5.5.2 Inventory control methods

• What percentage of the total inventory value do Class A items account for in ABC Analysis?

  70-80%
• What percentage of the total inventory items do Class C items represent in ABC Analysis?

  50-70%
• ABC Analysis helps businesses prioritize resources on critical items.
• Match the ABC Analysis Class with its management approach:

  Class A ↔️ Strict control, frequent monitoring

  Class B ↔️ Moderate control

  Class C ↔️ Minimal control
• What is the primary goal of Just-In-Time (JIT) inventory management?

  Minimize inventory levels
• In JIT, products are manufactured in response to customer orders in a pull system.
• Toyota is well-known for its use of JIT to ensure parts arrive just before they are needed in the assembly line.
• What is one major advantage of JIT inventory management?

  Lower holding costs
• One major disadvantage of JIT is the risk of stockouts.
• Compare JIT with Traditional inventory management based on key aspects:

  1️⃣ Inventory Levels: Minimal vs. High

  2️⃣ Order Timing: Just when needed vs. Based on historical demand

  3️⃣ Stockouts: High risk vs. Low risk
• What is one key feature of Inventory Management Software?

  Stock level tracking
• What is the primary goal of effective inventory control?

  Maintain optimal stock levels
• The Economic Order Quantity (EOQ) minimizes total inventory costs by considering both ordering costs and holding costs.
• Ordering costs increase with the number of orders placed in a year.
• Match the variables with their descriptions in the EOQ formula:

  D ↔️ Annual Demand

  S ↔️ Ordering Cost

  H ↔️ Holding Cost per Unit
• What is the EOQ formula?

  $EOQ =$$\sqrt{\frac{2DS}{H}}$
• In an example calculation, a company with annual demand of 5000 units, ordering cost of $20, and holding cost of $4 should order approximately 224 units each time.
• EOQ improves cash flow by reducing unnecessary inventory costs.
• What does the EOQ help businesses minimize?

  Total inventory costs
• The EOQ formula is $EOQ =$$\sqrt{\frac{2DS}{H}}$
• What is the purpose of the reorder point?

  Replenish stock before stockouts
• The Reorder Point is calculated using the formula: Lead Time Demand + Safety Stock.
• Lead time demand is the quantity used during the lead time.
• What is the reorder point for a company with a lead time of2 weeks, average weekly demand of 50 units, and safety stock of 100 units?

  200 units
• Safety stock protects against unexpected fluctuations in demand and delays in lead time.
• What are the two primary factors that influence the size of safety stock?

  Demand variability and lead time variability
• The formula for safety stock is: Safety Stock = z \times \sqrt{\sigma_{D}^{2} \times LT + \sigma_{LT}^{2} \times D^{2}}</latex>.
• How many units should be held as safety stock in the given example?

  Approximately 47 units
• Safety stock protects against unexpected fluctuations in demand
• Higher demand variability requires larger safety stock.
• What is the formula to calculate safety stock?

  $Safety Stock =$ z \times \sqrt{\sigma_{D}^{2} \times LT + \sigma_{LT}^{2} \times D^{2}}
• The variable 'z' in the safety stock formula represents the required confidence
• What is the calculated safety stock for the example with given variables?

  Approximately 47 units
• Class A items in ABC analysis require the most control.
• Class C items in ABC analysis require minimal attention
• Match the ABC class with its characteristics:

  A ↔️ High value, strict control

  B ↔️ Moderate value, moderate control

  C ↔️ Low value, minimal control
• What type of items fall into Class A in the ABC analysis example?

  High-demand smartphones
• Effective inventory control reduces holding costs and prevents stockouts.
• What is the primary goal of the Economic Order Quantity (EOQ)?

  Minimize total inventory costs
• The EOQ formula is $EOQ =$$\sqrt{\frac{2DS}{H}}$, where 'S' represents the ordering cost.