Inventory
The stock of any item or resource used in an organization.
Independent demand
The demand for various items are unrelated to each other.
Dependent demand
The need for any one item is a direct result of the need for some other item, usually an item of which it is a part.
Inventory is expensive mainly due to
1) storage
2) obsolescence
3) insurance
4) the value of the money invested.
main costs relevant to inventory models are
(1) the cost of the item itself
(2) Holding (or carrying) costs,
(H)
-- the cost to hold an item in inventory
(3) setup (or production change) costs,
(S)
(4) ordering costs
(5) Shortage costs
--costs incurred when an item runs short.
inventory system
the set of policies and controls that monitor levels of inventory and determine what levels should be maintained, when stock should be replenished, and how large orders should be.
provides a specific operating policy for managing items to be stock.
Other
manufacturing inventory
generally refers to items that contribute to or become part of a firm's product output
classification of manufacturing inventory
* raw materials
* finished products
* component parts
* supplies
* work-in-process
* in-transit (in distribution)
-- inventory is being moved in the system
* warehouse
-- inventory in a warehouse or distribution center
* Retail sites carry inventory for i
basic decisions that need to be made are for using inventory models are
(1) when should an item be ordered
(2) how large should the order be.
Purposes of Inventory
1) To maintain independence of operations
2) To meet variation in product demand
3) To allow flexibility in production scheduling
4) To provide a safeguard for variation in raw material delivery time
5) To take advantage of economic purchase order size
6)
Single-period model
used when an item is purchased only one time and it is expected that it will be used and then not reordered
Multiple-period model
used when the item will be reordered and the intent is to maintain the item in stock
Multiple-period models
used when the item will be reordered and the intent is to maintain the item in stock
two basic types of multiple-period models
1) fixed-order quantity model
2) fixed-time period model
* key distinction - what triggers the timing of the order placement.
fixed-order quantity model (Q-model)
An inventory control model where the amount requisitioned is fixed and the actual ordering is triggered by inventory dropping to a specified level of inventory.
order is placed when inventory drops to a low level called the reorder point
fixed-time period model (P-model)
An inventory control model that specifies inventory is ordered at the end of a predetermined time period.
The interval of time between orders is fixed and the order quantity varies.
Safety stock
The amount of inventory carried in addition to the expected demand.
extra inventory that is carried for protection in case the demand for an item is greater than expected.
Statistics are used to determine an appropriate amount of safety stock to carry bas
Inventory turn
measures the expected number of times that average inventory is replaced over a year.
can be calculated in aggregate using average inventory levels or on an individual item basis
Single-period problem
Answers the question of how much to order when an item is purchased only one time and it is expected that it will be used and then not reordered
Inventory position
The amount on-hand plus on-order minus backordered quantities.
In the case where inventory has been allocated for special purposes,
--the inventory position is reduced by these allocated amounts.
Optimal order quantity (Qopt)
order size minimizes total annual inventory-related costs.
Reorder point
An order is placed when the inventory position drops to this level.
Price-break model
The model is useful for finding the order quantity of an item when the price of the item varies with the order size.
ABC inventory classification
Divides inventory into dollar volume categories that map into strategies appropriate for the category.
Cycle counting
A physical inventory-taking technique in which inventory is counted on a frequent basis rather than once or twice a year.
The model most appropriate for making a one-time purchase of an item.
Single-period model
The model most appropriate when inventory is replenished only in fixed intervals of time, for example, on the first Monday of each month
Fixed-time period model
The model most appropriate when a fixed amount must be purchased each time an order is placed.
Fixed-order quantity model
Based on an EOQ-type ordering criterion, what cost must be taken to zero if the desire is to have an order quantity of a single unit?
Setup or ordering cost
Term used to describe demand that can be accurately calculated to meet the need of a production schedule, for example
Dependent demand
Term used to describe demand that is uncertain and needs to be forecast.
Independent demand
We are being evaluated based on the percentage of total demand met in a year (not the probability of stocking out as used in the chapter). Consider an item that we are managing using a fixed-order quantity model with safety stock. We decide to double the
Go up (we are taking fewer chances of running out)
If we take advantage of a quantity discount, would you expect your average inventory to go up or down? Assume that the probability of stocking out criterion stays the same
Will probably go up if the probability of stocking out stays the same
This is an inventory auditing technique where inventory levels are checked more frequently than one time a year.
Cycle counting