Inventory Management

In a two-bin inventory system, the amount contained in the second bin is equal to the:

A. ROP.

Lead time is exactly 20 days long. Daily demand is normally distributed with a mean of 10 gallons per day and a standard deviation of 2 gallons. What is the standard deviation of demand during lead time?

C. 2 times the square root of 20

Cycle stock inventory is intended to deal with:

D. expected demand.

In a supermarket, a vendor's restocking the shelves every Monday morning is an example of:

D. fixed order intervals.

Fixed Order Quantity models

Demand for the product is constant and uniform -lead time is constant -price per unit is constant -Inventory Holding cost is based on average invetory. -ordering or setup costs are constant -all demands for the product will be satisfied

A stock or store of goods is called a(n):

E. inventory.

Safety Stock

Extra stock held due to uncertainties in demand or supply _ increases with higher variation in demand or supply _ should be determined by customer service level goals

A quantity discount will lower the reorder point.

FALSE

In the fixed-order-interval model, the order size is the same for each order.

FALSE

In the quantity discount model, if holding costs are given as a percentage of unit price, a graph of the total cost curves will have the same EOQ for each curve.

FALSE

In the quantity discount model, the optimum quantity will always be found on the lowest total cost curve.

FALSE

It is critical that the exact quantity calculated in the EOQ model be ordered.

FALSE

The average inventory level is inversely related to order size.

FALSE

The fixed-order-interval model requires a continuous monitoring of inventory levels.

FALSE

The objective of inventory management is to minimize the cost of holding inventory.

FALSE

Multi-Period Models

Fixed -order quantity models -Also called the economic order quantity, EOQ and Q model -event triggered

Fixed-Time Period Model

Item is ordered at certain intervals of time.

Single Period Inventory

Single Period inventory -one time purchasing decision vendor selling t shirts - balance inventory

Annual ordering cost is inversely related to order size.

TRUE

Carrying cost is a function of order size; the larger the order, the higher the inventory carrying cost.

TRUE

DVD recorders would be an example of independent-demand items.

TRUE

In the single-period model, the service level is the probability that demand will not exceed the stocking level in any period.

TRUE

Interest, insurance, and opportunity costs are all associated with holding costs.

TRUE

Monitoring inventory turns over time can be used as a measure of performance

TRUE

One important use of inventories in manufacturing is to decouple operations through the use of work-in-process inventories.

TRUE

Inventory Management

The planning and controlling of inventories in order to meet the competitive priorities of the organization _ maximize supply chain potential _ getting the right amount of inventory is critical --> not extra and not less than what needed = efficiency

ABC Analysis

The process of dividing SKUs into three classes (A,B,C) according to their dollar usage so that managers can focus on items that have the highest dollar value

Inventory System

The set of policies and that controls that that monitor levels of inventory. - determines what levels should be maintained, when stock should be replenished and how large orders should be.

Inventory

The stock of any item or resource used in an organization. -includes raw materials, finished products, competent, -manufacturing inventory: refers to items that contribute to or become part of a firm's products

Inventory Holding Cost

The sum of the cost of capital and the variable costs of keeping items on hand, such as storage and handling, taxes, insurance, and shrinkage

Single Period Model

Used when we are making a one-time purchase of an item.

Fixed Time Period Models

-Also Called the periodic review system, fixed order interval system and P-model Refer to slide 21

Inventory Costs

-Holding or carrying costs - Setup or production change costs -Ordering Costs -Shortage Costs

Purpose of Inventory

-Maintain independence of operations -to meet variation in product demand -Allow flexibility in production scheduling -to provide safeguard for variation in raw material -take advantage of an economic order size

Multi-Period Inventory model

-fixed order quantity models - Fixed time period models ex.monthly sales call by sales reps

Single Period Model Applications

-overbooking of airline flights -Ordering of clothing and other fashion items -One time order for events - E.g., t shirts for a concert

2 Methods of Keeping Track of Inventory

1) Continuous review (Q) System 2) Periodic Review System (P)

3 Types of Shrinkage

1) Pilferage = theft of inventory by customers or employees 2) Obsolescence = inventory cannot be inventory used or sold at full value, owing to model changes, engineering modifications, or unexpectedly low demand 3) Deterioration *not important slide

Why have inventory?

1) Provides protection from uncertainties in demand and supply 2) Enables the firm to achieve economies of scale 3) Preparing for anticipated events 4) Materials must move from place to place 5) Acts as a buffer between critical interfaces within the supply chain 6) Speed delivery and improve the firm's on-time 7) Reduce stockouts and backoders

3 Types of Inventory Based on Usefulness

1) Raw materials 2) Work-in-process 3) Finished goods

Inventory Management is Used to Determine:

1) What items should be ordered and stored 2) When items should be ordered and stored 3) How much should be ordered and stored

Pressure for Large Inventories

1) customer service = stockout and backorder 2) ordering cost 3) setup cost 4) labor and equipment utilization 5) transportation cost 6) payments to suppliers

4 Types of Inventory Based on How It was Created

1) cycle 2) safety stock 3) anticipation 4) pipeline

Supply Chain Inventory Models

1. Raw Materials - 2. Manufacturing Plant Inventory 3. Retail Store Inventory

Class A SKUs

20% of SKU but 80% of dollar usage _ need to maintain high inventory turnover --> more control

Class B SKUs

30% SKU but only 15% dollar usage _ less frequent monitoring

Class C SKUs

50% SKU but only 5% dollar usage _ looser control _ holding cost low --> can hold a lot more --> larger lot size

Economic Order Quantity

= EOQ help determine lot size that minimizes total annual inventory holding and ordering cost

Average Annual Cost to Hold Inventory

= Firm's holding cost X Average Value of Total Inventory

Stock-keeping Unit

= SKU An individual item or product that has an identifying code and is held in inventory somewhere along the supply chain

Backorder

A customer order that cannot be filled when promised or demanded but is filled later

Inventories

A stock of materials used by the firm to transform to satisfy customer demand or to support the production of services or goods

In an A-B-C system, the typical percentage of the number of items in inventory for A items is about:

A. 10.

Given the same demand, setup/ordering costs, and carrying costs, the EPQ calculated using incremental replenishment will be ____________ if instantaneous replenishment was assumed.

A. greater than the EOQ

Average demand for a particular item is 1,200 units per year. It costs $100 to place an order for this item, and it costs $24 to hold one unit of this item in inventory for one year. If the fixed-order-interval model is chosen in this instance, how often (on average) will this item be ordered?

A. once a month

Which of the following interactions with vendors would potentially lead to inventory reductions?

A. reduced lead times

Safety Stock

Amount of inventory carried in addition toe expected demand. -determined based off of many criteria. -keep certain number of weeks in supply. -Best approach is to keep probability.

personal appeals

An influence tactic in which the requestor asks for something based on personal friendship or loyalty,

apprising

An influence tactic in which the requestor clearly explains why performing the request will benefit the target personally

exchange tactic

An influence tactic in which the requestor offers a reward in return for performing a request,

Stockout

An order that cannot be satisfied, resulting in a loss of the sale

Pipeline vs. Lot Size

Assumes that both d and L are constants and that L is not affected by the order or lot size, Q _ Changing an item's lot size does not directly affect the average level of the pipeline inventory. _ Nonetheless, the lot size can indirectly affect pipeline inventory if it is related to the lead time. --> pipeline inventory will change depending on the relationship of L to Q.

In the basic EOQ model, if D = 60 per month, S = $12, and H = $10 per unit per month, EOQ is:

B. 12.

A fill rate is the percentage of _____ filled by stock on hand.

B. demand

If no variations in demand or lead time exist, the ROP will equal:

B. expected usage during lead time.

A risk avoider would want ______ safety stock.

B. more

Which of the following is typically the largest of all inventory costs?

B. purchase cost

In a single-period model, if shortage and excess costs are equal, then the optimum service level is:

C. .50.

In a single-period inventory situation, the probabilities that demand will be 1, 2, 3, or 4 units are .3, .3, .2, and .2, respectively. If two units are stocked, what is the probability of selling both of them?

C. .7

In the A-B-C classification system, items which account for 15 percent of the total dollar volume for a majority of the inventory items would be classified as:

C. C items.

Which is not a true assumption in the EOQ model?

C. No more than three items are involved.

Dairy items, fresh fruit, and newspapers are items that:

C. are subject to deterioration and spoilage.

The management of supply chain inventories focuses on:

C. both internal and external inventories.

Which of these products would be most apt to involve the use of a single-period model?

C. fresh fish

Holding Cost and Value of Inventories

Companies usually state an item's holding cost per period of time as a percent of its value _ typically ranges from 15 to 35 percent of its values

In the basic EOQ model, if lead time increases from five to 10 days, the EOQ will:

D. remain the same.

ROP models indicate to managers the time between orders.

FALSE

Example of Holding Cost and Value of Inventories

Firm's holding cost = 20% Average value of total inventory = 20 % of sales Average annual cost to hold inventory = 4% <-- [0.20(0.20)] of total sales. This cost is sizable in terms of gross profit margins, which often are less than 10 percent --> create pressures for small inventories

Advantage for Cycle Inventory

Good for when demand rate is constant and uniform _ provide a good estimate when demand rates are not constnats

Pressure for Small Inventories

Holding cost: 1) cost of capital 2) storage and handling 3) taxes, insurance and shrinkage

Cycle Inventory

Inventory that results from the replenishment process of a fixed order quantity _ the portion of total inventory that varies directly with lot size _ the greater the time between orders --> larger order size _ lot sizing

Anticipation Stock

Items stocked in anticipation of a known event _ can be seasonal stock _ absorbed uneven rates of demand

Pipeline Inventory

Items that are enroute from one location to another = in-transit inventory _ considered part of on-hand inventory, even though it is not available

Work-in-Process

Items, such as components or assemblies, needed to produce a final product in manufacturing or service operations.

Finished Goods

Manufacturing plants, warehouses, and retail outlets are the items sold to the firm's customers _ finished goods of one firm may actually be the raw materials for another

Storage and Handling Costs

May be incurred when a firm rents space on either a long- or short-term basic <-- inventory takes up space and must be move in and out of storage _ inventory holding cost is incurred when a firm could use storage space productively in some other way

Inventories as an Investment

Monies invested in inventory are not available for investment in other things --> represent a drain on the cash flows of an organization = temporary monetary investment

Taxes and Insurance

More taxes are paid if end-of-year inventories are high, and the cost of insuring the inventories increases

Cost of Capital

Opportunity cost of investing in an asset relative to the expected return on assets of similar risk _ Inventory is an asset

Inventory Models with Price Breaks

Price Varies with the order size to find the lowest cost calculate the order quantity for each price and see if the quantity is feasible. 1. sort prices from lowest to highest and calcualte order quantiity for each price refer to slide 35

Average Cycle Inventory

Q = lot size; quantity at maximum 0 = quantity at minimum

Profit margins tend to be inversely related to inventory turns.

TRUE

To provide satisfactory levels of customer service while keeping inventory costs within reasonable bounds, two fundamental decisions must be made about inventory: the timing and the size of orders.

TRUE

Variability in demand and/or lead time can be compensated for by safety stock.

TRUE

When the item is offered for resale, shortage costs in the single-period model can include a charge for loss of customer goodwill.

TRUE

When to order can be calculated by the ROP and expressed as a quantity.

TRUE

Setup Cost

The cost involved in changing over a machine or workspace to produce a different item

Ordering Cost

The cost of preparing a purchase order for a supplier or a production order for manufacturing.

independant demand

The demand for various items are unrelated -workstation produce many parts unrelated but meet external demand.

Lot Sizing

The determination of how frequently and in what quantity to order frequently

Raw Materials

The inventories needed for the production of services or goods

Dependent Demand

The need for any one item is a direct result of the need for some other item. -car requires four wheels

Fixed-order Period Model

Used when we want to maintain an item "In-stock" and when we restock, a certain number of units must be ordered.

Pipeline Inventory Equation

_ DL , which is the average demand for the item per period _ (d ) multiplied by the number of periods in the item's lead time (L) to move between the two points

Too Much or Too Little Inventory

_ Too much inventory on hand reduces profitability _ Too little inventory on hand creates shortages in the supply chain and ultimately damages customer confidence. Inventory management involves trade-offs.

Safety Stock Advantage

_ avoid customer service problems _ avoid hidden costs of unavailable components _ avoid suppliers mishaps --> ensures operations are not disrupted

Inventory Accuracy

refers to how well the inventory records agree with physical count

Cycle Counting

the physical inventory taking technique in which inventory is counted on a frequent basis rather than once or twice a year.

Inventory

-inventory can be stacks of money, equipment products -Largest asset place on the balance sheet at any given time. -difficult convert back into cash -want to get inventory down as far as possible.

In the basic EOQ model, an annual demand of 40 units, an ordering cost of $5, and a holding cost of $1 per unit per year will result in an EOQ of:

A. 20.

Daily usage is exactly 60 gallons per day. Lead time is normally distributed with a mean of 10 days and a standard deviation of 2 days. What is the standard deviation of demand during lead time?

A. 60 times 2

In the A-B-C classification system, items which account for 60 percent of the total dollar volume for few inventory items would be classified as:

A. A items.

In the single-period model, if excess cost is double the shortage cost, the approximate stockout risk, assuming an optimum service level, is ___ percent.

B. 67

In a single-period model, if shortage cost is four times excess cost, then the optimum service level is ___ percent.

B. 80

Weekly demand for a particular item averages 30 units, with a standard deviation of 4. This item is managed with a fixed-order-interval model. The order interval is three weeks, and this item has a certain lead time of one week. The desired service level is 97.5 percent. Assume that it is now time to place another order, and there are 43 units on hand. How many units should be ordered?

B. 93

In the quantity discount model, with carrying cost stated as a percentage of unit purchase price, in order for the EOQ of the lowest curve to be optimum, it must:

B. be in a feasible range.

An operations strategy for inventory management should work toward:

B. decreasing lot sizes.

When carrying costs are stated as a percentage of unit price, the minimum points on the total cost curves:

C. do not line up.

An operations strategy which recognizes high carrying costs and reduces ordering costs will result in:

C. greatly decreased order quantities.

The purpose of cycle counting is to:

C. reduce discrepancies between inventory records and actual quantities.

Even though it is often the case that no cash outflows result when demand exceeds capacity, __________ can nevertheless be experienced in those circumstances

C. shortage costs

All of the following are possible reasons for using the fixed-order-interval model except:

C. the required safety stock is lower than with an EOQ/ROP model.

In the basic EOQ model, if annual demand is 50, carrying cost is $2, and ordering cost is $15, EOQ is approximately:

D. 28.

Which of the following is not one of the assumptions of the basic EOQ model?

D. Quantity discounts are available.

Which one of the following is implied by a lead time service level of 95 percent?

D. The probability is .95 that demand during lead time will not exceed the amount on hand at the beginning of lead time.

Which of the following is not true for the economic production quantity model?

D. There are no ordering or setup costs.

If there are shipping cost economies that result from bundling orders for different items together, the __________ model becomes a relatively more attractive option.

D. fixed-order-interval

A nonlinear cost related to order size is the cost of:

D. receiving.

If average demand for an inventory item is 200 units per day, lead time is three days, and safety stock is 100 units, the reorder point is:

E. 700 units.

Which one of the following is implied by an annual service level of 95 percent?

E. Approximately 95 percent of all demand will actually be satisfied directly from on-hand inventory.

In the basic EOQ model, if annual demand doubles, the effect on the EOQ is:

E. It increases by about 40 percent.

The need for safety stocks can be reduced by an operations strategy which:

E. decreases lead time variability.

The EOQ model is most relevant for which one of the following?

E. determining fixed order quantities

A cycle count program will usually require that A items be counted:

E. more often than annually.

Which one of the following is not generally a determinant of the reorder point?

E. purchase cost

Which of the following is least likely to be included in order costs?

E. temporary storage of delivered goods

The introduction of quantity discounts will cause the optimum order quantity to be:

E. unchanged or greater.

A retail store that carries twice as much inventory as its competitor will provide twice the customer service level.

FALSE

A single-period model would be used mainly by organizations going out of business

FALSE

An example of inventory holding cost is the cost of moving goods to temporary storage after receipt from a supplier.

FALSE

An inventory buffer adds value and lowers cost in all supply chains.

FALSE

Because price is not a factor in the EOQ formula, quantity discounts will not affect EOQ calculations.

FALSE

Decoupling operations applies to the railroad industry.

FALSE

Discrete stocking levels are used when an organization does not want visibility of inventory levels.

FALSE

EOQ inventory models are basically concerned with the timing of orders.

FALSE

In the A-B-C approach, C items typically represent about 15 percent of the number of items, but 60 percent of the dollar usage

FALSE

In the EOQ formula, holding costs under 10 percent are expressed as percentages, above 10 percent are expressed as annual unit costs.

FALSE

ROP models assume that demand during lead time is composed of a series of dependent daily demands.

FALSE

Reorder point models are primarily used for dependent-demand items.

FALSE

Safety stock eliminates all stockouts

FALSE

Safety stock is held because we anticipate future demand.

FALSE

The A-B-C approach involves classifying inventory items by unit cost, with expensive items classified as A items and low-cost items classified as C items.

FALSE

The single-period model can be very helpful in determining when to order

FALSE

Understocking an inventory item is a sure sign of inadequate inventory control.

FALSE

Solving quality problems can lead to lower inventory levels

TRUE

The EOQ should be regarded as an approximate quantity rather than an exact quantity. Thus, rounding the calculated value is acceptable.

TRUE

The average inventory level and the number of orders per year are inversely related: As one increases, the other decreases.

TRUE

The basic EOQ model ignores the purchasing cost

TRUE

The fixed-order-interval model requires a larger amount of safety stock than the ROP model for the same risk of a stockout.

TRUE

The inventory value of the supply chain exceeds the inventory value of the organization's work-in-process inventory.

TRUE

The overall objective of inventory management is to achieve satisfactory levels of customer service while keeping inventory costs reasonable.

TRUE

The rate of demand is an important factor in determining the ROP

TRUE

The single-period model can be very helpful in determining how much to order.

TRUE

The total cost curve is relatively flat near the EOQ.

TRUE

The two main concerns of inventory control relate to the costs and the level of customer service.

TRUE