bmgt372 chapter 9
types of inventory
1. cycle stock 2. safety stock 3. anticipation inventory 4. pipeline inventory 5. maintenance, repair and operating items (MRO)
inventory costs
1. holding costs 2. ordering cost 3. shortage costs
reasons to carry inventory
1. protect against lead time demand 2. maintain independence of operations 3. balance supply and demand 4. buffer uncertainty 5. economic purchase orders
economic order quantity (equation)
EOQ = √(2DS/H) D= annual demand S = ordering cost H = holding cost
holding cost
H = IC H = dollar value to hold one unit in inventory over some time I = percentage of item cost C= cost of the item
fixed order quantity system
Inventory is replenished with a set quantity every time it is ordered; the time interval between orders may vary. - place an order when inventory reaches the reorder point ROP - Q = amount of quantity to reorder
total cost
TC = DC + (D/Q)S + (Q/2)H TC = total cost D = annual demand C = unit cost Q = order quantity S = ordering cost H = holding cost
hedge inventory
a form of inventory carried in anticipation of a price increase or shortage of products
inventory policy
addresses the basic questions of when and how much to order
fixed order quantity system (names)
also known as: - EOQ model - Q model - continuous review system - sawtooth model
seasonal inventory
an extra inventory buffer that is held in response to predictable demand increases that occur annually
raw materials
any materials that go into the final product
economic order quantity (EOQ)
economically optimal order quantity
safety stock (buffer stock)
extra inventory we carry to serve as a cushion for uncertainties in supply and demand
ordering cost (setup cost)
includes all the costs involved in placing an order and procuring the item - decides on order quantities, clerical costs involved in placing the order, tracking the order, and receiving it.
holding cost (carrying cost)
includes all the costs that vary with the amount of inventory held in stock
maintenance repair and operating items (MRO)
includes everything from office supplies and forms, to tools and parts needed to repair machines - make up a significant amount of inventory and need to be managed like all other inventories
anticipation inventory
inventories carried in anticipation of certain events - purpose to compensate for differences in the timing of supply and demand, and to smooth out flow of products throughout the supply chain
cycle stock
inventory for immediate use and is computed based on expected demand over a certain time period - assumes demand is known with certainty and computes how much stock is needed over a set period of time - accounts for fact that products are typically produced in batches
fixed time period system
inventory levels are checked in fixed time periods and the quantity that is ordered varies. also known as periodic review system Q = R - IP Q= quantity R= target inventory IP= inventory position
pipeline inventory (transportation inventory)
inventory that is in transit
service inventory
involves all activities that are carried out in advance of the customer's arrival
component parts
manufactured goods or subassemblies of finished items that organizations need to complete their own products
shortage costs
occur when we run out of cost - reflects consequences of not having enough in inventory
work in process inventory (WIP)
products or components that are no longer raw materials but have yet to become finished products
inventory
quantities of goods in stock
finished goods
units of product that have been completed but not yet sold to customers
reorder point (ROP)
when to order ROP = demand during lead time ROP = dL d= demand L= lead time
