Week 4 - Statistical Safety Stock & ABC Analysis

Question 1

How much stock should a company order at once?

Answer 1

The economic order quantity (EOQ) amount

Question 2

How do you workout standard deviation?

Answer 2

Standard deviation = square root of the variance

Question 3

How do you workout variance? (2)

Answer 3

• 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

Question 4

Example of a normal distribution curve

Answer 4

Question 5

3 Characteristics of safety stock

Answer 5

• 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

Question 6

What makes up the ‘estimated demand during lead time’?

Answer 6

Demand during lead time = order lead time + demand rate

Question 7

Formula for the average demand during lead time

Answer 7

Demand x lead time

Question 8

Formula for the standard deviation during lead-time

Answer 8

• Sl is the standard deviation for lead time
• Sd is the standard deviation for demand
• D is demand
• L is lead time

Question 9

What is meant by the order point?

Answer 9

is the level of current inventory at which a new order is placed

Question 10

Formula for the ordering point (OP)

Answer 10

OP = EDDLT + SS
• EDDLT = Estimated demand during lead time
• SS = Safety stock

Question 11

What is the trade off for increasing safety stock?

Answer 11

It reduces the probability of a stock-out during the lead time but can incur a costs because of it

Question 12

What is FMCG alternative for calculating safety stock?

Answer 12

• FE is the forecast error
• RLT is the replenishment lead time

Question 13

What is the formula for stock quantity?

Answer 13

Average of finished goods inventory + safety stock level

Question 14

What is the concept of Pareto’s principle aka 80/20 rule?

Answer 14

It concludes 80% of the events arrives from 20% of the causes

Question 15

80/20 rule in relation to inventory

Answer 15

20% of the quantity of goods stored is represents 80% of the cost

Question 16

How do you conduct an ABC Analysis? (2)

Answer 16

• 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

Question 17

What is VED analysis used for?

Answer 17

Primarily for control of spare parts

Question 18

What are the 3 categories for spare parts in VED analysis

Answer 18

• Vital
• Essential
• Desirable

Question 19

What is FNSD Analysis?

Answer 19

FNSD analysis divides the items of stores into categories in the descending order of importance of their usage rate

Question 20

What are the 4 categories in FNSD analysis?

Answer 20

• 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

Question 21

What is HML classification? (2)

Answer 21

• Is an ABC classification focusing purely on unit value
• 3 categories: High value items, medium value items and low value items

Question 22

Examples of ABC criteria (4)

Answer 22

• 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