OM 301
Classification System
1) A-B-C Classification 2) A few items makes up most of the dollar volume sales
(6) Basic Inventory Model
1) Economic Order Quantity (EOQ) 2) Production Order Quantity (POQ) 3) EOQ with quantity discount 4) Reorder Point (ROP) 5) Fixed Order Interval (FOI) 6) Single Period Model (SPM)
(7) Basic Economic Order Quantity Model Assumptions (EOQ)
1) Only one product 2) Known future demand (no variable demand) 3) Uniform demand pattern 4) Constant Lead-Time 5) No Quantity Discount 6) Instantaneous Replenishment 7) No Storage Space Required
Fixed Order Interval Model (FOI)
1) Orders are placed at fixed time intervals 2) The order quantity varies; typically the order quantity for a cycle is enough to bring the inventory level up to predetermined level
Service Level
1) Probably of a stock out 2) Percent of demand satisfied
When to use Fixed Order Interval Model (FOI)?
1) Suppliers policy nay encourage use. 2) Grouping orders from the same suppliers can produce savings in shipping cost. 3) Some circumstances do not lend themselves to continuously monitoring inventory position.
Perpetual Inventory System
1) System that keeps track of removals from inventory continuously , monitoring current level of each items.
The amount of safety stock depends on?
1) The expected demand during lead time. 2) The variability of demand during lead time. 3) The desired cycle service level.
Determinate of the Reorder point
1) The rate of demand (d) 2) The lead time (LT) 3) The extent of demand and/or lead time variability 4) The degree of stock-out risk acceptable to management
Lead Time (LT)
Amount of time it takes to get more products.
Three Things Needed for Total Cost (TC) in Quantity Discount Model?
Annual Ordering Cost + Annual Holding Cost + Annual Purchase Cost S(D/Q) + H(Q/2) + D*c = TC
Single Period Model (SPM) Graphs
Demand is variable; it may be approximated by.. 1) continuous distribution (uniform, normal) 2) Discrete distribution (Based historical frequencies)
What is reorder point level generally set at?
Enough to satisfy expected demand during lead time.
Order Size for Fixed Order Interval (FOI) Model?
Expected demand during protection interval + Safety Stock + Amount on hand at reorder time Weird equation.
Annual Holding Cost
H*(Q/2)
How does D*c affect total annual cost as a function of Quantity (Q)?
It does not affect Q because it is a constant. (Constants have no derivatives)
Product Order Quantity Model (POQ)
It is the same as the EOQ Model without instantaneous replenishment.
In EOQ, POQ, and QDM, when is Annual Holding and Order Quantity Equal?
Only if Q is the optimal quantity.
Excess Cost for SPM Equation and what it is.
Original Cost - Salvage Value (Excess cost pertains to items left over at the end of the period) (Salvage can be negative if there is cost associated with disposing of the product)
Average Inventory Level EOQ
Q/2
What does it mean when it says ROP is stated in terms of quantity?
Reorder when quantity on hand drops to a set level.
Shortage Cost for SPM Equation and what it is.
Revenue per unit - cost per unit (Unrealized Profit per unit) (Are there other costs of running out of stock?)
Annual Ordering Cost EOQ
S*(D/Q)
Optimal Order Quantity For EOQ
SQRT((2DS/IC))
Quantity Discount Model Break Quantity
The minimum order quantity to qualify for a cost C.
Service Level (S) For SPM
The probability that demand will not exceed the stocking level of S units. P(demand <=S)
What does Single Period Model (SPM) focus on?
Two Cost 1) Shortage 2) Excess
Two-Bin System
Two container of inventory, reorder when the first is empty.
When do we use Single Period Model? (SPM)
When ordering Perishables and other items with limited shelf life.
Reorder Point (ROP)
When the quantity on hand of item drops to this amount, the item is then reordered.
Equation for Reorder point (ROP) when both variables are constant?
d * LT
Window of vulnerability
for a stock-out is once the reorder point is reached, during lead time. The demand during lead time is a random variable.
Annual Service Level
is the percent of annual demand (D) that is satisfied; to determine it requires the expected number of units satisfied and the expected number of units short per year.
Cycle Service Level
is the probability of having enough stock to satisfy demand during lead time.
EOQ model determines a fixed order quantity (Q) while (ROP) determines what?
specifies when to order.
What is Safety Stock?
stock that is held in excess of expected demand, due to a variable demand/lead time.
What does the Economic Order Quantity Model do?
Calculates the value of order quantity (Q) that minimizes total annual cost.
Number of Orders a Year EOQ
D/Q