SCM 304 Inventory Management – Flashcards

those stocks or items used to support production (raw materials and work-in-process items), supporting activities (maintenance, repair, and operating supplies) and customer service (finished goods and spare parts)

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

(1) necessary for operations and (2) contribute to customer satisfaction

1. Level of customer service • Having the right goods 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 1. Customer satisfaction 2. Measures of performance » Number and quantity of backorders » Customer complaints 3. Inventory turnover

Requires: 1. A system keep track of inventory 2. A reliable forecast of demand 3. Knowledge of lead time and lead time variability 4. Reasonable estimates of • holding costs • ordering costs • shortage costs 5. A classification system for inventory items

• Purchase cost - The amount paid to buy the inventory • Holding (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 - Analogous to ordering costs • Shortage costs - Costs resulting when demand exceeds the supply of inventory; often unrealized profit per unit

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

• The set of policies and controls that monitor levels of inventory • Determines what levels should be maintained, when stock should be replenished, and how large orders should be

the demands for various items are unrelated to each other

the need for any one item is a direct result of the need for some other item

1. How Much to Order (Quantity of the Order) 2. When to Order (Timing of the Order)

Economic order quantity models identify the optimal order quantity by minimizing the sum of annual costs that vary with order size and frequency 1. The basic economic order quantity model 2. The economic production quantity model 3. The quantity discount model

The basic EOQ model is used to find a fixed order quantity that will minimize total annual inventory costs

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 is received in a single delivery 6. There are no quantity discounts

Inventory is consumed at a constant rate, with a new order placed when the reorder point (R) is reached once again

• Under quantity discounts, a supplier offers a lower unit price if larger quantities are ordered at one time • This model differs from the basic EOQ Model because the purchasing cost (C) varies with the quantity ordered

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

• 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 - Safety stock • Stock that is held in excess of expected demand due to variable demand and/or lead time

refers to the amount of inventory carried in addition to expected demand.

A common approach is to simply keep a certain number of weeks of supply A better approach is to use probability. • Assume demand is normally distributed. • Assume we know mean and standard deviation. • To determine probability, we plot a normal distribution for expected demand and note where the amount we have lies on the curve.

• In the fixed order quantity model, the ordering process is triggered when the inventory level drops to a critical point, the Reorder Point (ROP). • This starts the lead time for the item. • Lead time is the time to complete all activities associated with placing, filling and receiving the order. • During the lead time, customers continue to draw down the inventory • It is during this period that the inventory is vulnerable to stockout (run out of inventory)