SCM 301 Preciado FINAL EXAM STUDY GUIDE MODULE 7 Got Stock Inventory Part II Learning about Independent Management 3 27 14 pages 334 341 Book Notes for Module 7 Periodic review system company checks the inventory level of an item at regular intervals and restocks them based on a predetermined level best suited for items which periodic stocking is economical and cost of high restocking level is not an issue Restocking level should be high enough to meet all but the most extreme demand levels during the reorder period and time it takes for the order to come in Continuous review system inventory level is constantly monitored and when reorder point is reached an order is made Economic order quantity EOQ order point that minimizes holding and ordering costs for an item Tells how much to order but not when to order 4 1 14 pages 347 350 Even though the EOQ minimizes costs for a particular firm it can cause problems for other partners and may actually increase overall supply chain costs Ex Bullwhip effect an extreme change in the supply position upstream in a supply chain generated by a small change in demand downstream in the supply chain To reduce the bullwhip effect many supply chain partners are working together to reduce order quantities by removing volume discount incentives and reducing ordering costs Inventory positioning manages have to decide where in the supply chain to hold inventory Based on Cost and value of inventory increase as materials move down the supply chain 1 2 Flexibility of inventory decreases as materials move down the supply chain a product that is in stock and available immediately is always worth more to the customer than the same product available later Repositioning goods from one location to another can be expensive compared to cost of delaying movement until demand is more certain Supply chain managers try to strike a balance between costs on one hand and flexibility on the other in deciding where to position inventory Inventory pooling holding safety stock in a single location instead of multiple locations several locations then share safety stock inventories to lower overall holding costs by reducing overall safety stock levels Class Notes for Module 7 3 27 14 Module 7 Learning Objectives 1 What are periodic review inventory systems 2 What are continuous review inventory systems 3 What is needed to establish an inventory replenishment policy 2 Classic Systems for Independent Demand Items 1 Periodic review systems orders inventory at regular intervals a Figures out the cycle in which to stock goods b Order sizes vary i There is a gap between restocking level and stock decision 2 Continuous Perpetual review systems checks inventory levels continuously waiting until levels get down to reorder point a Reorder point is optimal point of inventory available where there is enough to sustain business while waiting for the next order to arrive 4 1 14 Comparing Periodic vs Continuous Review Systems important for final PERIODIC CONTINUOUS fixed order intervals always ordering at same time varying order intervals can order weekly monthly daily to fit whatever is needed variable order sizes orders can be combined saves costs convenient to administer less costly less time consuming fixed order sizes Q can guarantee discounts from shippers because you are always ordering the same amount individual review frequencies more responsive to individual needs of products Ex only measured weekly possible quantitiy discounts inventory position is only required at review lower less expensive safety stocks do not control the order size as much Finding Q the best order size Deals with cost of inventory how much it costs you to acquire hold have the inventory you are not using selling Determined by 3 things Order preparation costs and set up costs Inventory carrying costs Shortage and customer service costs ESQ Economic Order Quantity This is the cost to minimize Q Assumptions know assumptions for final ex of question which is an assumption of esq 1 Uniform and known demand rate 2 Fixed item cost no quantity discounts 3 Fixed ordering cost 4 Constant lead time 5 No lot size restrictions supplier will fill whatever size you order 6 No partial deliveries all of order comes at once in full 7 No product interactions Total Relevant Annual Inventory Costs Variables D total demand for year YEARLY DEMAND if given to you a different way remember to first convert to yearly demand before doing the math S cost to place a single order S is independent of the amount in the order H cost to hold one unit in inventory for a year Q order quantity Formula for Total Cost Total Annual Costs and EOQ 2 or 3 questions on final know this logic GOAL of EOQ minimize total costs As Q increases carrying costs increase therefore when you carry less carrying cost goes down As Q increases order cost decreases because the more you order you order less times and save money But when you order less you order more often and shipping costs are higher increasing Q does not always necessarily mean good or bad it depends on the EOQ EOQ Definition Formula Economic Order Quantity EOQ the point that minimizes total costs for carrying ordering inventory How much to order this tells you how much you should order to minimize costs When the order quantity EOQ the holding and setup costs are equal Safety Stock Uncertainty Drivers the costs of stock outs against the cost of holding extra inventory Additional inventory beyond amount needed to meet average demand during lead time Balances Protects against uncertainties in demand or lead time you want to have as little safety stock as possible Variability of demand Variability of lead time Average length of lead time Desired service level no company can guarantee 100 service level this is not possible because it would mean 0 stocking out Safety Stock Calculation the higher your service level the higher your z will be What happens if lead time is constant safety stock will be reduced What happens if demand is constant safety stock will be reduced What happens if lead time and demand are both constant there will be no safety stock How to decrease safety stock work with reliable suppliers keep suppliers closer by geographically decrease variability of demand preordering everyday low prices have a shorter lead time Reorder Point Calculation the timing of replenishment of inventory Read Page 192 3rd Paragraph and Top of Page 193 firms do no compete only against their competitors but