What are the common inventory classifications?
Raw materials, work-in-process (WIP), finished goods, distribution inventories, and MRO supplies.
What is safety stock inventory?
Additional inventory kept above average demand to reduce risk of stockouts. Extra inventory held as a buffer against demand or lead time uncertainty.
What is a stockout?
The inability to satisfy demand for an item.
What is the difference between a backorder and a lost sale?
Backorder: customer waits; Lost sale: customer buys elsewhere.
What are the objectives of inventory management?
Maximize customer service, minimize total inventory investment, and ensure low-cost plant operation.
What is independent demand?
Demand for an SKU unrelated to other SKUs, must be forecasted.
What is dependent demand?
Demand directly related to other SKUs, can be calculated.
What is static vs. dynamic demand?
Static = stable demand; Dynamic = varies over time.
What is the EOQ model?
A decision model that minimizes the sum of ordering and carrying costs.
What are the assumptions of the EOQ model?
Same quantity is reordered at each reorder point, only ordering and holding costs relevant, no stockouts, deterministic demand, constant lead time.
Formula for average inventory in units
Q ÷ 2
Because each time an order goes down to zero an order for Q units is received
Formula for annual holding cost.
(Q ÷ 2) × Ch.
Formula for annual ordering cost.
(D ÷ Q) × P
Where D = number of purchase orders per period (one year)
Q = size of each order
P= relevant ordering cost per purchase order
Formula for total annual cost.
(D ÷ Q × P) + (Q ÷ 2 × C)
Formula for EOQ.
√(2DP ÷ C).
Where:
D - annual demand
P - ordering cost per purchase orders
C - carrying cost of one unit in stock for the time period used for D
Formula for reorder point.
r = d × L (demand rate × lead time).
Formula for reorder point with safety stock.
r= μL + zσL
This formula incorporates both the average demand during lead time and the safety factor, which accounts for variability in demand and lead time. Understanding this calculation is crucial for maintaining optimal inventory levels and minimizing stockouts.
What factors affect safety stock level?
High stockout cost, low carrying cost, high demand variability, frequent small orders.
What are the six categories of inventory-related costs?
Purchasing, ordering, carrying, stockout, quality, shrinkage.
Which costs are relevant in EOQ analysis?
Ordering and carrying costs only.
What is the impact of quantity discounts?
Encourages larger orders, increases carrying cost, decreases ordering cost, lowers unit price.
What is the single-period inventory model?
Used when one order is placed for a season with uncertain demand (newsvendor problem).
Formula for optimal order quantity.
Q* = √(2SO/(C(1−D/P))
…
Where:
D= demand rate
P = production rate
What is ABC inventory analysis?
Categorizes SKUs by annual dollar usage into A, B, and C classes.
