inventory management Flashcards
what is supply chain
network of activities to deliver finished products to customers
supplier -> manufacturer -> distributor -> retailer -> customer
what is supply chain management
business function that coordinates:
- the flow of goods from suppliers to customers
- the sharing of information (sales forecast, data, inventory levels)
- to all members of the supply chain
- to maximize customer value and achieve competitive advantage
types of inventory
- raw materials -> items that are transformed during the production stage
- components -> parts or subassemblies that will be part of the final product
- finished goods -> goods that are ready to be delivered to customers
- work-in-process -> unfinished products that are in process in the plant
- distribution -> finished products in the distribution system
- maintenance, repair and operating inventory-> items used in production stage without being part of the final product
different purposes of carrying inventory
- seasonal stock/ anticipation inventory -> anticipation of demand. Used to maintain level production throughout the year
- safety stock/ fluctuation inventory -> buffer agains demand fluctuation, assures customer service levels
- cycle stock/ lot-size inventory -> taking advantage of quantity discounts
- transportation/ pipeline inventory -> goods in movement between locations. From manufacturer to distribution centers
- speculative. hedge inventory -> extra inventory built to protect against future events. Allows for continuous supply
- MRO -> facilitates day-to-day operations
inventory management objectives
- provide desired customer service level -> ability to satisfy customer requirements
customers can either be external or internal
measuring inventory effectiveness
- percentage of orders shipped on schedule
- percentage of line items shipped on schedule
- percentage of dollar volumee shipped on schedule
- idle time due to material and component shortages
- Ensure cost-efficient operations
- carry work-in-process inventory between workstations to avoid idle time
- anticipate seasonal demand to avoid overtime, hiring and firing, training
- schedule long production runs to avoid setup cost
- order large volumes to receive discount - Minimize inventory-related investments
- calculate inventory turnover rate (minimum inventory investment)
higher the number of turnover rate, the more effectively the company os using its inventory
- weeks of supply
- days of supply
inventory-related costs
- item cost -> direct price associated with the purchase (purchase price, handling costs, insurance, taxes)
- holding cost -> variable expenses related to the volume of inventory (capital cost, storage cost, risk cost)
- ordering cost -> fixed costs incurred for each order placed (administration costs, handling)
- shortage cost -> incurred when demand exceeds supply (loss of customer goodwill, back-order/delayed delivery or lost sale)
how to determine appropriate review frequency
- all items are not equal and do not need the same level of control
Pareto’s law states that 10-20% of inventory accounts for 60-80% of its inventory costs. It is used to determine the level of control needed for individual items
ABC classification -> determine the level of control and frequency of review
Pareto analysis -> items are segmented based on dollar value
A items -> high dollar volume -> continuous review (EOQ model) -> tight control, highly accurate inventory records, track every inventory transaction
- typically 20% of items representing 60-80% of inventory value
B items -> medium dollar volume -> periodic review (TI model) -> normal control, moderately accurate inventory records, daily/weekly/monthly review
- typically 30% of items represent 25-35% of inventory value
C items -> low dollar volume -> low frequent or two bin system -> least amount of control
- typicaly 50% of items represent 5-15% of inventtory value
Procedure for ABS inventory analysis
- calculate annual dollar usage for each item (annual usage x item cost)
- list items in descending order based on annual dollar usage
- calculate the cumulative annual dollar volume
classiffy into groups
common ordering approaches
lot-for-lot -> order exactly what is needed
fixed order quantity -> order predetermined amount each timee order is placed
min-max system -> predetermined min amount falls then order quantity that ffulfills predetermined max amount
order n periods -> order enough to satisfy demand for the next n periods
how to determine optimal order quantities
- multiple period models
- fixed order quantity models -> require continuous review
EOQ
EPQ
Extension to EOQ with quantity discounts and safety stock
- fixed time interval models -> require periodic review Target inventory (TI)
- single period model
EOQ
the objective is to satisfy demand with minimized sum of order costs and holding costs
keeps track of inventory as it is withdrawn and added
determines when to order and how many items per order?
place neew order at reorder point
Assumptions:
total demand is known and constant (no safety stock)
lead time is known and constrant
fixed ordering cost is known and constant
all demands need to be satisfied on time (no backorders)
holding cost is known and proportional to the inventory level
no quantity discounts
order replenishment items arrive at once
EPQ model
- model that allows for incremental product delivery
- inventory is gradually replenished and can be used as soon as it arrives
- production rate has to be larger than depletion rate
- cycle begins when we start making the product
- each day we use some of what we made to satisfy immediate demand
- rest is put in inventory
- make product until we reach Q units
- then satisfy demand from on hand inventory, depleting it daily
- when we reach the reorder point, we order another batch
- company starts producing new batch as we run out of current inventory
EOQ model with quantity discounts
EOQ assumes there are no quantittyt discounts
- In reality, vendors allow multiple unit price levels P
what do companies do when there is demand uncertainty
if demand during lead time is uncertain, companies invest in safety stock
Increased reorder point
unaffectetd redorder quantity
increased total cost
determine adequate level of safety stock based on order-cycle service level: the probability that demand during lead time wil exceed on hand inventory
target inventory model
periodic review system: inventory on hand is measured at fixed time intervals
Order quantity Q is variable and determined based on the difference between a target inventory level and the current inventory level
Advantages -> no need to continuously monitor inventory level, items from same supplier can be reviewed on same day
Disadvantages -> replenishment quantities vary and might not qualify for discounts, higher average inventory levels needed
