• If you increase demand, you will see increase in UOQ
• If you increase holding cost, you will see increase in UOQ

Question 22

If you increase EOQ by factor four, what is the increase in total cost

Answer 22

2

Just take the square root of whatever factor

Question 23

If you increase your holding cost or ordering cost,

Answer 23

You increase total cost

Question 24

Newsvendor question types

Answer 24

Impact of parameters on service levels and stock out risk

Question 25

Service levels =

part of newsvendor

Answer 25

Service level (SL) =Cs / (Cs + Ce)

Question 26

Ce =

Excess cost per unit

(part of newsvendor)

Answer 26

Cost per unit – Salvage per unit

Question 27

Cs =

Shortage cost per unit

(part of newsvendor)

Answer 27

Revenue per unit- Cost per unit

Question 28

When you increase revenue per unit from 0.8 to $1, what change would you see in the cycle risk

Answer 28

A price increase results in less stock out risk

Question 29

We want to determine the __________________ so that we _________ the total cost associated with the purchase, delivery, and storage of the product

Answer 29

optimal number of units to order (ONU)

minimize

Question 30

EOG Graph

Answer 30

X = Order size
Y = Cost

Question 31

D = Q / T // D=Q/T

Answer 31

Demand Rate equals Order Quantity / Period or Cycle

Question 32

D / Q = N // D/Q=N

Answer 32

Demand rate / Order quantity = Number of orders

1000 / 10 = 10 orders

Question 33

Many order of small Q produce a _____ average inventory

Answer 33

low

Question 34

Few orders of large Q produce a _____ average inventory

Answer 34

high

Question 35

To find average inventory

Answer 35

Q / 2

Because the highest is Q and the lowest is 0, so Q + 0 / 2 equals inventory

Question 36

Total Cost in Formula

Answer 36

( (Q/2) x H ) + ( ( D / Q ) x S)

Question 37

Annual Holding cost = Annual ordering cost

Answer 37

OKAY?

Question 38

So =

Answer 38

Optimum stocking level (i.e. order quantity)

Question 39

Stockout risk =

part of newsvendor

Answer 39

1.00 - Service Level Percentage