Inventory and Order Quantity

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Learning Objectives:
• •         To understand the different types of inventory and the reasons for maintaining inventory • •         To learn how to analyze inventory levels and effectiveness • •         To develop strategies for managing inventory by answering the following questions I. Why do we have it

II. What form should it take?
III. Where do we keep it?
IV. How much should we order?
V. When should we order?
VI. How can we reduce inventory?
Journey to World Class 3 – Managing Inventory – an excellent Industry Week article on one firm’s move to become a world class organization by managing their inventory. Contents: | EOQ || EOQ with Quantity Discounts | | Continuous & Periodic Review Systems | |Comparison of Q and P Systems | | Inventory Reduction | | ABC Analysis | | Links | | Back to 02-33 Index | [pic]

Two Types of Demand Impact Production/Service Organizations
1. Independent Demand
• •         external demand for end items or services • •         this demand is uncertain and we predict it using forecasting methods 2. Dependent Demand
• •         demand for items used to produce the final product or service • •         once we know demand for the final product we can predict this demand exactly Inventory Management for Independent Demand

- -         answers two basic questions
1. 1.      How much should we order?
2. 2.      When should we order?
I. Why do we have inventory?
Purpose of Inventory - Inventory serves a decoupling function - it decouples demand for final or intermediate products from the production of those products As part of production - Work in process - WIP

To meet anticipated demand - Cycle inventory - meets forecast demand during the order cycle (time between orders) To protect against uncertainty - Safety stock
• •         demand
• •         production - quantity of the right product, quality • •         supply
• •         Price
Required in transit - Pipeline inventory
- inventory in transit in the materials flow system • •         inbound: expected receipts (open orders) of material that have not yet arrived • •         within the plant: work-in-process inventory • •         outbound: finished goods that have been shipped but not yet received and paid for by the customer In anticipation of some event - Anticipation inventory - held in anticipation of increased demand, seasonality, changes in product price, product shortage, capacity restrictions, etc To take advantage of volume discounts

II. What form should it take?
Depends on customer requirements and the production system |Customer Requirements |Inventory Form | |Immediate order filling |Finished Goods | |Modularised products |WIP/modules | |Customised products |Raw Materials & primary components |

III. Where do we keep inventory?
1. 1.      Retail
2. 2.      Wholesale/Distributor
3. 3.      Processor/Further Processor
4. 4.      Producer
5. 5.      Input supplier
- Keep it closer to the customer if quick response to demand for finished goods is needed - Keep it further down the chain if more customization is needed [pic]
IV. How much should we order?
- There are different approaches to how much (and when to order) - Just in Time and Economic Order Quantity vary in the approach to order size and timing. Economic Order Quantity (EOQ) Model
• Demand is constant and known
• Supply is certain, and replenishment...
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