OM Ch. 12: Managing Inventories

Single Period Inventory Model

-Applies to inventory situations in which one order is placed for a good in anticipation of future selling season where demand is uncertain. At the end of the period, the product has either sold out or there is a surplus of unsold items to sell for a salvage value. -Single-period models are used in situations involving seasonal or perishable items that cannot be carried in inventory and sold in future periods. -A typical example is newspaper sales (therefore, the single-period model is sometimes referred to as the newsvendor problem).

A Items

Account for a large dollar value but a relatively small percentage of total items Example -10% to 30 % of items, yet 60% to 80% of total dollar value -Require close control by operations manager

C Items

Account for a small dollar value but a large percentage of total items Example -about 50% of items, yet about 5% to 15% of total dollar value -Needs not be closely controlled and can be managed using automated computer systems.

Safety Stock Inventory

Additional amount of inventory that is kept over and above the average amount required to meet demand.

Safety Stock

Additional planned on-hand inventory that acts as a buffer to reduce the risk of a stockout

Environmentally Preferable Purchasing (EPP)

Affirmative selection and acquisition of products and services that most effectively minimize negative environmental impacts over their life cycle of manufacturing, transportation, use, and recycling or disposal.

Inventory

Any asset held for future use or sale. The expense associated with financing and maintaining inventories are a substantial part of the cost of doing business.

Economic Order Quantity (EOQ) Model

Classic economic model that minimizes the total cost, which is the sum of the inventory-holding cost and the ordering cost Developed in the early 1900s Key assumptions -Only a single item (SKU) is considered -Entire order quantity (Q) arrives in the inventory at one time -Types of costs that are relevant -Order/setup -Inventory holding -No stockouts are allowed -Demand for the item is deterministic and continuous over time -Lead time is constant

Finished Goods Inventory

Completed products ready for distribution or sale to customers.

Annual Inventory Holding Cost per Unit

Cost of storing one unit in inventory for a year, Ch = (I)(C), where: -I = Annual inventory-holding charge expressed as a percent of unit cost -C = Unit cost of the inventory item or SKU

Dependent Demand

Demand directly related to the demand for other SKUs and can be calculated without needing to be forecasted.

Independent Demand

Demand for an SKU that is unrelated to the demand for other SKUs and needs to be forecasted.

Deterministic Demand

Demand is constant (or certain, known) over some period of time.

Stochastic Demand

Demand is uncertain (follow stochastic distribution).

Static Demand

Demand that is stable in nature (does not fluctuate over time).

Dynamic Demand

Demand that varies over time (e.g., seasonality)

Service Level

Desired probability of not having a stockout during a lead-time period A higher service level requires more safety stock. Choosing a service level is a management policy decision.

B Items

In between A and C

Inv. Characteristics(NUMBER AND DURATION OF TIME PERIODS)

In some cases, the selling season is relatively short and any leftover items cannot be physically or economically stored until the next season. In other situations, firms are concerned with planning inventory requirements over an extended number of time periods, in which inventory is held from one time period to the next. Approaches -Single period -Multiple time periods

Stockout

Inability to satisfy demand for an item

Inv. Characteristics(NATURE OF DEMAND)

Independent Demand Dependent Demand Deterministic Demand Stochastic Demand Static Demand Dynamic Demand

Raw Materials, Component Parts, Sub assemblies, and Supplies

Inputs to manufacturing and service-delivery processes.

Fixed-Period System (FPS) (Periodic Review System)

Inventory position is checked only at fixed intervals of time, T, rather than on a continuous basis. Principal decisions in an FPS: -Time interval between reviews (T) -Replenishment level (M) (sometimes called "order-up-to" level)

Inv. Characteristics(Lead Time and Stockout)

Lead Time Stockout -Backorder -Lost Sale

Annual Ordering Cost

Number of orders per year)(Cost per order) = (D/Q) x C0

Backorder

Occurs when a customer is willing to wait for an item

Lost Sale

Occurs when the customer is unwilling to wait and purchases the item elsewhere

Inventory Position

On-hand quantity (OH) plus any orders placed but which have not arrived (scheduled receipts, or SR), minus any backorders (BO), or IP = OH + SR - BO

Fixed-Quantity System(FQS)(Continuous Review System)

Order quantity or lot size is fixed; that is, the same amount, Q, is ordered every time. Order quantity (Q) can be any quantity of product Does not have to be economically determined Process of triggering an order is based on the inventory position. Inventory position (IP): -On-hand quantity (OH) plus any orders placed but which have not arrived (scheduled receipts, or SR), minus any backorders (BO), or IP = OH + SR - BO When the inventory position falls at or below a certain value, r, called the reorder point, a new order is placed Reorder point: -Value of the inventory position that triggers a new order.

Work-In-Process(WIP) Inventory

Partially finished products in various stages of completion that are awaiting further processing.

Managing Inventories in Global Supply Chain

Requires good technology, processes, and information technology (IT) support Purchasing must focus on: -Global sourcing and total system cost -Ensure quality, delivery performance, and technical support -Seek new suppliers and products and be able to evaluate the potential to the company

Cycle Inventory

Results from purchasing or producing in larger lots than are needed for immediate consumption or sale Average cycle inventory = (Maximum inventory + Minimum inventory)/2 Average cycle inventory = Q/2

Inventory Characteristics(NUMBER OF ITEMS)

Some stores maintain just a few items while others maintain hundreds of them. Each item is identified by a unique identifier, called a stock-keeping unit (SKU) Stock-keeping unit (SKU): -Single item or asset stored at a particular location. For instance, each color and size of a man's dress shirt at a department store.

Lead Time

Time between placement of an order and its receipt. is affected by: Transportation carriers Buyer order frequency and size Supplier production schedules

Reorder Point

Value of the inventory position that triggers a new order.

Inventory Management Decisions

When to order from a supplier or when to initiate production runs if the firm makes its own items? How much to order or produce each time a supplier or production order is placed?

Ordering Cost

as an annual cost also. Let D denote the annual demand and assume Q units are ordered each time, then D/Q orders is placed each year

ABC Inv. Analysis

categorizes inventory items into three groups according to their total annual dollar usage. A items C items B items

Marginal Economic Analysis

compares the cost or loss of ordering one additional item with the cost or loss of not ordering one additional item

Inventory Management

involves planning, coordinating and controlling the acquisition, storage, handling, movement, distribution, and possible sale of raw materials, component parts and subassemblies, supplies and tools, replacement parts, and other assets that are needed to meet customer wants and needs. Every function in an organization generally views inventory objectives differently.

Annual Inventory Holding Cost

(Average inventory)(Annual holding cost per unit) =( ½ Q)Ch