Term
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Definition
| a store of materials used to satisfy consumer demand or to support production |
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Term
| reflects how well a firm meets consumer demand |
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Definition
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Term
| What must managers balance? |
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Definition
| Holding and ordering costs |
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Term
| Pressures for small inventory: |
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Definition
• inventory holding cost- the sum of the cost of capital and the variable cost associated with keeping the items on hand, such as storage, handling, and taxes (usually represented as a percentage)
• cost of capital- the opportunity cost of investing in an asset relative to the expected return of investing in assets of a similar level of risk
• weighted average cost of capital (WACC)- the average of the required rate of return on a firm and the interest rate on its debts, weighted by the proportion of the equity and debt in the portfolio
• pilferage- customers or employees stealing inventory
• obsolesce- when inventory can’t be sold at full value
• deteriorate- when inventory spoils or is damaged |
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Term
| Pressures for large inventory: |
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Definition
• custom service increases by avoiding stock outs and backorders
• ordering costs are incurred each time an order is placed
• setup costs are reduced with larger inventory
• management can increase productivity when inventory is present and decreases the costly event of rescheduling
• transportation costs decrease with larger, less frequent shipments
• lower payments to suppliers for higher levels of inventory due to quantity discounts |
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Term
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Definition
| inventories needed for the production of goods and services |
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Term
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Definition
| items such a components, such as components or assemblies needed to produce a final product |
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Term
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Definition
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Term
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Definition
o Cycle inventory- inventory that varies directly with lot size
o Safety stock- surplus inventory that is there for variations in demand (achieved by placing an order before it is actually needed)
o Anticipation inventory- inventory used to absorb uneven rates of supply and demand
o Pipeline inventory- created when an order for an item is issued but not yet received |
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Term
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Definition
| one that is activated when inventory levels need to be reduced |
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Term
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Definition
| reduces the penalty cost of activating the primary lever and the need for having inventory in the first place |
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Term
| primary lever to reduce cycle inventory |
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Definition
| reduce lot sizes moving into the supply chain |
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Term
| secondary lever to reduce cycle inventory |
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Definition
| streamlining ordering and setups, increase repeatability to avoid changeovers |
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Term
| primary lever to reduce safety stock |
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Definition
| placing orders closer to when they need to be received |
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Term
| secondary lever to reduce safety stock |
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Definition
| improved demand forecasts, cut the lead times to decrease demand uncertainties, reduce supply uncertainties, rely on equipment and labor buffers |
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Term
| primary lever to reduce anticipatory inventory |
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Definition
| match production to demand |
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Term
| secondary lever to reduce anticipatory inventory |
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Definition
| add new products with different demand cycles, provide off-season promotional campaigns, offer seasonal pricing |
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Term
| primary lever to reduce pipeline inventory |
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Definition
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Term
| secondary lever to reduce pipeline inventory |
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Definition
| find more responsive suppliers and improve handling within the plant |
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Term
| Stock keeping units (SKUs) |
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Definition
| an individual item or product that has an identifying code and is held in inventory somewhere in the supply chain |
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Term
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Definition
| the theory of dividing SKUs into three different categories based on their dollar usage |
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Term
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Definition
| monitored frequently to reduce the average lot size |
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Term
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Definition
| monitored moderately and are coupled with safety stock |
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Term
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Definition
| loosely monitored due to low holding costs |
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Term
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Definition
| employees count a percentage of the items each day and correct errors that they find |
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Term
| Economic Order Quantity (EOQ) |
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Definition
the inventory level that minimized the annual holding and ordering costs under the following assumptions
o The demand rate for the items is constant and known with certainty
o No constraints are placed on the size of the lot
o The only two relevant costs are holding and ordering costs
o There is no advantage in combining orders
o The lead time is constant and known with certainty |
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Term
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Definition
o When “Made to order” is used and the customer specifies the entire order
o The order size is constrained by capacity limitations |
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Term
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Definition
o When you use a made to stock mentality
o If carrying costs per unit, setup costs, and ordering costs are relatively constant |
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Term
| Time between orders (TBO) |
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Definition
| the average time elapsed between receiving orders of Q units for a particular lot size (= EOQ/D) |
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Term
| Sensitivity analysis is a process of changing parameters to see how a process reacts |
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Definition
o Increase in demand increases the EOQ
o Decrease in setup cost decreases the EOQ
o Decrease in holding cost increases the EOQ |
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Term
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Definition
| items subject to market demand not inventory decisions (ie clothes). In this system, demand must be forecasted |
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Term
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Definition
| those items that are required as components of inputs to a service or product |
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Term
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Definition
| a system designed to track the remaining SKUs each time a withdrawal is made to determine if it’s time to reorder |
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Term
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Definition
| Inventory position= on hand inventory+ scheduled receipts-backorders |
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Term
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Definition
| Reorder point= dL+ safety stock |
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Term
| 3 steps to determining the reorder point |
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Definition
o Choose an appropriate service level policy
o Determine the distribution of demand during lead time
o Determine the safety stock and reorder point levels |
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Term
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Definition
| he desired probability of not running out of stock to provide coverage over the protection interval |
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Term
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Definition
a system that allows orders to be placed when inventories reach a visible level
a system that allows orders to be placed when inventories reach a visible level. Intended for low value SKUs |
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Term
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Definition
| a visual system version of the Q system in which a SKU’s inventory is stored in different locations |
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Term
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Definition
| = total annual holding cost+ annual ordering costs+ annual safety stock holding costs |
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Term
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Definition
| a system where inventory is reviewed periodically not constantly. In this system, the time between orders is fixed, and Q is variable. Inventory is returned to the target level |
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Term
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Definition
| = d(P+L)+ safety stock for the protection interval |
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Term
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Definition
| a maximum level is marked on a storage shelf and inventory is periodically refilled to that level |
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Term
| Advantages of the P system: |
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Definition
o The system is convenient because replenishments are made at fixed intervals
o Orders for multiple items can be compiled into one purchase order
o The inventory position must only be known when a purchase is made |
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Term
| Advantages of the Q system: |
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Definition
o Tailoring review frequency to the SKU can reduce holding costs and ordering costs
o Fixed lot sizes can result in ordering discounts
o Lower safety stock results in saving |
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Term
| Optional Replenishment System |
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Definition
| idea that inventory is reviewed periodically and if it has dropped below a certain level, it can be replenished with a variable Q |
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Term
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Definition
| an item is replenished each time one is withdrawn. Base stock is equal to the reorder point. This can be used to minimize cycle inventory. |
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