nventory management
,
types of inventories
,
functions of inventory
,
objective of inventory control
,
effective inventory management
,
inventory counting systems
,
key inventory terms
,
economic order quantity models
,
assumptions of eoq model
,
deriving the eoq
,
economic production quantity assumptions
,
single period model
,
fixed-interval disadvantages
,
when to reorder with eoq ordering
Safety stock (also called buffer stock) is a term used by logisticians to describe a level of extra stock that is maintained to mitigate risk of stockouts due to uncertainties in supply and demand
Safety stock is an additional quantity of an item held in the inventory in order to reduce the risk that the item will be out of stock, safety stock act as a buffer stock in case the sales are greater than planned and or the supplier is unable to deliver the additional units at the expected time
nventory management
,
types of inventories
,
functions of inventory
,
objective of inventory control
,
effective inventory management
,
inventory counting systems
,
key inventory terms
,
economic order quantity models
,
assumptions of eoq model
,
deriving the eoq
,
economic production quantity assumptions
,
single period model
,
fixed-interval disadvantages
,
when to reorder with eoq ordering
Safety stock (also called buffer stock) is a term used by logisticians to describe a level of extra stock that is maintained to mitigate risk of stockouts due to uncertainties in supply and demand
Safety stock is an additional quantity of an item held in the inventory in order to reduce the risk that the item will be out of stock, safety stock act as a buffer stock in case the sales are greater than planned and or the supplier is unable to deliver the additional units at the expected time
References:
Inventory Control Models, 2013 Pearson Education, Inc. publishing as Prentice Hall
Special Inventory Models, 2010 Pearson Education, Inc. publishing as Prentice Hall
6.3 Further Business Applications: Economic Lot Size
Dr. Grethe Hystad, Mathematics Department, The University of Arizona (www.math.arizona.edu)
Business Dictionary (www.businessdictionary.com)
1. Suppose a firm decides to minimize its holdings of current asse.docxjackiewalcutt
1. Suppose a firm decides to minimize its holdings of current assets, relative to sales. Which statements are true?
Answer
1.
The firm's expected profits will decrease.
2.
The firm's expected profits will increase.
3.
The risk of the firm's profits will decrease.
4.
The risk of the firm's profits will increase.
2. A firm uses the EOQ model to detemine its optimal order quantity, but is considering adding a safety stock of 1,000 units to meet unexpected demand, or to cover demand during variations in lead time. Check all of the statements that are correct if it starts holding safety stocks.
Answer
a.
The firm's annual total carrying cost (TCC) will increase.
b.
The firm's annual total ordering cost (TOC) will decrease.
c.
The firm's annual total inventory cost (TIC) will increase.
3. Match the term in the left column with the description in the right column.
credit period length of time customers are given to pay for purchases
discount reduction in amount owed if invoice is paid early
credit standard required financial strength of acceptable credit customer
collection policy procedures followed to collect past-due accounts
Inventory Management
FIN 340
Prof. David S. Allen
Northern Arizona University
Types of InventoryRaw materials inventory:
Factors of production that will be used in a later stage of production or assembly.Work-in-progress inventory:
Partially assembled or completed goods.Finished goods inventory:
Items ready for distribution or sale.
Types of InventoryIndependent items: Have demand unrelated to the requirements for other items, e.g. finished goods.
Independent items lend themselves to analysis by quantitative techniques.Dependent items: Derive their demand from the need for other items or finished products, e.g. raw materials or work-in-progress.
The demand for the end product is used to infer demand for its components, subcomponents, and raw materials, This is combined with the existing inventory balances to establish a net requirement.
Benefits of Holding InventoryFor finished goods, most marketing analyses suggest that product availability is the most important factor in customer satisfaction.The ability to order in larger lot sizes can create economies of scale in pricing, handling, and setups.In manufacturing, inventory decouples supply and demand. It makes possible longer production runs and more flexibility in the manufacturing process.Inventory also can enhance firm liquidity. In periods of high cash flows, the firm can invest excess cash in building up inventory. When cash flows are lower, the firm can sell off excess inventory without replacing it in order to generate cash.
Costs of Holding InventoryOrdering costs: The fixed and variable costs resulting from the placement and processing of an order.
These include freight, labor, and handling charges. They are generally assumed to be proportional to the number of orders placed. In a produ ...
INVENTORY MANAGEMENT:
What is inventory?
Why do we care for inventory?
What do you consider regarding inventory?
Cost of inventory
Benefits of inventory
Modelling inventory in supply chain
Types of inventory models
Inventory Control and Replacement Analysis Priyanshu
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INVENTORY MODELS
One basic problem of
inventory management is to find
out the order quantity so that it
is most economical from overall operational point of view. Here that problem lies in minimizing the two conflicting costs, i.e. ordering cost and inventory carrying cost.
Inventory models help to find out the order quantity which minimizes the total costs(sum of ordering costs and inventory carrying costs).
Similar to Basic terminologies and EOQ models of Inventory Theory (20)
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3. 3
• OPERATIONS RESEARCH is a branch of
mathematics – specially applied mathematics,
used to provide a scientific base for management
to take timely and effective decisions to their
problems. It tries to avoid the dangers from taking
decisions merely by guessing or by using thumb
rules.
• OR make use of techniques from other
mathematical sciences, such as
mathematical modeling, statistical analysis,
and mathematical optimization and then
operations research arrives at optimal or near-
optimal solutions to complex decision-
making problems.
7. Definition of
Inventory
7
• Inventory theory is the sub specialty within
operations research and operations management
that is concerned with the design of production
system to minimize costs. It studies the decision
faced by firms and the military in connections
with manufacturing , warehousing , supply chains
, spare parts allocation and so on and provides
the mathematical foundation for logistics.
• The purpose of inventory theory is to to
determine rules that management can use to
minimize the costs associated with maintaining
inventory and meeting customer demand.
8. INVENTORY
DECISIONS
8
• Most businesses other than service
businesses are required to carry
inventory. In these businesses, good
management of inventory is essential.
The management of inventory
requires a number of decisions.
• Decisions regarding inventory can be
placed in two general categories:
1 - How much to order?
2 - When should the order be placed?
9. CARRYING COST :- Also known as holding costs,
these are costs involved with storing inventory
before it is sold.
SHORTAGE COST :- These costs, also called stock-
out costs, occur when businesses become out of
stock for whatever reason.
ORDERING COST :- Ordering costs are the
expenses incurred to create and process an order to
a supplier.
INVENTORY
RELATED
COSTS
9
11. 11
2. LEAD TIME
The time gap between placing of an order and its true arrival is known as lead time in
inventory.
3. ORDER CYCLE
Order cycle time refers to the time period between placing of one order and the next
order. It is the time period between two orders that are placed.
4. TRADE CREDIT
Trade credit means an arrangement to buy goods and/or services on account without
making immediate cash or cheque payments.
12. 12
5. REORDER POINT
A reorder point (ROP) is the minimum unit quantity that a business should have in
available inventory before they need to reorder more product.
6. REORDER QUANTITY
Reorder quantity is the total number of product units requested from a manufacturer or
supplier on an inventory replenishment purchase order.
7. DETERIORATION
Deterioration is defined as change, damage, decay, spoilage obsolescence and loss of
utility or loss of original value in a commodity that results in the decreasing usefulness
from the original one product.
13. 13
8. PERISHABLE ITEMS
Perishable refers to items that have an expiration date, such food that will go bad if not
eaten in a certain amount of time. Perishable inventory can also be inventory that will
never be available again, such as hotel rooms, seats on an airplane flight, sports events
or restaurant reservations.
9. INFLATION
Inflation is the rate at which the general level of prices for goods and services is rising
and, consequently, the purchasing power of currency is falling.
10. WAREHOUSE
Warehousing is the house of storing goods that will be sold or distributed later.
14. EOQ
(ECONOMIC
ORDER
QUANTITY)
14
Economic order quantity (EOQ) is one of
the techniques of inventory control which
minimizes total carrying and ordering cost.
EOQ as a model has been introduced in
1913 by Ford W. Harris; and R. H. Wilson
was given credit for their in-depth analysis .
15. EOQ MODEL
-
ASSUMPTIONS
15
1. The demand rate is known and constant .
2. There is no time gap between placing an
order and receiving its supply, i.e. lead time
is zero.
3. Carrying cost is known and constant.
4. Ordering cost is known and constant.
5. Shortages are not allowed.
17. EOQ -
NOTATIONS
17
Q= Number of units ordered(supplied) per order
D = Demand in units of inventory per year
N = Number of orders placed per year
TC = Total inventory cost
Co = Ordering cost per order
C = Purchase price per inventory
Ch = Carrying cost per unit per period of time the
inventory is kept
Cs = Shortages cost per unit of inventory
19. Ordering cost = no. of order per year × ordering cost per order
Carrying cost = Average units in inventory × carrying cost per unit
Total inventory cost ,
TC =
𝐷
𝑄
𝐶0 +
𝑄
2
𝐶h
and TC is minimum at the value of Q where the derivative of TC with respect
to Q is zero. Differentiating TC with respect to Q and then equating it to zero ,
we get
20. 20
Q
This value of Q minimize the total inventory cost (TC) and hence it is the economic
order quantity.
Let this denote by Q*.
So, Q*
And optimum no. of orders placed per year, N*
Minimum total yearly inventory cost, TC*
21. Model 2:- EOQ Model with Different Rates
of Demand in Different Cycle
21
22. 22
Let the demand in different periods of time t1, t2, …, tn be D1, D2, …, Dn respectively,
so that the total demand in time T is given by
D = D1+ D2+ …+ Dn where T = t1+ t2+ …+ tn
The cost of ordering in time T,
The carrying cost for time T,
=
1
2
𝑄𝐶hT
The total inventory cost ( TC )
23. 23
This cost is minimum when its derivative with respect to Q is zero,
i.e. if,
Q* =
Total inventory cost,
24. REFERENCES
24
• Taha, H. A., ‘Operations Research : An
Introduction‘ . (2017). Pearson Education.
• Hillier, F. S., & Lieberman, G. J., Introduction to
operations research. (2015). San Francisco:
Holden Day.
• Inventory definitions and EOQ concept:
https://nptel.ac.in/courses/111102012