# Lecture 6 - Inventory Management Flashcards

What are the 6 objectives of “Inventory management”?

- Improve customer service: delivery reliability
- Shorten delivery time
- Reduce inventory investment
- Increase capacity utilization
- Reduce purchasing money
- Increase flexibility

What is “Inventory Management”?

The planning and controlling of inventories to meet the competitive priorities of the organization.

There are 4 types of inventories, which ones and what to they mean?

1) Anticipating stock - depends on the type of product and strategy. Produce what is possible but to a certain limit. Have a certain anticipation of the future - create stock in advance to be ready.

2) Cycle stock - is the most important type of inventory - is the inventory we have because we are working in a kind of batches, not a single item, but batches. Depends on the set-up cost of the production or administration costs.

3) Safety stock - have this due to our forecasts, they can never be accurate, therefore we safe up with stock

4) Pipeline stock -depends on our transportation and distribution stock, on the way but we haven’t received it yet.

What is the formula for the “Average Cycle inventory”?

ACI = Q / 2

Q = Lot Size, divide lot size to get the average. Is based upon the start of the period and the end of it.

How do you calculate the average demand during “Lead time”?

D = d * L d = Average demand per period L = Number of periods in the item's LEAD time

What is an ABC-analysis?

This shows us which product that we have to put a lot of effort in in terms of Inventory Management.

In Inventory Management Policy, there are 2 questions that we want to answer, which ones?

1) How much do we need to order?

2) When do we need to order?

What is meant by “Economic Order Quantitiy” and what are the 5 assumptions of it?

it is the lot size, Q, that minimizes total annual inventory holding and ordering costs.

- Demand rate is constant and known with certainty.
- No constraints are placed on the size of each lot.
- The only two relevant costs are the inventory holding cost and the fixed cost per lot for ordering or setup.
- Decisions for one item can be made independently of decisions for other items.
- The lead time is constant and known with certainty.

How do we calculate the EOQ?

EOQ = [ (2*D*S) / (H) ]^(1/2)

where:

D = Annual Demand

S = Ordering or Set Up costs per Lot

H = Holding Cost per Unit per Year

We take the derivative of the formula for the “Total annual cycle-inventory cost”.

How do we calculate the “Total annual cycle-inventory cost”?

C = ( Q/2 ) * H + ( D/Q ) * S

C = Total Annual cycle-inventory cost Q = Lot size (in units) D = Annual Demand S = Ordering or Set Up costs per Lot H = Holding Cost per Unit per Year

How do we calculate the “Annual Holding Cost”?

Average cycle inventory * unit holding cost

The unit cost is the same for everyone we order

How do we calculate the “Annual Ordering Cost”?

(number of orders/year) * (Ordering or Set up costs)

Larger Q –> lower costs/unit

How do we calculate the “Total Cost”?

Annual Holding Cost + Annual Ordering Cost

How much we should order

How do we calculate “Time Between Orders (TBO) “?

TBO = EOQ / D * ( amount of Months or weeks / year)

What kind of costs should be included in the “Holdings Costs”?

- Costs of capital - opportunity cost of storageing something
- Storage & handling costs
- Insurance costs
- Taxes
- Shrinkage costs - lots of inventory - some parts may deteroriate - inventory that deteroriates after a while - products becomes less good with time.