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