week four Flashcards
what is inventory
Inventory is the raw materials, component parts, work-in-process, or
finished products that are held at a location in the supply chain.
Inventory
symbol = upside down triangle
* Raw materials
* Parts in stock
* Finished semi manufactured products, waiting for follow up production
* Work-in-process (WIP)
* Finished products
* Safety stock (SS)
* Seasonal stock
why inventory
- Decoupling fluctuations
Fluctuations are (unexpected) changes in supply and/or demand due to:
* Supply - delayed deliveries, insufficient quality, …
* Production - machine breakdown, workers calling in sick, mix up in the
schedule, capacity constraints, …
* Demand - order early, less demand than expected, changing orders, …
Other ways to manage fluctuations are:
* Capacity management - ramping up or down, overcapacity,…
* Waiting-time - You need raw materials and/or parts for production
- Delivery only possible in fixed quantities
- Cost reduction
* Quantity discounts
* Batching
* Price-fluctuations - …
inventory pros and cons
Pros
* Customer service improves (i.e., faster delivery)
* Less dependent upon suppliers
* Less uncertain
–Inventory costs account for approximately 40-70%
of total company costs
cons =* Inventory costs money!
Inventory costs
1. Carrying (or holding) costs
2. Ordering costs
3. Stock-out costs
- carrying costs
Carrying costs (or holding costs)
* Warehousing costs (rent, utilities, salaries)
* Money tied up in inventory (cost of capital, opportunity costs)
* Risks (obsolete, theft, fire etc.)
- ordering costs
Ordering costs are the expenses incurred to create and
process an order to a supplier.
They include the costs of obtaining the inventory and building
and maintaining relationships with suppliers
Examples of ordering costs are cost to:
* Prepare a purchase requisition
* Prepare a purchase order
* Inspect goods when they are received
* Put away goods once they have been received
* Process the supplier invoice related to an order
* Prepare and issue a payment to the supplier
The total amount of ordering costs that a business incurs will
increase with the number of orders placed
Steps:
* Annual demand (A) = 100 * 365 = 36,500 lids
* Purchase order = 36,500 / 500 = 73
* Ordering costs (O) = 73 * $10 = $730
Average sales = 100 cups of coffee each day
Cost to prepare one purchase requisition = $10
Order quantity of lids = 500.
The total amount of ordering costs that a business incurs will
increase with the number of orders placed
Stock-out costs
Stock-out cost is the lost income and expense associated with
a shortage of inventory:
1. Costs of no-sales
* Loss of the gross margin related to the sale.
* Loss of future sales.
2. Internal process-related
* When a company needs inventory for a production run and the inventory
is not available, it must incur costs to acquire the needed inventory and
produce the product on short notice
Stock-out cost is the lost income and expense associated with
a shortage of inventory:
→ Communication between Sales & Marketing and Supply Chain
simple formula - Profit= total sales - Total expanses
invetory management
Key questions:
* How much? → Economic Order Quantity (EOQ)
* When to place an order? → Re-Order Point (ROP)
economic order quantitty (EOQ)
The amount to order that minimises both the total costs of holding
inventory and (purchase) ordering costs
- the EOQ graph
The amount to order that minimises both the total costs of holding
inventory and (purchase) ordering costs
graph with three lines with order costs holding costs and tottal costs
The total amount of ordering costs that a business incurs will
increase with the number of orders placed.
The total amount of ordering
costs decreases if the
quantity ordered increases
(→ less orders placed
- costs trade-off
The amount to order that minimises both the total costs of holding
inventory and (purchase) ordering costs
When ordering the EOQ amount,
the annual ordering costs equal the annual carrying costs
economic order quantitiy (EOQ)
Assumptions:
* The ordering costs are well known and constant.
* The rate of demand is known and spread evenly throughout the year.
* The lead time is fixed.
* The purchase price of the item is constant.
* The replenishment is done instantaneously, the whole order is
delivered at once.
* Only one product is involved
Relevant variables:
A = Annual demand/usage
S = Ordering (set-up) costs
I = Annual carrying costs as a decimal or percentage (%) of
purchase unit price
C = Purchase unit price
Q = Order Quantity in units
EOQ: Trade off
There is a trade-off between holding costs and ordering costs
re-order point (ROP)
ROP = The level of inventory which triggers an action to replenish that
particular inventory stock.
In other words,
ROP is the minimum amount of an item which a firm holds in stock before
a new order is placed
If demand is stable and known,
place an order when inventory equals
demand during lead time
periodic revieuw system
Model that checks inventory at specific times and
orders quantities to bring inventory up to a target level
* Fixed moments in time, e.g. once a week or once a month.
* Fixed target level.
* Variable Order Quantity.
It establishes ordering routine
Relevant variables:
T = Target Level of Inventory
D = Demand per period
L = Lead Time
R = Review period
SS = Safety Stocks
Q = Order Quantity
I = Inventory
T = (D * (R + L)) + SS
Q = T - I
PERIODIC REVIEW SYSTEM
