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Inventory

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A stock or store of goods

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Independent demand items

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Items that are ready to be sold or used

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Inventories are a vital part of business:

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(1) necessary for operations and (2) contribute to customer satisfaction A "typical" firm has roughly 30% of its current assets and as much as 90% of its working capital invested in inventory

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Types of Inventory

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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)

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Functions of Inventory - Why have?

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1. Meet anticipated customer demand (anticipated stocks) 2. Smooth operational requirements 3. Decouple operations 4. Protect against stock outs 5. Take advantage of order cycles 6. Hedge against price increases 7. To permit operations 8. Take advantage of quantity discounts

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Objectives of Inventory Control

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Inventory management has two main concerns: Level of customer service Having the right goods available in the right quantity in the right place at the right time Costs of ordering and carrying inventories

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The overall objective of inventory management

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is to achieve satisfactory levels of customer service while keeping inventory costs within reasonable bounds Measures of performance Customer satisfaction Number and severity of backorders Customer complaints Inventory turnover

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Inventory management

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Management has two basic functions concerning inventory: Establish a system for tracking items in inventory Make decisions about When to order How much to order

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Effective Inventory Management

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Requires: A system to keep track of inventory A reliable forecast of demand Knowledge of lead time and lead time variability Reasonable estimates of holding costs ordering costs shortage costs A classification system for inventory items

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Periodic System

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Physical count of items in inventory made at periodic intervals 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 Two-bin system Two containers of inventory; reorder when the first is empty

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A periodic system

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Use of the fixed-interval model requires having

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Perpetual Inventory System

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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 Two-bin system Two containers of inventory; reorder when the first is empty

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Two-bin system

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Two containers of inventory; reorder when the first is empty

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True: It will decrease because holding cost is in the denominator of the EOQ formula.

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Using the EOQ model, if an item's holding cost increases, its order quantity will decrease.

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The two basic questions in inventory management

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are how much to order and when to order.

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A-B-C

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A-B-C is based on the product of unit cost and annual volume.

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A-B-C approach

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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

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In an A-B-C system, B items typically represent about this percentage of items:

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30%

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Cycle counting

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A physical count of items in inventory Count some every day or every week Cycle counting management How much accuracy is needed? A items: ± 0.2 percent B items: ± 1 percent C items: ± 5 percent

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False: Unless demand, holding cost, or ordering cost changing, the order quantity will not change.

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When using EOQ ordering, the order quantity must be computed in every order cycle.

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Using an economic order quantity is an example of this.

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Inventory might be held to take advantage of order cycles.

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Holding and ordering costs are inversely related to each other.

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Changes in order quantity will cause one to increase and the other to decrease.

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The objective of inventory management is

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to minimize total cost, which includes ordering costs and sometimes purchase costs (e.g., quantity discount models).

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A two-bin system is essentially a simple reorder point system.

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Reorder when the first bin is empty.

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A fixed-interval ordering system

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would be used for items that have independent demand.

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In the basic EOQ model

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annual ordering cost and annual ordering cost are equal for the optimal order quantity.

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The total cost curve is flat to the right of the EOQ.

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Increasing the order quantity so that it is slightly above the EOQ would not increase the total cost by very much.

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A store that sells daily newspapers could use the single-period model for reordering

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The period is one day, and the news in "perishable" beyond one day.

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Other things beings equal, an increase in lead time for inventory orders will result in an increase in the:

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reorder point Feedback: Quantity models do not involve lead time.

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Which product is usually bought on an ROP basis?

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sugar

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If average demand for an item is 21 units per day, safety stock is 4 units, and lead time is 2 days, the ROP will be:

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46 Feedback: ROP = d x LT + SS = 21 x 2 + 4 = 46.

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Which model does not take into account the amount of inventory on hand?

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EOQ Feedback: The EOQ factors are demand, ordering costs, and carrying costs.

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ROP formula

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ROP= d X LT (demand rate X Lead time in days or weeks) ROP=Expected demand during lead time+Safety Stock

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In the two-bin system, the quantity in the second bin is equal to the

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ROP Feedback: The second bin holds the reorder point quantity,

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Forecasts

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Inventories are necessary to satisfy customer demands, so it is important to have a reliable estimates of the amount and timing of demand Point-of-sale (POS) systems A system that electronically records actual sales Such demand information is very useful for enhancing forecasting and inventory management

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Which product is usually bought on a fixed interval basis?

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textbooks Feedback: Usually bought once a semester.

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Inventory Costs

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-Purchase cost The amount paid to buy the inventory largest of all inventory costs -Holding (carrying) costs Cost to carry an item in inventory for a length of time physically having items in storage two ways: 1) as a percentage of unit price or as a dollar amount per unit 2)as a dollar amount per unit -Ordering costs Costs of ordering and receiving inventory expressed as fixed dollar amount per order -Setup costs The costs involved in preparing equipment for a job Analogous to ordering costs expressed as a fixed charge per production run -Shortage (stock-out) costs Costs resulting when demand exceeds the supply of inventory unrealized profit per unit expedite costs

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Lead time

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Time interval between ordering and receiving the order

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the EOQ annual holding cost the ROP safety stock

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are a function of demand.

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Using the basic EOQ model, if the ordering cost doubles, the order quantity will be

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Feedback: Because S in under the square root sign, multiplying its value be 2 will increase the EOQ by the square root of 2, which is .707. about 71% of its former value

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If a decrease in unit price causes the average demand rate to increase, which would not increase?

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lead time

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Setup costs are analogous to which one of these costs?

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ordering Feedback: Both setup and ordering costs are in the numerator of the quantity formula; and both are independent of order size.

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