Inventory Management Principles and Practices

Inventory Fundamentals

One use of inventory is to provide a hedge against inflation. ABC analysis divides an organization's on-hand inventory into three classes based upon annual dollar volume. Cycle counting is a process by which inventory records are verified. The difference(s) between the basic EOQ model and the production order quantity model is that the production order quantity model does not require the assumption of instantaneous delivery. Extra units that are held in inventory to reduce stockouts are called safety stock. Inventory record accuracy would be decreased by increasing stockroom accessibility. The two most important inventory-based questions answered by the typical inventory model are when to place an order and how many of an item to order. The appropriate level of safety stock is typically determined by choosing the level of safety stock that assures a given service level.

Inventory Concepts and Calculations

Which of the following is NOT a type of inventory? MRP. In the probabilistic model, increasing the service level will increase the cost of the inventory policy. A system that triggers ordering on a uniform time basis is called a fixed-period system.

Example Problems

• A company wishes to determine the EOQ for an item that has an annual demand of 2,000 units, a cost per order of $75, and annual carrying cost of $7.50 per unit. What is the EOQ? 200 units.
• A production facility is trying to determine the best batch size for an item that is produced intermittently. This item has an annual demand of 1,000 units, an annual carrying cost of $10 per unit, and a setup cost of $400. They operate 50 weeks per year and can produce 40 units per week. What is the best batch size for this item? 400.
• A store wants to ensure a shelf full of marshmallow peeps as the holiday season approaches. Daily demand for peeps is normally distributed with a mean of 25 and a standard deviation of 5. Lead time is 3 days and the store intends a 98% service level. What is their reorder point? 93.

A production facility is trying to expand production on a machine that is currently used to produce one part. This item has an annual demand of 1,000 units, an annual carrying cost of $10 per unit, and a setup cost of $400. They operate 50 weeks per year and can produce 40 units per week. What percentage of the time are they using this machine? 50%.

Inventory Management Strategies

Policies based on ABC analysis might include investing more in supplier development for A items. A system that keeps track of each withdrawal or addition to inventory continuously is a perpetual inventory system.

Exam 2: True or False

EXAM2

• For most items in inventory, yearly holding costs amount to only a few percent of the unit cost. False.
• Inventory models under conditions of dependent demand are quite different from those under conditions of independent demand. True.
• In the EOQ model, the reorder point is determined by the demand during the lead time. True.
• One function of inventory is to take advantage of quantity discounts. True.
• Reducing cycle time reduces work-in-process inventory. True.
• ABC analysis is based on the Pareto principle. True.
• The maximum inventory level in the production order quantity model is always less than the order quantity. True.
• As the service level rises, the amount of buffer stock falls. False.
• A company that places orders smaller than the EOQ amount will incur a higher annual holding cost as a result. False.
• Two items have the same average weekly demand, but item A's demand has high variability while item B's demand variability is low. If both A and B have identical lead times and service levels, the reorder point for A will be higher than that for B. True.
• If a company's estimates of ordering and holding costs are off slightly, their EOQ calculations will be grossly inaccurate. False.