inventory management
EOQ main points
Key: Understanding Model Assumptions Like Any Model, Solution is Not Decision Good Starting Point EOQ Answers the Question of "How Much to Order"
perpetual inventory tracking
Know amount on hand at all times
variability of demand during lead time
May Be the Result of Daily Demand Variable with Lead Time Constant Lead Time Variable with Daily Demand Constant Both Daily Demand & Lead Time Variable
EOQ solution
Optimal solution occurs where Holding and Ordering Costs are Equal Total Cost Curve is flat in neighborhood of Optimal Solution Not sensitive to small changes in order quantity
Perpetual Inventory (How much to order)
Order Quantity (Q) Balance Ordering Costs and Holding Costs
we have inventory because
Production/Order Lead Time Longer than Customer will Wait (customers will not wait)
Perpetual Inventory (when to order)
Quantity (R) not Time Balance the Cost of Running Out during Lead Time (L) with the amount of Holding extra units
Setting the Reorder Point Greater Than the Expected Demand During Lead Time
Reduces the Probability of Running Out
reorder points and cost
Setting the Reorder Point means balancing two opposing costs The cost of running out and The cost of carrying extra units in inventory
setting up a reorder point
Since the distribution represents demand during lead time, when we choose a value for the reorder point The probability to the left represents the probability of not running out The probability to the right represent the probability of running out
3 key values of single period model
The Sales price per unit The Cost per unit The Salvage value What a left-over unit is worth
If the Reorder Point is set equal to the Expected Demand During Lead Time
The probability of a stockout is 50%
reorder points provide
Units from the Time the Order is Placed until the Order Arrives
Cost of purchasing is not included in EOQ because
We don't need to include the purchase price of inventory because it will be the same among all solutions
inventory on hand is the result of
What we Purchase/Produce When we Purchase/Produce What we Sell or Use Up
safety stock
When we set the Reorder Point greater than the Expected Demand During Lead Time safety stock is a buffer, we dont need it on average
inventory is considered
a necessary, non-value added evil
when lead time is fixed
a reorder point can be set such that the new order will arrive exactly when we run out
EOQ Model
an inventory-control technique that minimizes the total of ordering and total costs
inventory is an
asset
reorder points answer the question of
at what inventory level do we need to place an order
Increasing inventory as a current asset is
bad, it decreases working capital
inventory is classified as
current asset
dependent demand
demand for items that are subassemblies or component parts to be used in the production of finished goods
dependent demand includes
items used in our company's production (WIP) running out means there are delays in production
Reorder Points
minimum and maximum stock levels which determine when a reorder is placed and for how much
single period models only have
one decision - how much to order
Inventory is the result of
ordering in large quantities (take advantage of quantity discounts, hold down costs of ordering
2 Inventory tracking methods
periodic perpetual
independent demand helps
satisfy outside markets running out means items are back ordered or are lost sales
independent demand
the demands for various items are unrelated to each other
periodic system is used when
when we can't keep perpetual inventory or keeping perpetual is meaningless
why some companies do not have inventory
- high carrying costs (keeps money tied up) - storage cost - loss or theft
key to single period model
Balance cost of running out with cost of left-over units
periodic inventory tracking
Check Inventory balance at set intervals
setting reorder points based on service level
Done when its too hard to calculate expected inventory shortage Service Level is the Probability that Demands During Lead Time can be Satisfied Probability that we don't run out
goal of inventory control
Identify the Quantity and Timing of Purchases/Production to Minimize Costs
perpetual reorder points
In Perpetual Inventory System, you can only Run Out during Lead Time
single period model
In each period, an order is the placed That quantity can be sold only in that period If units are left over, they are disposed of for little or no value
periodic key components
Inventory level will be different each time you order Must cover demand over review period (P) and lead time (L) Means greater uncertainty and leads to greater safety stock