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Operations Management > Materials and inventory Management Lecture > Flashcards

Materials and inventory Management Lecture Flashcards

1
Q

Weeks of supply

A

= average aggregate inventory value in $ / weekly sales in $

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2
Q

Inventory turnover

A

= annual sales / average aggregate inventory value in $

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3
Q

Strategic purpose of inventory

A

to provide a set of advantages that reflect a business’s needs

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4
Q

Annual inventory turns

A

= annual cost of goods sold / average inventory (at cost)

number of times inventory is cycled through in a year

higher (more) turns is better management of inventories (theoretically) though there could be a better level of inventory to maintain

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5
Q

Days of inventory

A

= 365 (days in a year) / annual inventory turns

approximate number of days inventory is held

lower is better!

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6
Q

Inventory strategy trade offs

A

Between customer service levels and inventory related costs
Between customer service levels and operational performance
Between inventory related costs and operational performance

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7
Q

Affect of inventory on return on assets

A

High inventory levels reduces return on assets. Lower levels increases return

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8
Q

Corporate inventory

A

essentially strategic reserves - segregated inventory held aside from regular stock for specific uses

as opposed to mainstream inventory

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9
Q

types of mainstream inventory

A
  • pipeline
  • cycle
  • buffer (safety)
  • capacity (anticipation)
  • de-coupling
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10
Q

Pipeline inventory

A

in- transit inventory
inventory currently moving between stages in the supplychain

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11
Q

Cycle inventory

A

Portion of total inventory that varies with lot size - helps gain advantages of reduced set-ups

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12
Q

Buffer inventory

A

safety stock to address uncertainty

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13
Q

Capacity or anticipation inventory

A

Preparing for seasonal variations

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14
Q

De-coupling inventory

A

inventory held to allow one set of processes to not wait on the other

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15
Q

Characteristics to consider in choosing an inventory model

A
  • number of items to track
  • nature of demand (independent vs dependent, deterministic vs stochastic)
  • number of periods
  • lead time (deterministic vs stochastic)
  • stock out (is result of stock out a backorder or a lost sale?)
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16
Q

ABC analysis

A

Separating inventory into classes depending on their dollar value

Class A items: 80% of the dollar value (about 20% of items), manage closely
Class B items: 15% of dollar value (about 50% of items)
Class C items: 5% of dollar value (about 30% of items). Do not require careful management and may be cheap enough to hold more inventory)

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17
Q

VED analysis

A

Independent of the dollar value: what is the penalty for lacking the item in stock? options
Vital
Essential
Desirable

Can create a matrix between ABC and VED analysis. AV and BV require most careful consideration and forecasting

lower importance/ lower cost items can be de-emphasized

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18
Q

lot sizing models

A

models to assist in quantity decisions

Static models for items that have regular demand to the horizon

dynamic models (DLS) for items with lumpy demand

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19
Q

Controllable variables for inventory management

A
  • what to order?
  • how much to order?
  • when to order?

Variety, quantity, timing

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20
Q

uncontrollable variable for inventory management

A

demand

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21
Q

When is demand considered lumpy?

A

V= variance of demand per period/ square of the average demand per period

if V<0.25 then EOQ is appropriate (demand is regular). V> 0.25 then DLS

22
Q

EOQ model assumptions

A
  • single item under continuous review
  • entire quantity ordered arrives at one point in time
  • demand rate and lead time are known and constant
  • stock outs are not allowed
23
Q

Variables for determining EOQ

A

D = annual demand in units per year
S = cost of ordering or setting up one lot (does not change if order changes)
H = cost of holding one unit of inventory for a year (may be expressed as “I”(Inventory factor)*“C”(cost of unit)
LT or L = lead time
Q = lot size in units
C= unit cost of item

24
Q

Cycle time

A

interval of time between the arrive of two consecutive orders

= lot size/ annual demand (=Q/D)

25
Q

Number of cycles per year

A

= annual demand / lot size (=D/Q)

26
Q

Average inventory per cycle

A

= Lot size /2 (= Q/2)

27
Q

Holding cost per year

A

= holding cost/cycle * cycles/year
aka
= ((lot size/2)holding cost(lot sizes/annual demand))(annual demand / lot size)
OR = average cycle inventory (Q/2)annual holding cost

28
Q

order cost per year

A

= order cost*annual demand / lot size

29
Q

Total cost per year

A

= holding cost per year + order cost per year

30
Q

EOQ

A

Economic order quantity

(where annual holding cost = annual ordering cost)

=square root of ((2order costannual demand)/holding cost)

31
Q

Optimal number of orders per year

A

= annual demand / EOQ

32
Q

If lead time is 0

A

EOQ order placed when stock hits 0

33
Q

If lead time demand is less than or equal to EOQ

A

Have to determine reorder point = lead time demand * average demand for period (possibly + safety stock if lead times vary)

idea is that inventory reaches 0 when the new inventory arrives

34
Q

If lead time demand is greater than EOQ

A

generally happens with items with very long lead times (raw materials)

likely to have multiple orders outstanding at once

35
Q

Additional applications for EOQ

A

Cash management
HR (balance training cost vs salary to determine minimum employees)

36
Q

What are the constraints on EOQ

A
  • budgetary limitations
  • limitations on number of orders
  • limitations of storage space
37
Q

Lead time demand distribution

A
  • observe average demand for a give period over many periods to plot frequency distribution
  • this can be used to determine standard deviation of demand
38
Q

Using service level to determine required safety stock

A
  • need to know standard deviation of demand
  • assuming a normal distribution can estimate the probability of having the necessary stock to meet demand during lead time (aka service level, = 1-chance of stock out)
  • using normal distribution table can determine the number of standard deviations required to be at required service level

Safety stock = z for required service level * standard deviation of demand during lead time

39
Q

inventory position

A

= inventory on hand + outstanding orders - back orders

40
Q

ROP

A

expected demand during lead time aka reorder point

41
Q

continuous review system

A

aka Fixed Order Quantity (Q) system

  • when inventory position hits reorder point, an order is placed for fixed quantity Q
  • time between orders fluctuates with demand changes
42
Q

Periodic Review

A

aka Fixed time Period (P) system

  • orders are placed at fixed time intervals
  • quantity ordered at each reorder point varies
43
Q

Protection interval for periodic review systems

A

= time between orders + lead time

44
Q

Order quantity for periodic review systems

A

= expected demand during protection interval + safety stock - inventory on hand

= average demand * (time between orders + lead time ) + (service level * standard deviation of demand during lead time) - inventory

45
Q

Primary lever to reduce cycle inventory

A

reduce order lot size

46
Q

secondary lever to reduce cycle inventory

A
  • reduce ordering and set up costs (reduces EOQ)
  • increase repeatability
47
Q

Primary lever to reduce safety stock

A

Place orders closer together

48
Q

Secondary levers to reduce safety stock

A
  • improve forecasting
  • reduce lead-time
  • reduce supply uncertainties
  • increase labor & equipment buffers
49
Q

Primary and secondary levers to reduce anticipation inventory

A

Primary: use chase strategy

Secondary: level out demand rates

50
Q

Primary lever to reduce pipeline inventory

A

cut production to distribution lead time

51
Q

Secondary levers to reduce pipeline inventory

A
  • forward placement
  • selection of suppliers & carriers
  • reduce Q

Operations Management (11 decks)

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