Inventory Part 1 (OTM 26-Inventory Part 2 is at bottom of list)
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| single order inventory problems | 1. discrete demand example (slide 2) 2. normally distributed demand example (slide 3)
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| inventory control | 1.inventory reduction is a long term goal 2.there are reasons why firms might maintain a certain level of inventory 3.manage inventory costs 4. production or purchase costs
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| reasons to maintain a certain level of inventory | 1. maintain independence of operations 2. to meet variation in product demand 3. to allow flexibility in production scheduling 4. to provide safeguard for variation in raw material delivery time 5. take advantage of economic purchase-order size
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| ways to manage inventory costs | 1. production or purchase costs 2. fixed setup or ordering costs 3. shortage/stockout costs 4. holding costs
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| factors in production or purchase costs | 1. purchased items could be affected by order quantity 2. produced items cost is more difficult to calculate
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| fixed setup or ordering costs | 1. independent of order size 2. ordering costs 3. setup costs 4. shortage costs 5. holding costs 6. opportunity cost of money ties up in inventory-typically 20-40% of item value annually
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| ordering costs | 1. order forms 2. postage/delivery 4. order entry costs
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| setup costs | 1. direct labor 2. lost production time
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| shortage/stockout costs | 1. lost sales or backorders 2. goodwill costs
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| holding costs | 1.expense of managing inventory 2. cost of money ties up in inventory-typical 20-40% of item value annually
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| expenses of managing inventory | 1.warehouse space 2.theft 3.spoilage/obsolescence 4.insurance 5.handling/counting costs
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| inventory accuracy | refers to how well the inventory records agree with physical count
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| cycle counting | a physical inventory-taking technique in which inventory is counted on a frequent basis rather than once or twice a year
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| ABC inventory control | 1.all items do not require the same level of control 2. typically, a small % of the SKUs account for a large % of the dollars 3. can help establish the appropriate degree of control for each item
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| Pareto rule | 80/20 rule described in ABC inventory control
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| common measures of inventory performance | 1. average total value 2.runout time 3.inventory turns
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| key decisions for inventory controls systems | 1. How often should we order?
2. How much should we order?
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| multi-period inventory systems | 1. fixed order quantity models - event triggered like running out of stock 2. Fixed-time period models - time triggered like a monthly sales call by sales representative
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| fixed-order quantity model assumptions | constants:1.demand for product is uniform throughout period 2.lead time 3.price per unit of product 5.ordering or setup costs 4.inventory holding cost is based on avg. inventory 6.all demands for the product will be satisfied (no back orders allowed)
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| lead time | time from ordering to receipt
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| basic fixed-order quantity model and reorder point behavior variables(see slide 16 for illustration) | R = Reorder point Q = Economic order quantity L = Lead time
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| basic fixed-order quantity model | 1.you receive an order quantity,Q 2. you start using them up over time 3.when you reach down to a level of inventory of R, you place your next Q sized order 4. the cycle then repeats
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| cost minimization goal (see slide 17 for illustration) | by adding the item, holding and ordering costs together, we determine the total cost curve, which in turn is used to find the Q(sub)opt inventory order point that minimizes total costs
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| (EOQ)Model Formula formula for basic fixed-order quantity | (see slide 18 for formula)
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| Q | order quantity
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| DC | annual cost of items
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| TC | total annual cost
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| D | demand
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| C | cost per unit
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| S | cost of placing an order or setup cost
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| R | reorder point
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| L | lead time
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| H | annual holding and storage cost per unit of inventory
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| (D/Q)S | annual ordering cost
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| (Q/2)H | annual holding cost
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| EOQ example (see slide 19 |
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