Inventory Management (Ch. 20)

-What inventory level should be maintained -When should stock be replenished -How large should orders be

Inventory Systems determine:

Inventory Turns= COGS/Cost of Inventory

Inventory Turns Equation

-Raw materials -Component parts -Supplies -Work-in process -Finished products

Inventory can include:

r

Inventory carrying rate

H

Inventory holding cost (carrying cost)

Pipeline

Inventory that has been ordered but not yet received and is in transit is called:

(Supply) Lead time

L=

L

Lead time

Physical Centralization

Less safety inventory than a decentralized system.

I= RT

Little's Law Equation

Inventory System

Sets of policies & controls the monitor levels of inventory.

Virtual Centralization

Sharing inventory across locations.

-Loss of customer goodwill -Lateness charges -Cost of loss production

Shortage Cost Examples:

Inventory

Stock of any item or resource used in an organization.

In-transit inventory.

What is the term used to refer to inventory while in distribution i.e. being moved within the supply chain?

Is= z times square root of L times theta

Safety Stock Equation

Dependent Demand

Derived demand items for component parts, subassemblies, raw materials, etc.

Fixed-time period model.

Almost certainly you have seen vending machines being serviced on your campus and elsewhere. On a predetermined schedule the vending company checks each machine and fills it up with various products. Which category of inventory model is this an example of?

D

Annual demand (average)

A-B-C Approach

Classifying inventory according to some measure of importance, and allocating control efforts accordingly.

Unit cost

C=

1. Periodic (Review) System 2. Continuous (Review) System

Inventory Counting Systems

Ordering Cost

Cost ordering and receiving inventory.

Q/d

Cycle Length Equation

Demand, usually in units per year

D=

d

Daily demand (average)

Independent Demand

Demand for final end-product or demand not related to other items.

Ordering cost

S=

In-process inventory consists of those items of materials components and partially completed units that are currently in the production process. Safety-stock inventory is set so that inventory is maintained to satisfy some maximum level of demand. It could be stated that safety stock is that level of inventory between the minimum expected demand and the desired level of demand satisfaction. Seasonal inventory is that inventory accumulated to meet some periodic increase in de- mand.

Distinguish between in-process inventory, safety stock inventory, and seasonal inventory.

-Only one product is involved. -Annual demand is spread evenly throughout the year so that the demand rate is reasonably constant. -Lead time does not vary. -Each order is received in a single delivery. -There are no quantity discounts.

EOQ Assumptions:

D= 360d

Equation for D

H= rc

Equation for H

dt= d(L+T)

Equation for Mean Demand during time

Q= square root of 2DS/H

Equation for Q

ROP= Ld + safety stock

Equation for ROP

theta t= theta square roof of L+T

Equation for Standard deviation of demand during time

Q/2 H + D/S + CD

Equation for Tc(Q)

-falls below a reorder point -continuous review system, Q-model -Event triggered -An order of a fixed quantity Q is placed every time in the inventory

Fixed-Order Quantity Models:

-Periodic review system, P-model -Time triggered (inventory is counted at particular times) -A quantity that depends on the current inventory level is ordered

Fixed-Time Period Models:

H= rC

H Equation

Holding (carrying) cost per unit unit period (year)

H=

-Interest, Insurance -Taxes, Depreciation -Obsolescence, Deterioration -Spoilage, Breakage -Warehouse costs (heat, light, rent, security) -Opportunity costs for having funds tied up in inventory.

Holding (Carrying) Cost Examples:

One-half the annual usage

In a fixed order quantity model (Continuous Review System (Q, ROP)), average inven- tory is defined as

10 to 20

In an A-B-C system, the typical percentage of the number of items in inventory for A items is about :

Fixed costs

In making any decision that affects inventory size, which of the following costs do not need to be considered?

Ordering or setup

Inspecting, unpacking and storing are components of

Achieve satisfactory levels of customer service while keeping inventory costs within reasonable bounds.

Objective of Inventory Control

Shortage Cost

Opportunity cost for not making a sell.

Q= Square root of 2DS/H

Optimal Order Quantity Equation

-Determine how much needed, typing up invoices -Inspecting goods for quality and quantity -Moving to storage -Cost of machine setup

Ordering Cost Examples:

Tied up funds

Over-Stocking results in:

Holding (Carrying) Cost

Physically holding item in storage.

-To maintain independence of operations -To provide a safeguard for variation in raw material delivery time (Safety Inventory) -To take advantage of economic purchase order size (Cycle Inventory) -To help here against price increases -To allow flexibility in production scheduling -To meet variation in product demand (Safety Stock)

Purposes of Inventory:

-A system to keep track of the inventory on hand and on order. -A reliable forecast of demand that includes an indication of possible forecast error. -Knowledge of lead times and lead time variability. -Reasonable estimates of inventory holding costs, ordering costs, and shortage costs. -A classification systems for inventory items.

Requirements for Effective Inventory Management

Review Period

T=

TC= Annual carrying cost + Annual ordering cost

TC Equation

Total cost (per year) associated with carrying and ordering inventory when Q units are ordered.

TC=

Economic Order Quantity

The order size that minimizes total cost.

1. Fixed-Order Quantity Models 2. Fixed-Time Period Models

There are two types of multi-period inventory models:

tries to achieve a balance in stocking.

This means, the manager...

Dependent demand.

To support the manufacture of desktop computers for their customers, Dell needs to order all the parts that go into the computer, such as hard drives, motherboards and memory modules. Obviously the demand for these items is driven by the production schedule for the computers. What is the term to describe demand for these parts?

Square Root Law

Total safety inventory required to provide a specified level of service increased by the square root of the number of locations at which it is held.

1. Timing of the order 2. Size of the order

Two fundamental decisions are to be made:

"order up to " level (target inventory level)

U=

Dissatisfied customers, lost sales

Under-Stocking results in:

C

Unit cost

A physical inventory-taking technique in which inventory is counted on a frequent basis. In typical stores, computerized systems with bar coding of products keep track of the count of inventory of items in real time.

What is cycle counting?

Using a classification scheme such as this one allows a greater portion of time to be spent in controlling specific groups or classes or items. For the ABC grouping, greater control is afforded those items which comprise the greatest dollar volume in usage. The result of this classification is a reduction in the overall inventory size and, therefore, decreased costs for the same level of satisfying inventory demands.

What is the purpose of classifying items into groups, as the ABC classification does?

Any inventory control model or rule must establish (1) when items should be ordered, and (2) how many should be ordered.

What two basic questions must be answered by an inventory-control decision rule?

"A" items are more valuable, so quantity variations are less acceptable to the firm. Some students might suggest that the acceptable tolerance in item count should be related to the total value of inventory in each category, which is another way of stating the same concept.

When cycle counting inventory, why do experts recommend a lower acceptable tolerance for A items than B or C items?

Helps to control "A" items

Which is not an advantage of the periodic review system?

stockout cost

Which is not considered a holding cost?

To provide a safeguard for variation in raw material delivery time To take advantage of economic purchase-order size To maintain independence of operations To meet variation in product demand

Which of the following is (are) reason(s) to carry inventory?

Annual demand requirements are known and constant (Delivery) Lead time is known Each order is received in a single delivery (Delivery) Lead time does not vary

Which of the following is (are) the assumption(s) of the basic EOQ model?

Economic order quantity model

Which of the following is a fixed-order-quantity inventory model?

Periodic system model

Which of the following is a fixed-time-period inventory model?

Annual holding cost, annual ordering cost, annual purchasing cost

Which of the following is the set of all cost components that make up the fixed-order- quantity total annual cost (TC) function?

reducing carrying costs

Which of the items listed below would not generally be considered a reason for holding inventories?

Mean demand during unit time

d=

Mean demand during the lead time

dL=

S

ordering cost/order

Holding (carrying) cost per dollar per unit period (year)

r=

Theta

std daily demand

Standard deviation of demand during the lead time

theta square root of L

Standard deviation of demand during unit time

theta=