Week 4 - Statistical Safety Stock & ABC Analysis Flashcards
How much stock should a company order at once?
The economic order quantity (EOQ) amount
How do you workout standard deviation?
Standard deviation = square root of the variance
How do you workout variance? (2)
• Find the differences of each value from the average of the values
• Square those differences then get an average of the square differences which gives the variance
Example of a normal distribution curve
3 Characteristics of safety stock
• Is the maximum probable demand during lead time
• Is the expected demand during the lead time
• Is needed because demand and order lead time is not predictable
What makes up the ‘estimated demand during lead time’?
Demand during lead time = order lead time + demand rate
Formula for the average demand during lead time
Demand x lead time
Formula for the standard deviation during lead-time
• Sl is the standard deviation for lead time
• Sd is the standard deviation for demand
• D is demand
• L is lead time
What is meant by the order point?
is the level of current inventory at which a new order is placed
Formula for the ordering point (OP)
OP = EDDLT + SS
• EDDLT = Estimated demand during lead time
• SS = Safety stock
What is the trade off for increasing safety stock?
It reduces the probability of a stock-out during the lead time but can incur a costs because of it
What is FMCG alternative for calculating safety stock?
• FE is the forecast error
• RLT is the replenishment lead time
What is the formula for stock quantity?
Average of finished goods inventory + safety stock level
What is the concept of Pareto’s principle aka 80/20 rule?
It concludes 80% of the events arrives from 20% of the causes
80/20 rule in relation to inventory
20% of the quantity of goods stored is represents 80% of the cost
How do you conduct an ABC Analysis? (2)
• Has 3 categories:
- A = 80%
- B = 15%
- C = 5%
• To get the 80% you total the usage values and get a percentage of that from the value of the total usage value
What is VED analysis used for?
Primarily for control of spare parts
What are the 3 categories for spare parts in VED analysis
• Vital
• Essential
• Desirable
What is FNSD Analysis?
FNSD analysis divides the items of stores into categories in the descending order of importance of their usage rate
What are the 4 categories in FNSD analysis?
• F - fast moving items - consumed in a short span of time
• N - normal moving items - consumed over a year or so
• S - slow moving items
• D - dead items
What is HML classification? (2)
• Is an ABC classification focusing purely on unit value
• 3 categories: High value items, medium value items and low value items
Examples of ABC criteria (4)
• Consequences of a stockout - higher priority potentially given to these if serious delays or disrupt other operations if they are not in stock
• Weight of volume
• Uncertainty of supply - some products even if low in volume may warrant more attention if there supply is erratic or uncertain
• High obsolescence or deterioration risk - items that lose their value quickly might require extra attention and monitoring
