Ch 5 Inventory mgt

Question 1

Winning team

Answer 1

typically ordered every 2-3 months

Question 2

Decisions that had to be made for inventory ordering

Answer 2

When to order
How much to order

Question 3

Cost factors that influenced the decisions to order

Answer 3

Setup(make)/order (buy)
Stockout cost- out of stock-profit loss is SC
holding cost- cost for storing unsold inv.
material cost- qty discount- exp for rm
-A successful inventory mgt means balancing these interrelated costs

Question 4

Control of inventory is

Answer 4

= administration cost

Question 5

Inventory systems

Answer 5

Low cost & smaller items - Periodic
High cost & larger items - Continuous

Question 6

Inv. system table

Answer 6

Periodic Review Continuous Rev
-WHEN to reorder(trigger) - at every rev. period(12, 26)FIXED TIMING > When inv. position(on-hand + on-order) falls to reorder point (R) or lower VARIED TIMING
-HOW MUCH to order - Usually use an order up to level (Q = OUTL(or-der up to level) – on-hand qty) VARIED QTY> Normally a fixed order quantity (Q) FIXED QTY

Question 7

Ways businesses get the best of both systems

Answer 7

-Constant tracking (continuous) with low administration (periodic)
Fast Usage Recording- record immediately an item is taken- the button is tied to software system that maintains inv. qty.
Backflushing - record that product completed in software all comp. are then automatically reduced

Question 8

Supply Chain Inventory

Answer 8

Retail Store Inv. > continuous
Warehouse Inv. > periodic
Mfg Plant Inv. > material req. planning
Raw materials

Question 9

Inventory Cost Components

Answer 9

Item Costs
Setup (Replenishment) Cost (S)
Holding (carrying) costs (H)

Question 10

Item Costs

Answer 10

it is the simplest case for each replenishment, cost is C-unit variable cost ($/unit) * Q - order qty(units)

Question 11

Setup Costs (S)

Answer 11

Outside Ordering (purchase order)
Inhouse supply (prod. order)- prod. setup cost - labour cost.

Question 12

Holding Cost H

Answer 12

for each year holding cost is H/unit
H is often expressed as a % of the cost of an item /yr: H=iC (i =% carrying cost/yr) Carrying cost can be higher than 40%

Question 13

Total Annual Cost

Answer 13

TAC= DC + D/Q* S+ Q/2* H
DC= Ann. purchase cost > ann. dem.* unitcost
D/Q* S= Ann. ord. cost> # of orders * setup cost
Q/2H - Ann. Hold. Cost .Avg. inv. holding cost

Question 14

Info. on determining avg. inventory

Answer 14

The cycle stock’s is a saw tooth pattern

Question 15

The Economic Order Quantity (EOQ)

Answer 15

is how much to order under stable , known conditions. Balances two types of costs: Setup cost (incentive to make large purc.) vs. Holding cost (incentive to make small purc. )
TAC = DC + D/Q*S + Q/2 * H Q(EOQ) ans

Question 16

Note about Total Cost

Answer 16

are very flat around the low point

Question 17

Derivation Of EOQ or Q* or Q opt

Answer 17

Setup cost = holding cost
Q = sqrt 2DS/H

Question 18

Reorder Point Formula

Answer 18

R=dl order when inv. position is at reorder point. bar D is the avg. daily dem. lev
L is the replenishment lead time in days

Question 19

if you are asked to solve optimal ordering policy

Answer 19

for how much= EOQ
When is R

Question 20

The Q in TAC is calculated from

Answer 20

EOQ

Question 21

EOQ Limitations & Solution

Answer 21

-Dem. is constant and known(no dem. uncertainty)
-Replenishment lead time is known(no supply uncertainty)
-No shortages are allowed (stockout cost ignored)
EOQ IS A GOOD THEORY, BUT WOULD NOT WORK WELL IN PRACTICE.

Question 22

WHAT IS THE SOLUTION TO EOQ WEAKNESS

Answer 22

Safety Stock
if dem. uncertainty ^ SS ^
If sup. uncertainty Y SS Y
If stockout cost ^ SS ^
BUT KEEPING EXTRA STOCK ^ HOLDING COST

Question 23

Average Inventory

Answer 23

= Q/2 + SS TAC formula must be revised with safety stock

Question 24

Demand Uncertainty & Stocking level

Answer 24

Use the table given avg demand and sd

Question 25

Reorder Point with Uncertainty

Answer 25

Reorder point = what should happen + ext. in case = Avg. dem during lead time + safety stock = dL + Z@(sd)L l= sqrt L(@d)^2

Question 26

Interpreting Inv graph

Answer 26

There are repeated stockout- RP is too low Excess inv(holding cost). - RP is too high

Question 27

ABC classification

Answer 27

A- top 15%- rep 70-80 of total$ usage managerial invovl is req. B-nxt 35%- 15-25% of tot $usage. auto. control with mgt by exception is used. C-last 50%- rep 5% annual $ vol.

Question 28

ABC analysis is an inventory classification of

Answer 28

Pareto Analysis. Divides on hand inv. into 3 classes based on annual $ volume = unit cost* annual demand

Question 29

Advantages of dividing inv. into categories

Answer 29

it allows appropriate controls and policies to be developed for each class: Purchasing and supplier development  Collaboration(a) vs. arms-length relat. (c) Demand forecasting  Sophistication of forec. models(a) Physical inventory control  e.g. insurance, computer syst. (a&b) Inventory Counting  Frequency of inventory counts a's freq. , c's rarely (if cont. review)

Question 30

Use of ABC cycle counting

Answer 30

Cycle counting is used to continuously reconcile inventory with inventory records.  Rather than shutting down the business for a full inventory count, items are randomly chosen to be counted, based upon their classification.

Question 31

Which of those elements can be managed to reduce inventory levels and how

Answer 31

 To achieve a lower order quantity (Q): S: reduce setup / ordering costs  To achieve a lower reorder point (R): L: reduce lead time Safety Stock: reduce uncertainty