BCOR 3050 Independent Demand Inventory

Periodic Review Systems

A periodic review system (P-system) requires a precise counting of inventory only at specific times, often once a week, once a month, or once a quarter

Inventory Systems

An inventory system provides the structure and operating policies for maintaining and controlling goods to be stocked in inventory.

Continuous review system (crs)

An inventory system that always orders the same quantity of items but has differing periods of time between orders- crs monitor inventory levels regularly and place an order as soon as a certain inventory level or reorder point is reached.

Periodic review system (prs):

An inventory system that has a fixed time between orders but has different order quantities from order to order- prs monitor inventory at the end of the prescribed time period (week, month etc.), the order quantity is based on the difference between a target inventory level and the existing inventory level at the end of the time period.

Safety Stock Inventory

Excess Inventory that a company holds to guard against uncertainty in demand, lead time, and supply.

IP (Inventory Position)

IP = OH + SR - BO

Work-in-process (WIP) Inventory

Inventory that is in the process of being transformed from one state to another and cannot be sold because it is not finished (EX: 50 chairs are painted but need to dry before selling)

Costs of Materials/Quantity Discounts

Just as one company benefits from larger orders in terms of set-up cost, labor and equipment utilization, and transportation, so do companies that supply goods to other companies. It is fairly common for companies to offer quantity discounts.

Remanufactured/Reconditioned Inventory

Products that have been used by a customer and then reacquired by a company and either remanufactured or reconditioned for resale (print cartridges, cell phone, car parts)

Bullwhip Effect

The ripple effect of small changes in customer demand are magnified upstream through a supply chain

Total Inventory Cost

The sum of the cost of holding inventory and the cost of ordering inventory.

Transportation Cost

When large items or large quantities of smaller items are shipped, it is much more efficient to have an entire truckload (or railroad car or plane or some other vehicle) than to have a partial load.

Enterprise Resource Planning (ERP)

a large, integrated information system that supports most enterprise processes and data storage needs across the entire organization

Cycle Inventory

a quantity of inventory that varies in proportion to order quantity; the order quantity Q is proportional to the time between orders (cycle). The longer the time between orders, the higher the order quantity.

Cycle counting

a system in which employees physically count a percentage of the total number of items stocked in inventory and correct any errors that are found; often combined with ABC system

Electronic data interchange (EDI)

a technology that allows companies or units within a company to exchange orders, forecasts, and invoices electronically without human intervention to enter data into the receiving system

Base Stock System

a type of inventory system that issues an order whenever a withdrawal is made from inventory (one-for-one basis)

Bin system

a type of inventory system that uses either one or two bins to hold a quantity of the item being inventoried; an order is placed when one of two bins is empty or a line on a single bin is reached

Radio Frequency Identification (RFID)

an automatic identification method that relies on storing and remotely retrieving data using devices such as RFID tags or transponders

SR (Scheduled Receipt)

an order that has been placed but not yet received

ABC Systems

approach that recognizes that different items have different values and levels of importance. Thus, the goal is to divide all items held in inventory into groups that receive varying levels of attention

Independent demand

demand for items that are considered end items that go directly to a customer, and for which demand is influenced by market conditions and not related to inventory decisions for any other item

Dependent demand

demand for items that are used to make another item or are considered to be component parts

Newsvendor Problem

determines how much inventory to order when handling perishable products or items that have a limited life span. Example: Newspaper, T-shirts for a sporting event, flowers.

Anticipation Inventory

inventory that is held for future use at a time when demand will exceed available capacity

BO (Backorder)

is an order that has been promised to a customer(s) but is currently not in inventory (in retailing this is often called a rain check)

OH (On-hand Inventory)

is the amount of a unit that is physically available

Setup and ordering costs

is the cost in time and/or money to prepare all necessary materials and resources for production.

Lead time

is the time between when an order is placed and when it is expected to arrive or be finished

Protection interval

is the time during which safety stock must protect against running out of stock.

Ordering Cost

is used when purchasing items from a supplier or retailer because of the time or cost necessary to initiate the order and process it when it is received

Inventory position

on-hand inventory plus outstanding orders, minus any backorder quantities (items promised to a customer but not yet delivered)

Can order system

reviews the inventory position at fixed time intervals and places orders to bring the inventory up to an expected target level, but only if the inventory position is below a minimum quantity, similar to the reorder point in a continuous review system

Target inventory

the desired quantity of inventory that will cover expected demand during the protection interval plus enough safety stock to provide the desired cycle-service level

Excess cost

the difference between the purchase cost of an item and its salvage or discounted value

Shortage cost

the lost profit from not being able to make a sale, plus any loss of customer goodwill

Economic Order Quantity

the order quantity that minimizes the total annual cost of ordering and holding inventory for a particular item EOQ = √(2DS/H)

Inventory

the physical stock of any items or resources used in an organization

Reorder point

the predetermined level that an inventory position must reach for an order to be placed

Setup Cost

used in manufacturing situations where physical steps need to be taken to prepare for an order

Vendor-managed inventory (VMI)

vendors monitor sales at the retailer and replenish inventories when supplies are low

Pipeline Inventory

•Inventory that is in the process of moving from one location in the supply chain to another. •Pipeline inventory consists of orders that have been placed but not yet received.

Labor and Equipment Utilization

•Organizations will often produce extra inventory in order to keep equipment and people occupied, believing that if the time is not used, it is lost. •Larger orders also have the benefit of reducing the number of setups and increasing the proportion of time that is spent processing an order (i.e., adding value).

Reasons to Reduce Inventory

•Storage and Handling- greater the inventory carried, the more storage and handling is necessary. •Interest and opportunity cost- money tied up in inventory could be used for other purposes- invested in bonds, stocks etc. - cost of capital •Property taxes and insurance premiums- Taxes and insurance premiums are often assessed on inventory in proportion to the amount- "inventory clearance sales" are designed to reduce inventory to reduce tax bills •Shrinkage and spoilage- obsolescence or spoilage (e.g., styles changing quickly, video games becoming obsolete, milk spoiling); Shrinkage (products misplaced, stolen, or shoplifted).

Customer Service and Variation in Demand

•While demand can be predicted, it cannot be predicted with great accuracy. •Businesses often carry buffer inventory so that there is a higher customer service level- i.e., less chance that the store is out of stock.