bmgt372 chapter 9

types of inventory

1. cycle stock 2. safety stock 3. anticipation inventory 4. pipeline inventory 5. maintenance, repair and operating items (MRO)

inventory costs

1. holding costs 2. ordering cost 3. shortage costs

reasons to carry inventory

1. protect against lead time demand 2. maintain independence of operations 3. balance supply and demand 4. buffer uncertainty 5. economic purchase orders

economic order quantity (equation)

EOQ = √(2DS/H) D= annual demand S = ordering cost H = holding cost

holding cost

H = IC H = dollar value to hold one unit in inventory over some time I = percentage of item cost C= cost of the item

fixed order quantity system

Inventory is replenished with a set quantity every time it is ordered; the time interval between orders may vary. - place an order when inventory reaches the reorder point ROP - Q = amount of quantity to reorder

total cost

TC = DC + (D/Q)S + (Q/2)H TC = total cost D = annual demand C = unit cost Q = order quantity S = ordering cost H = holding cost

hedge inventory

a form of inventory carried in anticipation of a price increase or shortage of products

inventory policy

addresses the basic questions of when and how much to order

fixed order quantity system (names)

also known as: - EOQ model - Q model - continuous review system - sawtooth model

seasonal inventory

an extra inventory buffer that is held in response to predictable demand increases that occur annually

raw materials

any materials that go into the final product

economic order quantity (EOQ)

economically optimal order quantity

safety stock (buffer stock)

extra inventory we carry to serve as a cushion for uncertainties in supply and demand

ordering cost (setup cost)

includes all the costs involved in placing an order and procuring the item - decides on order quantities, clerical costs involved in placing the order, tracking the order, and receiving it.

holding cost (carrying cost)

includes all the costs that vary with the amount of inventory held in stock

maintenance repair and operating items (MRO)

includes everything from office supplies and forms, to tools and parts needed to repair machines - make up a significant amount of inventory and need to be managed like all other inventories

anticipation inventory

inventories carried in anticipation of certain events - purpose to compensate for differences in the timing of supply and demand, and to smooth out flow of products throughout the supply chain

cycle stock

inventory for immediate use and is computed based on expected demand over a certain time period - assumes demand is known with certainty and computes how much stock is needed over a set period of time - accounts for fact that products are typically produced in batches

fixed time period system

inventory levels are checked in fixed time periods and the quantity that is ordered varies. also known as periodic review system Q = R - IP Q= quantity R= target inventory IP= inventory position

pipeline inventory (transportation inventory)

inventory that is in transit

service inventory

involves all activities that are carried out in advance of the customer's arrival

component parts

manufactured goods or subassemblies of finished items that organizations need to complete their own products

shortage costs

occur when we run out of cost - reflects consequences of not having enough in inventory

work in process inventory (WIP)

products or components that are no longer raw materials but have yet to become finished products

inventory

quantities of goods in stock

finished goods

units of product that have been completed but not yet sold to customers

reorder point (ROP)

when to order ROP = demand during lead time ROP = dL d= demand L= lead time