COB300C Ch. 13

Service level (eqn)

= 100% - Stockout risk

ROP (eqn)

= d * LT where: d = demand rate (units per day or week) LT = lead time in days or weeks

Periodic system

physical count of items in inventory made at periodic intervals (weekly, monthly)

Reorder point (ROP)

when the quantity on hand of an item drops to this amount, the item is reordered.

Different kinds of inventory

-Raw materials and purchased parts -Partially completed goods (Work in process/WIP) -Finished-goods inventories (manufacturing firms) or merchandise (retail stores) -Tools and supplies -Maintenance and repairs (MRO) inventory -Goods-in-transit to warehouses, distributors, or customers (pipeline inventory)

Requirements for Effective Inventory Management

1) A system to keep track of the inventory on hand and on order, 2) A reliable forecast of demand that includes an indication of possible forecast error, 3) Knowledge of lead times and lead time variability, 4) Reasonable estimates of inventory holding costs, ordering costs, and shortage costs, 5) A classification system for inventory items.

Assumptions of the Economic (EPQ) Model

1) Only one item is involved, 2) Annual demand is known, 3) The usage rate is constant, 4) Usage occurs continually, but production occurs periodically, 5) The production rate is constant, 6) Lead time does not vary, and 7) There are no quantity discounts.

Assumptions of the Basic (EOQ) Model

1) Only one product is involved, 2) Annual demand requirements are known, 3) Demand is spread evenly throughout the year so that the demand rate is reasonably constant, 4) Lead time is known and constant, 5) Each order is received in a single delivery, and 6) There are no quantity discounts.

3 Safety Stock Determinants

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

3 Order Size Models

1) The basic economic order quantity model, 2) The economic production quantity model, and 3) The quantity discount model.

4 Determinants of ROP

1) The rate of demand (usually based on a forecast), 2) The lead time, 3) The extent of demand and/or lead time variability, and 4) The degree of stockout risk acceptable to management.

Return on investment (ROI) (eqn)

Profit after taxes divided by total assets Net income / Total assets?

Cycle counting

a physical count of items in inventory.

To meet anticipated customer demand Anticipation stock (1 of 8 Functions of Inventory)

a customer can be a person who walks in off the street to buy a new stereo system, a mechanic who requests a tool at a tool crib. These inventories are referred to as "anticipated stocks" because they are held to satisfy expected (average) demand.

Inventory

a stock or store of goods

Universal product code (UPC)

bar code printed on a label that has information about the item to which it is attached.

A-B-C approach (TB p. 375 [got ripped out])

classifying inventory according to some measure of importance, and allocating control efforts accordingly. A - very important B - moderately important C - least important

Dependent-demand firms

components of finished products, rather than the finished products themselves. (ex: The components to a computer)

Holding (carrying( cost

cost to carry an item in inventory for a length of time, usually a year.

Ordering costs

costs of ordering and receiving inventory.

Shortage costs

costs resulting when demand exceeds the supply of inventory; often unrealized profit per unit.

To protect against stockouts Safety stock (1 of 8 Functions of Inventory)

delayed deliveries and unexpected increases in demand increase the risk of shortages. Delays can occur because of weather conditions, supplier stockouts, deliveries of wrong materials, quality problems, and so on. The risk of shortages can be reduced by holding "safety stocks", which are stocks in excess of expected demand to compensate for variabilities in demand and lead time.

Excess cost

difference between purchase cost and salvage value of items left over at the end of a period.

Safety stock

extra inventory carried to reduce the probability of a stockout due to demand and/or lead time variability.

To smooth production requirements Seasonal inventories (1 of 8 Functions of Inventory)

firms that experience seasonal patterns in demand often build up inventories during preseason periods to meet overly high requirements during seasonal periods. These inventories are aptly named "seasonal inventories". Companies that process fresh fruits and vegetables deal with seasonal inventories (as well as greeting cards, X-mas trees, etc.)

Shortage cost

generally, the unrealized profit per unit.

To decouple operations (1 of 8 Functions of Inventory)

historically, manufacturing firms have used inventories as buffers between successive operations to maintain continuity of production that would otherwise be disrupted by events such as breakdowns of equipment and accidents that cause a portion of the operation to shut down temporarily. The buffer permits other operations to continue temporarily while the problem is resolved.

Independent-demand items

items that are ready to be sold or used. (ex: A computer from Best Buy)

Single-period model

model for ordering of perishables and other items with limited useful lives.

To hedge against price increases (1 of 8 Functions of Inventory)

occasionally a firm will suspect that substantial price increase is about to occur and purchase larger-than-normal amounts to beat the increase. The ability to store extra goods also allows a firm to take advantage of price discounts for larger orders.

Fixed-order-interval (FOI) model

orders are placed at fixed time intervals.

Quantity discounts

price reductions for larger orders offered to customers to induce them to buy in large quantities.

Service level

probability that demand will not exceed supply during lead time.

Inventory turnover

ratio of average cost of goods sold to average inventory investment.

Point-of-sale (POS) systems

record items at time of sale.

Safety stock (TB p. 390)

stock that is held in excess of expected demand due to variable demand and/or lead time.

Perpertual inventory system

system that keeps track of removals from inventory continuously, thus monitoring current levels of each item.

Cycle stock

the amount of inventory needed to meet expected demand.

Purchase cost

the amount paid to buy the inventory

Little's Law

the average amount of inventory in a system is equal to the product of the average demand rate and the average time a unit is in the system.

Economic production quantity (EPQ)

the batch mode is widely used in production, Even in assembly operations, portions of the work are done in batches. The reason for this is that in certain instances, the capacity to produce a part exceeds the part's usage or demand rate. AS long as production continues, inventory will continue to grow. In such instances, it makes sense to periodically produce such items in batches, or lots, instead of producing continually.

Setup costs

the costs involved in preparing equipment for a job.

To permit operations (1 of 8 Functions of Inventory)

the fact that production operations take a certain amount of time (i.e., they are not instantaneous) means that there will generally be some work-in-process inventory. In addition, immediate stocking of goods-including raw materials, semifinished goods, and finished goods at production sites, as well as goods stored in warehouses-leads to pipeline inventories throughout a production-distribution system. Little's law can be useful in quantifying pipeline inventory.

Economic order quantity (EOQ) KNOW THIS EQUATION BOI (TB p. 378+)

the order size the minimizes total annual cost.

Fill rate

the percentage of demand filled by the stock on hand.

Basic economic order quantity model (EOQ)

the simplest of the three order size models. It is used to identify a fixed order size that will minimize the sum of the annual costs of holding inventory and ordering inventory. The unit purchase price of items in inventory is not generally included in the total cost because the unit cost in unaffected by the order size unless quantity discounts are a factor.

Lead time

time interval between ordering and receiving the order.

To take advantage of order cycles (1 of 8 Functions of Inventory)

to minimize purchasing and inventory costs, a firm often buys in quantities that exceed immediate requirements. This necessitates storing some or all of the purchased amount for later use. Similarly, it is usually economical to produce in large rather than small quantities. Again, the excess output must be stored for later use.

Two-bin system

two containers of inventory; reorder when the first is empty.