PRE-FINALS PQT

• Inventory


  Stocks or stores of goods that are a vital part of a business, necessary for operations and contribute to customer satisfaction
• Some vast firms have tremendous amounts of inventory
• Inventory management


  Aims to strike a balance between inventory investment and customer service
• A typical firm probably has about 30% of its current assets and as much as 90% of its working capital invested in inventory
• Inventory decisions in service organizations can be especially critical
• Objective of inventory management

  Achieve satisfactory levels of customer service while keeping inventory costs within reasonable bounds
• Fundamental decisions in inventory management


  Timing and size of orders (when to order and how much to order)
• Inventory costs


  • Purchase cost
  • Holding or carrying cost
  • Ordering cost
  • Shortage cost
• Purchase cost


  The amount a vendor or supplier pays to buy the inventory, typically the largest of all inventory costs
• Holding or carrying cost


  Costs related to physically having items in storage, including interest, insurance, taxes, depreciation, obsolescence, deterioration, spoilage, pilferage, breakage, tracking, picking, and warehousing costs
• Ordering cost


  The cost of ordering and receiving inventory, including determining how much is needed, preparing invoices, inspecting goods, and moving them to storage
• Shortage cost


  The cost that results when demand exceeds the supply of inventory on hand, including opportunity cost of not making a sale, loss of customer goodwill, late charges, and backorder costs
• ABC analysis


  Classifies inventory items according to some measure of importance and allocates control efforts accordingly
• Generally, three classes of items are used: A (very important), B (moderately important), and C (least important)
• A items generally account for about 10% to 20% of the number of items in inventory but about 60% to 70% of the annual dollar/peso value, while C items might account for about 50% to 60% of the items but only about 10% to 15% of an inventory's dollar/peso value
• Criteria other than annual value can determine item classification, such as high shortage or holding costs, anticipated engineering changes, delivery problems, or quality problems
• Policies based on ABC analysis

  • Higher purchasing resources expended on supplier development for A items

  Tighter physical inventory control and more frequent verification of inventory records for A items

  More care in forecasting A items
• Cycle counting


  A physical count of the items in an inventory to reduce discrepancies between inventory records and actual quantities on hand
• Cycle counting eliminates the shutdown and interruption of production necessary for annual physical inventories, eliminates annual inventory adjustments, trains personnel to audit inventory accuracy, allows identification of error causes and remedial action, and maintains accurate inventory records
• Cycle counting


  • Eliminates the shutdown and interruption of production necessary for annual physical inventories
  • Eliminates annual inventory adjustments
  • Trains personnel to audit the accuracy of inventory
  • Allows the cause of the errors to be identified and remedial action to be taken
  • Maintains accurate inventory records
• Cole's Trucks, Inc. has about 5,000 items in its inventory
• Item classes at Cole's Trucks, Inc.

  • A items (500)
  • B items (1,750)
  • C items (2,750)
• Cycle counting policy at Cole's Trucks, Inc.

  1. A items counted every Month (20 working days)

  2. B items counted every Quarter (60 working days)

  3. C items counted Semi-Annually (120 working days)
• Cole's Trucks, Inc. counts 25 A items, 29 B items, and 23 C items per day
• Economic Order Quantity (EOQ) Model


  Used to identify a fixed order size that will minimize the sum of the annual costs of holding and ordering inventories
• Assumptions of the EOQ model:
• Reorder Point (ROP)


  The inventory level at which an order should be placed
• ROP with safety stock adds one day's demand (32 units) to the ROP, for a total of 128 units
• Production Order Quantity Model

  Used when inventory continuously flows or builds up over a period after an order has been placed, or when units are produced and sold simultaneously
• ROP


  128 (5 96 1 32)
• Production Order Quantity


  1. Inventory order received over a period of time

  2. Inventory continuously flows or builds up over a period after an order has been placed

  3. Units are produced and sold simultaneously
• Production order quantity model

  • Especially suitable for the production environment
  • Useful when inventory continuously builds up and traditional economic order quantity assumptions are valid
• Deriving the production order quantity model

  1. Set ordering or setup costs equal to holding costs

  2. Solve for the optimal order size Q*
• Production order quantity (Qp*)

  √(2DS / H(1-d/p))
• The difference between the production order quantity model and the basic EOQ model is that the effective annual holding cost per unit is reduced in the production order quantity model because the entire order does not arrive at once
• Quantity discounts


  Price reductions for larger orders offered to customers to induce them to buy in large quantities
• Calculating total annual cost with quantity discounts

  Annual setup (ordering) cost + Annual holding cost + Annual product cost
• Total annual cost formula


  TC = DS/Q + QIP/2 + PD
• The EOQ formula is modified for the quantity discount problem
• Modified EOQ formula


  Q* = √(2DS / IP)