MSC385 Exam 2: Inventory Management

reorder point: under uncertainty

-Demand or lead time uncertainty creates the possibility that demand will be greater than available supply -To reduce the likelihood of a stockout, it becomes necessary to carry safety stock

Effective inventory management requires:

1. A system keep track of inventory 2. A reliable forecast of demand 3. Knowledge of lead time (from the time you place an order to the time you receive an order) and lead time variability (+/- some value in lead time, but that time is not always the same) 4. Reasonable estimates of costs 5. A classification system for inventory items

Objectives of Inventory Control

1. Level of customer service (having the rightgoods available in the right quantity in the right place at the right time) 2. Costs of ordering and carrying inventories The overall objective of inventory management is to achieve satisfactory levels of customer service while keeping inventory costs within reasonable bounds.

Inventory Counting Systems

1. Periodic System 2. Perpetual Inventory System

The amount of safety stock that is appropriate for a given situation depends upon:

1. The average demand rate and average lead time. 2. Demand and lead time variability. 3. The desired service level.

determinants of the reorder point

1. The rate of demand 2. The lead time 3. The extent of demand and/or lead time variability 4. The degree of stockout risk acceptable to management

Functions of Inventory

1. To meet anticipated customer demand 2. To smooth production requirements 3. To decouple operations 4. To protect against stockouts 5. To take advantage of order cycles 6. To hedge against price increases 7. To permit operations 8. To take advantage of quantity discounts

Inventory Counting Technologies

1. Universal product code (UPC): bar code printed on a label that has information about the item to which it is attached 2. Radio frequency identification (RFID) tags: a technology that uses radio waves to identify objects, such as goods in supply chains

ABC Classification System

Classifying inventory according to some measure of importance, and allocating control efforts accordingly. A items (very important): 10 to 20 percent of the number of items in inventory and about 60 to 70 percent of the annual dollar value B items (moderately important) C items (least important): 50 to 60 percent of the number of items in inventory but only about 10 to 15 percent of the annual dollar value

Deriving EOQ

Using calculus, we take the derivative of the total cost function and set the derivative (slope) equal to zero and solve for Q. The total cost curve reaches its minimum where the carrying and ordering costs are equal.

cycle counting (periodic system)

a physical count of items in inventory. Cycle counting management : How much accuracy is needed (A items: +/- 0.2%; B items: +/- 1%; C items: +/- 5%), when should cycle counting be performed, and who should do it?

inventory

a stock or store of goods vital to business (necessary for operations and contribute to customer satisfaction)

EOQ Models

identify the optimal order quantity by minimizing the sum of annual costs that vary with order size and frequency. There are three models: the basic economic order quantity model, the economic production model, and the quantity discount model

independent demand items

items that are ready to be sold or used

service level

probability that demand will not exceed supply during lead time Service Level = 100% - Stockout Risk

Basic EOQ Model

used to find a fixed order quantity that will minimize total annual inventory costs. Assumptions: 1. Only one product is involved. 2. Annual demand requirements are known. 3. Demand is even throughout the year. 4. Lead time does not vary. 5. Each order received in a single delivery. 6. There are no quantity discounts.

reorder point

when the quantity on hand of an item drops to "x" amount, the item is reordered

Periodic System

Physical count of items in inventory made at periodic intervals

Quantity Discount

Price reduction for larger orders offered to customers to induce them to buy in large quantities.

Inventory Costs

Purchase cost (The amount paid to buy the inventory) Holding (or carrying) costs (Cost to carry an item in inventory for a length of time, usually a year) Ordering costs (Costs of ordering and receiving inventory) Setup costs (The costs involved in preparing equipment for a job) Shortage costs (Costs resulting when demand exceeds the supply of inventory; often unrealized profit per unit)

Types of Inventory

Raw materials and purchased parts Work-in-process (WIP) Finished goods inventories or merchandise Tools and supplies Maintenance and repairs (MRO) inventory Goods-in-transit to warehouses or customers (pipeline inventory)

safety stock

Stock that is held in excess of expected demand due to variable demand and/or lead time (Confidence intervals can help determine expected and max or you can simply take average versus worst case of actual data points.) As the amount of safety stock increases, the risk of stockout decreases, which improves customer service level.

perpetual inventory system

System that keeps track of removals from inventory continuously, thus monitoring current levels of each item. An order is placed when inventory drops to a predetermined minimum level (EX.:two-bin system: two containers of inventory; reorder hen the first one is empty)