Chapter 8 - Inventory Management

two major souces of uncertainty

1. demand - we don't expect sales = forecast 2. performance cycle - we don't expect logical execution at a constant rate

80/20 rule

80% of comapny's sales comes from 20% of its products; indicates the primary focus should be on 20% of products that generate the 80% of sales

how to calculate ROP under conditions of uncertainty

= (avg. daily demand (*) units times the length of the plenishment cycle) + Safety stock

reorder point formula

= avg. daily demand (DD) (*) units times the length of the replenishment cycle (RC)

formula for lead time demand

=length of the lead time in days (*) avg daily demand

inventory turnover formula

COGS / avg inventory

inbound supply chain inventory coordination

JIT - just in time, SMI - supplier managed inventory

outbound supply chain inventory coordination

QR - quick response, CR - continuous replenishment, ECR - effecifient consumer response, VMI - vendor managed inventory, CFR - collaborative planning, forecasting, and replenishment

low inventory turnover indicates

a company is taking longer to sell its inventory

dead stock

a product for which there is no sale during a 12-month period, inventory that has lost normal value

inventory turnover gives insights about

an organization's competitiveness and effeciciency

which industries is JIT ordering appropriate?

automobiles or computer manufacturing, where components have high valvue and high rates of obsolescence

limitations of the EOQ

basic form doesn't account for quantity discounts, does not consider the interactions between items, does not account for minimum order quantities, doesn't factor in transportation discounts, not appropriate for items with unstable demand

conflicting objectives of high inventory levels

better customer service, lower costs per unit purchased, made, and trasported

ordering costs

costs associated with ordering inventory; such as order costs and setup costs

inventory carrying costs

costs of holding an inventory such as: interest on investment, insurance, deterioration

economic order quantity (EOQ)

deals with calculating the proper order size with respect to costs of caryying the inventory and costs of ordering the inventory; determinds the point at which the sum of the carrying costs and ordering costs are minimize, or the point at which carrying costs = ordering costs

service parts logistics

designing a network of facilities to stock service parts, deciding upon inventory ordering policies, stocking the required parts, and the transporting parts from stocking facilities to customers

avg inventory equation

economic order quanitity / 2

stockout costs

estimating costs / penalties for a stockout; involve understanding of a customer's reaction to a company being out of stock when a customer wants to buy an item

lean manufacturing

focuses on the elimination of waster and the increase of speed and flow

inventory reduction strategies

forecasting, inventory centralization, postponement, supple chain inventory coordination

an increase in the number of orders leads to

higher order costs and lower carrying costs (respond in opposite ways to the number of orders or the size of orders)

when is lead time demand not appropriate?

in settings with relatively steady demand

what items are best ordered through EOQ?

inexpenisve items that have low rate of obsolescence

complementary products

inventories that can be used or distributed together example: razor blades and razors

speculative stock

inventory acquired to hedge against future price and availability changes inventory held for: seasonal demand, projected price increases, potential shortage of product

fixed order interval system

inventory is replenished on a constant, set schedule and is always ordered at a specific time; quantity ordered varies depending on forecast sales beofre the next order date

fixed order quantity system

inventory is replenished with a set quantity every time it is ordered; the time intervals between orders may vary

in-transit stock

inventory that is en route between various fixed facilities in a logistics system such as a plant, warehouse, or store, "rolling stock"

safety stock

inventory that is held in addition to cycle stock to guard against uncertainty in demand or lead time, never expected to be used

psychic stock

inventory that stimulates demand in the sense that customer puchases are stimulated by inventory that they can see

cycle stock

inventory that's needed to satisfy normal demand during the course of the order cycle

principle of postponement

labeling, packaging, assembly, manufacturing, intra vs inter - organizational

reorder (trigger) point

level of inventory at which a replenishment order is placed

high inventory turnover indicates

low levels of inventory - can increase chance of product stockouts

higher inventory levels results in

lower chances of a stockout (hence lower stockout costs)

conflicting objectives of low inventory levels

lower holding costs, easier and more accurate control of inventory, focus on quality execution

inventory shrinkage

more items are recorded entering than leaving warehouse facilities; caused by damages, loss, or theft

components of inventory carrying cost

obsolescence costs, inventory shrinkage, storage costs, handling costs, insurance costs, taxes, interest costs

lead time demand ordering strategy

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

substitute products

products that can fill the same need or want as another product

ABC analysis of inventory

recognizes that inventoryies are not of equal value to a firm and that as a result all inventories should not be managed the same way

obsolescence

refer to the fact that products lose value through time

JIT approach

seeks to minimize inventory by reducing safety stock, as well as by having the required amount of materials arrive at the production location at the exact time they are needed

vendor-managed inventory (VMI)

size and timing of replenishment orders into a retailer's system are the manufacturer's responsibility

seasonal stock

speculative stock held in anticipation of peak demand

Inventory

stocks of goods and materials that are maintained for many purposes - most common being to satisfy normal demand patterns

inventory turnover

the number of times that inventory is solf in a one-year period

setup costs

those necessary to modify production processes to make the products necessary to satisfy particular orders

lead time

time that elapses when you place an order until that order is received

when is JIT ordering not the most cost effective strategy?

when ordering costs are high, as occurs when fuel prices increase

when is it most appropriate to use lead time demand?

when utilizing a forecasting system, and thus the order quantity continually changes based on the projected demand

under a fixed order quantity system, what will happen to the reorder point if sales start to increase?

will be reached more quickly and a new order will automatically be placed