Reasons For Holding Inventory
�Maintaining Customer Service Requirements
Leverage Economies of Scale for Production
�Take Advantage of Purchase Discounts
Take Advantage of Transportation Discounts
Act as a Buffer for Demand Variability and Lead Time Variability
�Hedge Against Risk
Lead Time
the time needed to respond to a customer order
HIGH inventory levels yield:
Better customer service
Stockout protection (+ wide variety and selection)
Short lead times (since it's available)
Lower costs per unit purchased, made, transported
Quantity discounts and inflation hedging
LOW inventory levels yield
Lower holding costs
Easier and more accurate control of inventory
A focus on quality execution
Types of inventory
�Cycle stock: inventory maintained for normal sales
�Safety stock: inventory maintained to buffer against uncertainties -- never expected to be used
�In-transit stock: "rolling" stocks
�Speculative stock: inventory acquired to hedge against future price &
EOQ
the lot size that minimizes total annual inventory holding and ordering costs
How Much Inventory Should a Firm Carry?
Constant Demand- EOQ
Two major sources of uncertainty:
�Demand: We don't expect Sales = Forecast
�Performance Cycle: We don't expect logistical execution at a constant rate
Determinants of Risk
Demand, Lead Time, and Lead Time Demand
Limitations of the EOQ
�Basic form does not account for quantity discounts
�Does not consider the interactions between items
-For example, would it make sense to order 200 tires and 200 axles?
�Does not account for minimum order quantities
�Does not factor in transportation dis
Lead Time
time that elapses when you place an order until that order is received
-For production, the time from when a customer places the order till the order can be delivered to the customer's door
The Order Point
the amount of inventory below which the quantity available shouldn't go or the item will be out of stock before the next order arrives
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