Term
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Definition
is the planning and controlling of inventories in order to meet the competitive priorities of the organization.
Effective inventory management is essential for realizing the full potential of any value chain.
Inventory management requires information about expected demands, amounts on hand and amounts on order for every item stocked at all locations.
The appropriate timing and size of the reorder quantities must also be determined. |
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| when the receipt of materials, parts, or finished goods exceeds their disbursement. |
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| when their disbursement exceeds their receipt. |
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| Pressures for Low Inventories |
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Definition
| Inventory holding cost, Cost of Capital, Storage and Handling, Taxes, Insurance, and Shrinkage |
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| is the sum of the cost of capital and the variable costs of keeping items on hand, such as storage and handling, taxes, insurance, and shrinkage. |
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| is the opportunity cost of investing in an asset relative to the expected return on assets of similar risk. |
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| arise from moving in and out of a storage facility plus the rental cost and/or opportunity cost of that space. |
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| Taxes, Insurance, and Shrinkage |
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Definition
| More taxes are paid and insurance costs are higher if end-of-the-year inventories are high. Shrinkage comes from theft, obsolescence and deterioration. |
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| Pressures for High Inventories |
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Definition
| Customer Service, Ordering Cost, Setup Cost, Labor and Equipment, Transportation Costs, Quantity Discount |
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| Reduces the potential for stockouts and backorders. |
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| The cost of preparing a purchase order for a supplier or a production order for the shop. |
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| The cost involved in changing over a machine to produce a different item. |
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| Creating more inventory can increase workforce productivity and facility utilization. |
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| A drop in the price per unit when an order is sufficiently large. |
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| The portion of total inventory that varies directly with lot size (Q). Average = Q/2 |
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| The determination of how frequently and in what quantity to order inventory. |
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| Surplus inventory that a company holds to protect against uncertainties in demand, lead time and supply changes. |
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| is used to absorb uneven rates of demand or supply, which businesses often face. |
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| Inventory moving from point to point in the materials flow system. |
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Definition
The primary tactic (lever) for reducing cycle inventory is to reduce lot size.
This can be devastating if other changes are not made, so two secondary levers can be used:
Streamline the methods for placing orders and making setups in order to reduce ordering and setup costs and allow Q to be reduced.
Increase repeatability in order to eliminate the need for changeovers.
Repeatability is the degree to which the same work can be done again. |
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Term
| Reducing Safety Stock Inventory |
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Definition
The primary lever to reduce safety stock inventory is to place orders closer to the time they must be received. However, this approach can lead to unacceptable customer service.
Four secondary levers can be used in this case:
Improve demand forecasts so that fewer surprises come from customers.
Cut the lead times of purchased or produced items to reduce demand uncertainty.
Reduce supply uncertainties. Share production plans with suppliers. Surprises from unexpected scrap or rework can be reduced by improving manufacturing processes. Preventive maintenance can minimize unexpected downtime caused by equipment failure.
Rely more on equipment and labor buffers, such as capacity cushions and cross-trained workers. |
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| Reducing Anticipation Inventory |
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Definition
The primary lever to reduce anticipation inventory is simply to match demand rate with production rate.
Secondary levers can be used to even out customer demand in one of the following ways:
Add new products with different demand cycles so that a peak in the demand for one product compensates for the seasonal low for another.
Provide off-season promotional campaigns.
Offer seasonal pricing plans. |
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| Reducing Pipeline Inventory |
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Definition
The primary lever for reducing pipeline inventory is to reduce the lead time.
Two secondary levers can help managers cut lead times:
Find more responsive suppliers and select new carriers for shipments between stocking locations or improve materials handling within the plant.
Decrease lot size, Q, at least in those cases where the lead time depends on the lot size. Smaller jobs generally require less time to complete. |
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Definition
The positioning of a firm’s inventories supports its competitive priorities.
Inventories can be held at the raw materials, work-in-process, and finished goods levels.
Managers make inventory placement decisions by designating an item as either a special or a standard. |
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| An item made to order. If purchased, it is bought to order. |
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| An item that is made to stock or ordered to stock, and normally is available upon request. |
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| The process of dividing items into three classes, according to their dollar usage, so that managers can focus on items that have the highest dollar value. |
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| Economic Order Quantity (EOQ) |
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Definition
is the lot size that minimizes total annual inventory holding and ordering costs.
Assumptions of EOQ
The demand rate is constant and known with certainty.
There are no constraints on lot size.
The only relevant costs are holding costs and ordering/setup costs.
Decisions for items can be made independently of other items.
Lead time is constant and known with certainty. |
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| Time between orders (TBO) |
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Definition
| is the average elapsed time between receiving (or placing) replenishment orders of Q units for a particular lot size. |
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Term
| A Change in the Demand Rate (D): |
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Definition
| When demand rises, the lot size also rises, but more slowly than actual demand. |
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| A Change in the Setup Costs (S): |
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Definition
| Increasing S increases the EOQ and, consequently, the average cycle inventory. |
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| A Change in the Holding Costs (H): |
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Definition
| EOQ declines when H increases. |
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| Errors in Estimating D, H, and S |
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Definition
| Total cost is fairly insensitive to errors, even when the estimates are wrong by a large margin. The reasons are that errors tend to cancel each other out and that the square root reduces the effect of the error. |
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Term
| Inventory Control Systems |
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Definition
| systems tell us how much to order and when to place the order. |
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Definition
| Items for which demand is influenced by market conditions and is not related to the inventory decisions for any other item held in stock. |
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| Continuous review (Q) systems |
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Definition
| (Reorder point systems ROP) are designed to track the remaining inventory of an item each time a withdrawal is made to determine whether it is time to reorder. |
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| Periodic review (P) systems |
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Definition
| (Fixed Interval Reorder systems) in which an item’s inventory position is reviewed periodically rather than continuously. |
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Definition
is the measurement of an item’s ability to satisfy future demand.
IP = OH + SR – BO |
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| Scheduled receipts (SR) or Open orders |
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Definition
| are orders that have been placed but have not yet been received. |
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| is the predetermined minimum level that an inventory position must reach before a fixed order quantity Q of the item is ordered. |
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| Service level (Cycle-service level): |
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Definition
| The desired probability of not running out of stock in any one ordering cycle, which begins at the time an order is placed and ends when it arrives. |
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| The period over which safety stock must protect the user from running out. |
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| The number of standard deviations needed for a given cycle-service level. |
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| Periodic review (P) system |
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Definition
A system in which an item’s inventory position is reviewed periodically rather than continuously.
Sometimes called a fixed interval reorder system or a periodic reorder system.
A new order is always placed at the end of each review, and the time between orders is fixed at P.
Demand is a variable, so total demand between reviews varies.
The lot size, Q, may change from one order to the next. |
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Term
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Definition
Convenient to administer
Orders for multiple items from the same supplier may be combined
Inventory Position (IP) only required at review
Systems in which inventory records are always current are called Perpetual Inventory Systems |
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Definition
Review frequencies can be tailored to each item
Possible quantity discounts
Lower, less-expensive safety stocks |
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| A system that allows employees to place orders when inventory visibly reaches a certain marker. |
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| A visual system version of the Q system in which an item’s inventory is stored at two different locations. |
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| The concept of a P system can be translated into a simple visual system. A maximum level is marked on the bin and inventory is brought up to the mark periodically. |
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| Optional replenishment system |
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Definition
| A system used to review the inventory position at fixed time intervals and, if the position has dropped to (or below) a predetermined level, to place a variable-sized order to cover expected needs. |
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Definition
| An inventory control system that issues a replenishment order, Q, each time a withdrawal is made, for the same amount as the withdrawal. |
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| Approaches for Inventory Record Accuracy |
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Definition
Assign responsibility for reporting inventory transactions to specific employees.
Secure inventory in locked storage areas.
Cycle counting, an inventory control method, whereby storeroom personnel physically count a small percentage of the total number of items each day, correcting errors that they find, is used to frequently check records against physical inventory.
Logic error checks on each transaction; reporting and fully investigating discrepancies.
If inventory records prove to be accurate over several years’ time, the annual physical count can be avoided. It is disruptive, adds no value to the products, and often introduces as many errors as it removes. |
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