Lecture 3: Inventory Management Flashcards Preview

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Flashcards in Lecture 3: Inventory Management Deck (17):

What is inventory?

Stocks used to support production (raw materials and WIP)

, support activities (maintenance, repair)

and customer service (finished goods/spare parts)


Name the different types of inventory by function

Cycle stock: active component that is replenished cyclically

Safety stock: held to protect against fluctuations

Pipeline stock: Little's Law and protect against lead times

Anticipation stock: Stock held to smooth output rates, overbuying before a price increase


What are the arguments for inventory?

  • Little's Law implies: 
    • there is a minimum inventory needed to run the factory
  • Buffer against uncertainty
    • Market demand
    • Production throughput (breakdowns)
    • Supply
  • Exploitation of price fluctuations
  • Smoothing or levelling production
  • Enables achievement of economies of scale



Arguments against inventory

Cost involved:

  • Cost of capital
  • Opportunity cost
  • Depreciation
  • Obsolescence and deterioration
  • Handling: defects and labour costs
  • Warehousing: rent and energy
  • Insurance and overheads



What are the hidden costs of inventory?

  • Long lead times
  • Reduced responsiveness
  • Problems are hidden
  • Quality problems are not identified immediately
  • No incentive for improvement


What is Little's law


What is days of inventory?

Days of inventory is the number of days an organisation can satisfy demand using its inventory


What is stock turns?

Stock Turns is the number of times an organisation replaces its stocks during a period


What are the different approaches to ordering?

  • Fixed Order Quantity Models
    • EOQ
    • ROP (re-order point)
  • Fixed Time Period Models
    • Fixed period ordering
    • Order up to
  • Variable order quantity and ordering interval
    • Least unit cost
  • Materials requirements planning (MRP)
    • time phased requirements


Explain the fixed order quantity orderering model and explain when it should be used

  • Order quantity remains constant but time between orders varies
  • Preferred for important or expensive items because average inventory is lower
  • Provides a quicker response to stockouts
  • Expensive to maintain due to inventory record-keeping costs


What contributes to ordering costs?

  • Labour processing costs
  • Supplier fixed costs
  • Inspection costs
  • Transport costs
  • Handling costs


What are the costs of setup?

Labour costs of setting up

Loss of production while set up takes place

Return of poor quality products after start up


Explain the fixed time period ordering system

  • A system where the time period between orders remains constant but the order quantity varies
  • Has larger average inventory to prevent stockouts
  • Useful when purchasing multiple items from one vendor to save on costs


What is "Lot for Lot" ordering?

  • Also called pass on orders/order up to model
  • Simply passes on customer orders to the supplier as they come in
  • Only order from the supplier what is demanded by the customer
  • No fixed order quantity, but fixed time intervals
  • Optimal solution for inventory: but ordering cost an issue


What are the problems with EOQ and EPQ?

Rigid assumptions!

  • Demand is constant and steady
  • EOQ assumes replenishment lot arrives at same time
  • Replenishment lead time is known
  • Order size not constrained by supplier
  • Holding cost is constant
  • Cost of ordering is constant
  • Item is independent of others
  • Doesn't encourage us to decrease fixed ordering costs


What are the benefits of EOQ/EPQ?

  • EOQ/EPQ is robust; relatively insensitive to errors in estimating D, Ch, Co
  • Tends to inflate batch sizes
  • Can be adapted to different situations
  • Empirically EOQ/EPQ models are <12% away from optimum