Week 4 / Inventory Management Flashcards
ABC Analysis
One of the simplest Inventory methods
ABC Classification System (ABC Analysis)
Classifying inventory according to some measure of importance and allocating control efforts accordingly.
A-very important
B- moderately important
C- least important
For ABC analysis, what item should receive more attention?
‘A’ items should receive more attention!
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
Sometimes there wont be ‘C’ values if A and B are very large
Under a periodic inventory system (also known as a fixed-time-period system)
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
A perpetual inventory system (also known as a continuous review and a fixed-order-quantity system)
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.
Economic Order Quantity Model (EOQ)
Types of Inventory Cost / Estimating Inventory Costs:
Ordering or Setup costs
Holding (carrying) costs
Shortage costs
Holding (carrying) costs
Cost to carry an item in inventory
Holding (carrying) costs
Cost to carry an item in inventory
Ordering costs
Costs of placing an order (not including purchase price) receiving it and paying for it
Setup costs
Costs spent preparing equipment for the job by adjusting machine, changing tools, etc
Shortage costs
Costs when demand exceeds supply; often unrealized profit per unit, loss of goodwill
Assumptions of EOQ Model
- Only one product is involved
- Annual demand requirements known
- Demand is even throughout the year
- Lead time does not vary
- Each order is received in a single delivery
- There are no quantity discounts
- Shortage is not allowed
ASSUMPTION 2-5 Secures Assumption 7
T = 1/10 of a year
So if a year is 250 days, T would equal 25
250 / 10 = 10
If you increase Q, what does this do to the periods?
Shorter Periods if you order more
Longer periods if you order less
Increasing Q has less N
If you multiply Q by two, what does this do to N
You divide N by 2
Total Cost =
Annual holding cost + Annual ordering cost
Annual holding cost =
Average Inventory x Holding cost per unit
In Formula: (Q/2) x H
H = Annual holding cost per unit
Annual ordering cost =
Ordering number x Ordering cost per order
In formula: N x S = (D/Q) x S
S = Ordering or setup cost per order
Q^2 =
2DS / H
Multiply D by factor four, what will be the new mue Q
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
If you increase EOQ by factor four, what is the increase in total cost
2
Just take the square root of whatever factor
If you increase your holding cost or ordering cost,
You increase total cost
Newsvendor question types
Impact of parameters on service levels and stock out risk
Service levels =
part of newsvendor
Service level (SL) =Cs / (Cs + Ce)
Ce =
Excess cost per unit
(part of newsvendor)
Cost per unit – Salvage per unit
Cs =
Shortage cost per unit
(part of newsvendor)
Revenue per unit- Cost per unit
When you increase revenue per unit from 0.8 to $1, what change would you see in the cycle risk
A price increase results in less stock out risk
We want to determine the __________________ so that we _________ the total cost associated with the purchase, delivery, and storage of the product
optimal number of units to order (ONU)
minimize
EOG Graph
X = Order size Y = Cost
D = Q / T // D=Q/T
Demand Rate equals Order Quantity / Period or Cycle
D / Q = N // D/Q=N
Demand rate / Order quantity = Number of orders
1000 / 10 = 10 orders
Many order of small Q produce a _____ average inventory
low
Few orders of large Q produce a _____ average inventory
high
To find average inventory
Q / 2
Because the highest is Q and the lowest is 0, so Q + 0 / 2 equals inventory
Total Cost in Formula
( (Q/2) x H ) + ( ( D / Q ) x S)
Annual Holding cost = Annual ordering cost
OKAY?
So =
Optimum stocking level (i.e. order quantity)
Stockout risk =
part of newsvendor
1.00 - Service Level Percentage
