QDM Final

Inventory Turnover

*higher turnover preferred = costs of goods sold / inventory investment

Inventory as Percent of Total Assets

*lower percentage is preferred = (total inventory investment / total assets) * 100

Supply Chain Analytics

1. Inventory as Percent of Total Assets 2. Inventory Turnover 3. Weeks (or Days) of Supply 4. Bullwhip Effect Measure

Six Sourcing Strategies

1. Many suppliers 2. Few suppliers 3. Vertical integration 4. Joint ventures 5. Keiretsu networks 6. Virtual companies

Functions of Inventory

1. To provide a selection of goods for anticipated demand and to separate the firm from fluctuations in demand (e.g., seasonality) 2. To decouple or separate various parts of the production process 3. To take advantage of quantity discounts 4. To hedgeagainst inflation or some other event (e.g., upward price change, labor strike)

Weeks of supply is the reciprocal of inventory turnover and a large number usuallyindicates good supply chain performance. A. True B. False

B. False

EOQ Total Cost

= Annual Setup Cost + Annual Holding Cost = ((D/Q)*S) + ((Q/2)*H)

Weeks of Supply

= inventory investment / (annual costs of goods sold / 52 weeks)

Measure Bullwhip Effect

= variance of orders / variance of demand Bullwhip measure = 1: no amplification present Bullwhip measure > 1: variance amplification is present Bullwhip measure < 1: a smoothing or dampening is present

If​ A, B, and C are​ variables, which of the following is a valid constraint for a linear​ program? A. 2A​ + 5B​ <= 300 B. 4BC​ <= 150 C. 3AB​ + 4C​ >= 50 D. A2​ >= 100

A. 2A​ + 5B​ <= 300

Which of the following is NOT one of the basic assumptions of the basic EOQ​ model? A. Quantity discounts are possible. B. Lead time is known and consistent C. Demand for an item is known. D. Receipt of inventory is instantaneous and complete.

A. Quantity discounts are possible

The EOQ model assumes both demand and per-unit holding cost are deterministic andconstant. A. True B. False

A. True

The graphical method can only be used to solve a linear programming problem whenthere are two decision variables. A. True B. False

A. True

Which of the following is NOT one of the major causes of the bullwhip​ effect? A. shared demand information B. order batching C. price fluctuations D. demand forecast errors

A. shared demand information

Which of the following statements is NOT​ true? A. An increased sales effort may help a firm reach its profit goals more easily than would effective cost cutting. B. The objective of supply chain management is to coordinate activities within the supply chain to maximize the supply​ chain's competitive advantage and benefits to the ultimate consumer. C. Supply chain management describes the coordination of all supply chain​ activities, starting with raw​ materials, and ending with a satisfied customer. D. A supply chain includes​ suppliers; manufacturers​ and/or service​ providers; and​ distributors, wholesalers,​ and/or retailers who deliver the product​ and/or service to the final customer.

A. An increased sales effort may help a firm reach its profit goals more easily than would effective cost cutting.

Which of the following is NOT a part of inventory costs? A. lawyer's fee for legal services B. electricity bill of the warehouse C. storage room rental cost D. expedite shipping cost of the backordered items E. salary paid to the employees who process orders

A. lawyer's fee for legal services

What is the shadow price of a non-binding constraint? Why? Will this always be the case?

Always 0. If a resource is currently not fully consumed, it does not help to have additional units.

Figure 1 shows an answer report from Excel Solver. Which of the following is true aboutthe optimal solution?

At optimal, the left-hand-side of the third constraint is greater than the right-hand-side.

f A​, B​, and C are​ variables, which of the following functions is NOT​ linear? A. 2A​ + 3B​ + 6C B. ABC C. A D. 14A−4B​ + C

B. ABC

Bullwhip effect can be eliminated by increasing order quantity. A. True B. False

B. False

The optimal order quantity in a Newsvendor model balances the holding cost and or-dering cost. A. True B. False

B. False

What of the following statements about LP sensitivity analysis is NOT​ true? A. ​Trial-and-error is a valid approach to undertaking sensitivity analysis. B. Sensitivity information applies to simultaneous changes in several input data values. C. ​"Allowable Increase" values appear in both the Adjustable Cells section and the Constraints section of a sensitivity report. D. The shadow price is also known as the dual value.

B. Sensitivity information applies to simultaneous changes in several input data values

JC Manufacturing stocks connectors to produce Digital Motor Electronics for automo-biles. The demand for connectors is 15,000 units per month. The cost to place an order is2 $75. The holding cost for each unit of connector is $0.25 per month. A. The economic order quantity is 36,000 units. B. The economic order quantity is 3,000 units. C. The monthly holding cost is $450. D. The monthly setup cost is $400.

B. The economic order quantity is 3,000 units.

Which of the following statement is NOT​ true? A. The service level is the complement of the probability of a stockout. B. Probabilistic models are a​ real-world adjustment because demand and lead time will not always be known and constant. C. Having certain demand raises the possibility of a stockout. D. Probabilistic models relax the assumption that demand for a product is constant and certain.

C. Having certain demand raises the possibility of a stockout

A​ single-period inventory model is NOT applicable for A. milk. B. newspapers. C. furniture. D. seasonal goods.

C. furniture

Which of the following does NOT belong to holding​ costs? A. insurance on inventory B. storage costs C. order processing D. ​pilferage, scrap, and obsolescence

C. order processing

Probabilistic Demand

Challenge: Balance the cost of stock-outs with the cost of holding additional inventory.

Bullwhip Effect Mitigations

Change the way suppliers forecast demand by making this information available at all levels of the supply chain Share real demand information (POS terminals) Channel coordination, determine appropriate lot sizes Stabilize pricing Suppliers allocate orders based on past sales

Which of the following is true about ABC analysis?

Class A items represent 70% - 80% of the total dollar volume

Many Suppliers

Commodity products Suppliers compete with one another based on price

Finished Goods

Completed product awaiting shipment

Newsvendor Model Equation

Cs = Sales Price - Cost Co = Cost - Salvage Value Optimal Service Level = Cs / (Cs - Co) --> Z Optimal Order Quantity = Avg. Demand + (Z*Standard Deviation)

A linear programming is an optimization problem whose A. the objective function is linear in all the decision variables. B. the constraints are non-negative and continuous. C. the constraints are linear in the decision variables. D. Both A and C E. All of A, B, and C

D. Both A and C

Which of the following statements is NOT true regarding the bullwhip​ effect? A. Bullwhip fluctuations in the supply chain increase the costs associated with​ inventory, transportation, shipping and receiving. B. Inaccurate information results in distortions and​ fluctuations, causing what is known as the bullwhip effect. C. Bullwhip fluctuations in the supply chain decrease customer service and profitability. D. The bullwhip effect occurs as order are relayed from​ retails, to​ distributors, to​ wholesalers, to​ manufacturers, with fluctuations decreasing at each step in the sequence.

D. The bullwhip effect occurs as order are relayed from​ retails, to​ distributors, to​ wholesalers, to​ manufacturers, with fluctuations decreasing at each step in the sequence.

Economic Order Quantity (EOQ)

Determine the order quantity that minimizes total ordering and holding cost = square root of (2DS/H) Assumptions: Demand is known, constant, and independent Lead time is zero Receipt of inventory is instantaneous Quantity discounts are not possible Order and setup costs are fixed Stock-outs can be completely avoided

Inventory Models

Deterministic demand models 1. Economic Order Quantity model (EOQ) Probabilistic demand models 1. Safety Stock model 2. Newsvendor model

ABC Analysis

Divides inventory into three classes based on annual dollar volume Class A - high annual dollar volume (70-80%) Class B - medium annual dollar volume (15-25%) Class C - low annual dollar volume (5%)

Virtual companies

Exceptionally lean performance, low capital investment, flexibility, and speed

Answer Report

Final Value: indicates optimal solution and objective function Slack: indicates the difference between LHS and RHS. Binding constraints: constraints with LHS equal to RHS at optimal Non-Binding constraints: constraints with strict inequality at optimal

Vertical Integration

Forward and backward integration

Few Suppliers

Long term relationships Economies of scale and learning curve improvements Cost of changing suppliers is huge

Keiretsu networks

Long-term relationships

Optimization

Optimization Problem Components 1. Decision Variables 2. Objective Function (to maximize or minimize) 3. Constraints (requirements or limitations)

Continuous Review

Monitor inventory level continuously Place order when reorder point reached, to replenish in time, based on lead time, demand, safety stock Order quantities are the same, but time between orders will vary Good for higher-value items (e.g., A, some B items) Can result in lower inventory-related costs

Maintenance / Repair / Operating (MRO)

Necessary to keep machinery and processes productive

Linear Programming

Objective function and constraints are all linear functions Minimize F(x) subject to ax + b <= 0

B Items

Occasional Focus Periodic Review Transactional Occasional Supplier Contact

Newsvendor Model

Only one order is placed for a product Units have little or no value ("salvage value") at the end of the sales period Used for "perishable" inventory, either physically or economically *Airline seats, Hotel rooms, Rental cars, Other products we normally think of as being "perishable"

Raw Material

Purchased but not processed

A Items

Real-time Focus Continuous Review Active Management Frequent Supplier Contact

Sensitivity Report

Reduced Cost: how much the objective coefficient for a variable must be increased/decreased before the optimal value of the variable becomes positive *Reduced cost is 0 when variable is positive in optimal solution *When reduced cost is NOT 0, the variable must be 0 at optimal Allowable Increase/Decrease: the amount the objective coefficient for a variable can be increased/decreased without changing the optimal solution

Interpreting Sensitivity Report

Reduced cost of X1 is 0. Allowable increase/decrease 7 and 1.089 X1 current coefficient is 3. Interpretation: *The optimal solution of X1 is not 0 *The optimal solution of X1 will be the same between (3-1.089) and (3+7) *If reduced cost of X1 is not 0, then the optimal solution of X1 must be 0

Periodic Review

Review inventory level at fixed intervals Place order to get up to some "target" level Order quantities will vary, time between orders is the same Good for lower-value items (e.g., B, C items)

Interpreting Sensitivity Report

Shadow Price of C1 is $0.538/unit. Allowable increase/decrease is 103.33 and 38.70. Interpretation: *Constraint C1 is bounding at optimal. All units depleted *Slack for constraint C1 is 0 *We are willing to pay at most $0.538 for one extra unit of C1 *Having one extra unit of C1 could improve the objective function by 0.538 *The shadow price stays the same between (100-38.7)and (100+103.3) *If we make 20 additional units of resource C1 available, the objective function can be improved by 20×0.538 = 10.76

Sensitivity Report

Shadow Price: the cost to purchase an additional unit of resource. It also equals the change in objective value for one unit increase in RHS Allowable Increase/Decrease: increase/decrease of the RHS for which the shadow price stays the same; that is, the effect on the objective value stays the same in this range

C Items

System Managed Review Issues Only Order as needed Limited Supplier Contact

Supply Chain Management

The coordination of all supply chain activities, starting with raw materials and ending with a satisfied customer Objective: maximize its competitive advantage and benefits to the ultimate consumer

Safety Stock

The extra units in inventory as a buffer to the reorder point. Use safety stock to achieve a desired service level Service level: probability of in-stock Depends on shortage cost and additional holding cost

Reorder Points (ROP)

The reorder point (ROP) -when to order Lead time (L) is the time between placing and receiving an order = d*L where d = D / # of working days in a year

Bullwhip Effect

The tendency for larger order size fluctuations as orders are relayed to the supply chain from retailers Work towards real time visibility

Work-in-Process (WIP)

Undergone some change but not completed

Single Period Model

Used for items which are "perishable," either physically or economically Balance of expected demand (uncertain) versus risk of holding de-valued or worthless inventory Not just for truly single-period problems *Airlines, hotels, car rental firms use a form of this called "Revenue Management"

Graphical Approach

Works for Problems with 2 Variables 1. Graph the constraints to find the Feasible Region 2. Evaluate the objective function at the cornerpoints ("extreme points") of the feasible region to find the optimal solution.

A supply chain ends with

a satisfied customer

ABC analysis divides an​ organization's on-hand inventory into three classes based upon

annual dollar volume

An optimal solution to a linear programming problem MUST lie

at the intersection of at least two constraints

In the​ single-period inventory​ model, the overage cost is

cost per unit − salvage value per unit

The cost to produce the goods or services sold for a given period is referred to as

costs of goods sold

In linear programming, choices available to a decision maker are called

decision variables

With a probabilistic model, decreasing the service level will

decrease the total holding cost of the inventory policy.

Bullwhip Effect Causes

demand forecast updating order batching price fluctuations rationing (aka allocation) and shortage gaming

The advantage of having few suppliers is to

form a​ long-term relationship

Bose manufactures premium audio equipments, including speakers, sound-bars, and head-phones. The company's first Bose retail store was opened in 1993 in Kittery Maine. Thereare currently 190 stores in the US. This supply chain strategy is called

forward integration

In linear​ programming, a solution that does not simultaneously satisfy all constraints is called an

infeasible solution

Which of the following strategies is part​ collaboration, part purchasing from few​ suppliers, and part vertical​ integration?

keiretsu networks

Policies based on ABC analysis might include investing

more in supplier development for A items

The advantage of having many potential suppliers is their willingness to

offer lower prices in the short term

What is transferring a​ firm's activities that have traditionally been internal to external​ suppliers?

outsourcing

Three common measures of supply chain performance​ are:

percentage invested in​ inventory, inventory​ turnover, and weeks of supply

Tesla's latest driving system calculates the number of stops needed for charging on ex-tended roadtrips. Suppose Elon drives a Tesla Model X from Seattle, WA to San Diego,CA. During the trip, one stop per 4-hour driving is suggested and he always fully charge thebattery at each stop. Which inventory control system is used here?

periodic review system

Linear programming is a mathematical technique designed to help operations managers plan and make decisions necessary to allocate

resources

Extra units that are held in inventory to reduce stockouts are called

safety stock

What is the value of one additional unit of a scarce resource in​ LP?

shadow price

In a sensitivity report from Excel Solver, the reduced cost of a decision variable

shows how much the objective coefficient must change before the optimal value of thevariable becomes positive.

What is a system for ordering items that have little or no value at the end of a sales​ period?

single-period inventory model

The objective of inventory management is to

strike a balance between inventory investment and customer service.

In a typical​ product-mix problem in linear​ programming, each general constraint states that

the amount of a resource used ≤ the amount of resource available

One use of inventory is

to provide a hedge against inflation

What is developing the ability to produce goods or services previously purchased or actually buying a supplier or a​ distributor?

vertical integration

With a probabilistic​ model, increasing the service level

will increase the cost of the inventory policy

Prior to embarking on supply chain​ design, operations managers must first consider

​"make-or-buy" and outsourcing decisions