SMG OM 323 Study Guide - Final Guide: Inventory Turnover, Inventory Theory, Lead Time
13 Jun 2018
School
Department
Course
Professor
OM12 Inventory Management
Powerpoint
● Inventory Theory: to estimate inventory investment, how many parts to order each time
and how much buffer inventory do we need for protection against uncertainties in
demand and lead time
● What is Inventory?
○ Between organizations - goods in transit
Input → transformation → output
Raw materials → WIP → finished goods
● Why Hold inventory?
○ Cycle stock: to achieve economies of scale - fixed costs of each ordering and
quantity discounts - if you order weekly, your cycle is a week - can go a week
without ordering
○ Safety stock: to deal with uncertainty - in supply of raw materials and in demand
of finished goods - in terms of production lead time, or supplier issues
■ Uncertainties: lead time and demand
○ Pre build stock: to smooth capacity requirements - you make capacity early
because the capacity at normal time is not enough
○ Speculative stock: to hedge against possible price increases in the near future -
anticipate that prices will increase so you buy stock in advance
○ Pipeline stock: to keep supply lines full, WIP
● Objectives of inventory decisions
○ Inventory holding cost + inventory ordering costs
Inventory turnover = annual sales
Inventory
Days of supply = inventory
Daily sales
● Costs of holding inventory (H)
○ Warehousing, insurance, interest, Taxes, Breakage, theft, Devaluation, rework
○ Average - 30% of item cost
Cost of Ordering (S)
○ Preparing purchase orders, receiving and inspection costs, setting up machines,
handling fees (external), custom clearance shipping cost
○ DOESN’T DEPEND ON ORDER SIZE SO CALLED FIXED COST
● The Inventory Cycle
● All models are wrong but some are useful
○ Professor George Box
○ Different situations/ assumptions lead to different inventory models
● EOQ model assumptions
○ Demand is known and constant
■ Trade off: fixed cost to order vs. holding cost of inventory
■ Key equations
● Finding the Minimum Cost
● Quantity Discount Model: Assumptions
○ Demand is known and constant
○ Purchase price depends on the order quantity
■ Trade off: fixed cost to order, holding cost of inventory, purchasing cost
for items
● EOQ with purchase cost
Document Summary
Inventory theory: to estimate inventory investment, how many parts to order each time and how much buffer inventory do we need for protection against uncertainties in demand and lead time. Cycle stock: to achieve economies of scale - fixed costs of each ordering and quantity discounts - if you order weekly, your cycle is a week - can go a week without ordering. Safety stock: to deal with uncertainty - in supply of raw materials and in demand of finished goods - in terms of production lead time, or supplier issues. Pre build stock: to smooth capacity requirements - you make capacity early because the capacity at normal time is not enough. Speculative stock: to hedge against possible price increases in the near future - anticipate that prices will increase so you buy stock in advance. Pipeline stock: to keep supply lines full, wip. Warehousing, insurance, interest, taxes, breakage, theft, devaluation, rework.
