Module 6

Dwell time

(days inventory sits idle)/(days inventory moves in supply chain)

Low inventory levels yield...

- Low holding costs (inventory carrying costs) - Easier and more accurate control of inventory - A focus on quality execution (no room for error)

Limitations of EOQ

-Basic form does not account for quantity discounts -Does not consider the interactions between items -Does not account for minimum order quantities -Does not factor in transportation discounts -Not appropriate for items with unstable demand

Why do firms carry inventory?

-maintaining customer service requirements -leverage economies of scale for production -take advantage of purchase discounts -take advantage of transportation discounts -act as a buffer for demand variability and lead time variability -hedge against risk

Assumptions for EOQ

1. Demand and Lead time are constant and certain 2. No lot size constraints 3. Fixed order quantity 4. No shortages

What is the reorder point the sum of?

Average lead time demand and safety stock

High inventory levels yield...

Better customer service stockout protection (wide variety and selection) Short lead times Lower cost per unit purchased/transported Volume discounts

Inventory turnover

COGS / avg inventory

Inventory turns

COGS/Average Inventory

Components of inventory carrying costs

Capital costs inventory service costs (insurance, taxes) storage space costs (warehouse) inventory risk costs (damage, obsolescence, theft)

drivers of inventory growth

Customer pressure for service SKU proliferation Scrambled merchandising Growth and variability of demand Length and variability of lead time Lack of information Number of warehousing locations Diffused inventory management responsibility

What does the square root law of cycle stocks suggest?

Cycle stocks increase as the square root of demand

EOQ

Deals with calculating proper order size with respect to ordering cost and holding costs. How many units should the retailer order at a time?

Fixed Order Point, Fixed Order Quantity Model

Determine an inventory level, at which to reorder the EOQ. Depending on demand, the interval between orders varies, but not the quantity ordered. Constant monitoring of inventory, triggered by quantity

T/F: According to the square root law of cycle stocks, an increase in sales should result in an increase in inventory-to-sales ratios.

False

T/F: Larger, less frequent replenishments should be scheduled for products with greater annual usage.

False

Which are more cost effective: full truckloads or LTL?

Full truckload

symptoms of poor inventory management

High inventory levels and frequent stockouts Inventory transfers between units in the same firm Time needed to find items High variance in turnover rate for different stocking locations Frequent sales to reduce inventory levels Suppliers with long or unreliable delivery times Purchasing based on quantity discounts Buyers evaluated on the basis of purchase price Production planning based on batch sizes

The strategic profit model is useful to illustrate which of the following?

How inventory management affects overall firm profitability

Which of the following statements about "A", "B", and "C" items are correct?

I. "A" items should be reviewed continuously III. "C" items should be replenished in larger quantities

Which of the following information is needed to complete a DRP table?

I. Store-level demand forecast II. Economic order quantities III. Current inventory levels IV. Lead time information

The square root law of cycle stocks is rooted in the recognition of what?

In the EOQ formula, demand (D) is under the square root

Forecasting

Increases customer satisfaction, schedule production more efficiently, lower safety stock requirement, reduce stockouts, more informed pricing decisions, reduce obsolescence

Where to find EOQ

Intersection of carrying (holding) cost and ordering cost

inventory centralization

Inventory consolidation substantially reduces total inventory holdings (square root rule)

Dead stock

Inventory that has lost normal value

_________ is a measure of how often inventories are depleted and replenished over the course of a given time period (e.g., year).

Inventory turnover

Why is the reorder point model also called the "R,Q" model?

It is defined by a reorder point R and an order quantity Q

Risk pooling is a tool to manage and reduce which of the following?

Lead time demand risk

Compared to a larger warehouse, a smaller warehouse should have __________ inventory turns. (assume all else is equal.)

Lower

Warehouse centralization will be most beneficial when the correlation of lead time demands what between stocking locations is...

Negative

Common inventory management pitfalls

No supply chain-wide metrics (no communication between members) inadequate definition of customer service inaccurate delivery status data (don't say when product is late) old/inefficient information systems ignore uncertainty/risk simplistic inventory stocking policies poor coordination discriminate against internal customers incomplete shipment methods

Fill rate

Percentage of customer demand filled from on-hand inventory

In-stock rate

Percentage of order cycles without any stockout occurrences

Risk pooling potentially enables firms to lower which of the following?

Safety stocks

Seasonal stock

Speculative stock held in anticipation of peak demand

When NOT to use LTD

Steady demand

Which of the following would occur if a firm chose not to hold inventory for a given product?

Stockout costs would increase.

Retailers worldwide lose more than $400 billion in sales annually due to which of the following?

Stockouts

Which of the following occurs as the order placement cost (K) increases? (Assume that nothing else changes.)

The EOQ increases

When stockout costs are unknown, which of the following is true?

The best option is to determine the order quantity using the basic EOQ

Customer demand uncertainty refers to which of the following?

The challenge associated with anticipating how much of a product customers will buy in a specific time period

In the context of the EOQ model, the term "sawtooth" refers to which of the following?

The pattern of inventory consumption and replenishment over time

In the context of inventory classification, the term annual usage refers to which of the following?

The product of annual sales (in units) and unit costs

What does the EOQ model help managers determine?

The size of an individual order

Lead time uncertainty refers to which of the following?

The variability in lead times across multiple order cycles

If the in-stock rate is 95%, which of the following is true?

There will be no stockout occurrences in 95 out of 100 order cycles

What are stockout costs?

They are difficult to estimate precisely

Lead time

Time that elapses when you place an order until that order is received/delivered

When should distribution requirements planning be used?

To determine total requirements in a distribution system

T/F: An increase in customer demand uncertainty, all else equal, will result in greater lead time demand uncertainty.

True

T/F: If, in a given scenario, the initial EOQ is 292 and there is a subsequent decrease in inventory holding costs, all else equal, the new EOQ will higher.

True

When to use LTD

When utilizing a forecasting system, and order quantity continually changes based on projected demand

What do inventory holding costs typically amount to?

about 15%-40% of the unit value per year

Risk pooling

an approach to risk management that aggregates risk to reduce its impact

Safety stock variables

average replenishment cycle daily sales frequency of event

Types of inventory

cycle stock safety stock in-transit stock speculative stock seasonal stock dead stock

more inventory turns ??? inventory carrying costs

decrease

Sources of uncertainty

demand (sales wont = forecast) performance cycle (logistical execution, delays)

he inventory performance metric that measures how efficiently inventory moves through the supply chain is

dwell time

in transit stock

expected stock en route to buyer's location

T/F: If the order placement cost (K) decreases, the optimal order quantity will increase.

false

Inventory reduction strategies

forecasting inventory centralization postponement supply chain inventory coordination

In the context of inventory management, the purpose of an ABC analysis is to ________.

identify the classes of products that represent high, medium, and low annual usage, respectively

When should we order

if you are stable = EOQ if you are unstable = LTD

Supply chain inventory coordination

inbound: just in time, supplier managed inventory outbound: quick response, continuous replenishment, vendor managed inventory

Higher service level will ??? safety stock requirement

increase

Speculative stock

inventory acquired to hedge against future price and availability changes

Safety stock

inventory maintained to buffer against uncertainties-- never expected to be used

Inventory performance metrics

inventory turnover dwell time in-stock rate fill rate

lead time demand ordering

order enough product to cover our demand over the upcoming lead time

Fixed-order-interval (FOI) model

orders are placed at fixed time intervals. HIGHER INVENTORY LEVELS (SAFETY STOCK) IN THIS ONE Triggered by time

Cycle stock

the amount of inventory needed to meet expected demand (normal sales)

postponement

the strategy of delaying final activities (put on a label, package, assemble) in the provision of a product until the orders are received

Square root law (inventory centralization)

total inventory* sqrt(future facilities/existing facilities)