Week 6: Inventory Management Flashcards
What is inventory?
the stock of any item or resource used in an organization
Why manage inventory?
inventory is expensive due to storage, obsolescence, insurance, and the value of the money invested
Demand types
Independent demand and Dependent demand
Purposes of Inventory
- To maintain independence of operations.
- To meet variation in product demand.
- To allow flexibility in production scheduling.
- To provide a safeguard for variation in raw material delivery time.
- To take advantage of economic purchase order size.
- Many other domain-specific reasons
Inventory Costs
- Holding (or carrying) costs - storage facilities
- Setup (or production change) costs - obtaining the materials
- Ordering costs - managerial and clerical costs to prepare
- Shortage costs - when an item is depleted
Independent versus Dependent Demand
Independent: the demands for these items are unrelated to each other, or to activities that can be predicted with certainty VS Dependent: the need for an item is a direct result of the need for some other item, usually an item of which it is a part. Also, when the demand for the item can be predicted with accuracy due to a schedule or specific activity
Multiperiod Inventory Systems
they are designed to ensure that an item will be available on an ongoing basis throughout the year. The two types are fixed-order quantity (event triggered) models and fixed-time (time triggered) period models
Fixed-Order Quantity Models (Q-model)
an inventory control model where the amount reacquisitioned is fixed and the actual ordering is triggered by inventory dropping to a specified level of inventory (a perpetual system, records must reflect whether a redorder point has been reached)
Establishing Safety Stock Levels
- safety stock: the amount of inventory carried in addition to the expected demand
- demand is not constant and varies, safety stock must be maintained to prevent against stockouts
- state the number of weeks of supply needed to be kept in safety stock, or set the safety stock level
Fixed-Order Quantity Models (Q-model) with Safety Stock,
- danger of stockout occurs during lead time
- an order is placed when inventory level drops to reorder point, then when it is placed the inventory position increases so additional orders are not placed between the time when the order is placed and when it arrives
- quantity must be ordered, Q is calculated in the usual way considering the demand, reorder point is set to cover expected demand during the lead time plus a safety stock (determined by the desired service level)
- difference between fixed-order quantity model with KNOWN demand vs unknown is in computing the reorder point
Inventory position
the amount on hand plus on-order minus backordered quantities. In the case where inventory has been allocated for special purposes, the inventory position is reduced by these allocated amounts (when inventory drops to 36, place an order for 57 more)
Optimal order Quantity (EOQ)
this order size minimizes total annual cost by ordering and holding inventory
Reorder point (R)
an order is placed when inventory drops to this level
Safety Stock
the amount of inventory carried in addition to the expected demand
Inventory turn (term only)
a measure of the expected number of times inventory is replaced over a year
ABC inventory classification
divides inventory into dollar volume categories that map into strategies appropriate for the category and prioritizes inventory based on dollar usage (cost x volume)
