MG395 Managing Inventory Quiz

Planning Horizon

The amount of time an organization looks into the future when creating a plan

Why does the Planning Horizon Matter?

It dictates how far ahead resources must be secured and aligns short-term operations with long-term strategic goals

Time Buckets

Specific time intervals (days, hours, weeks, months) used to summarize, group, and track data in forecasting and material requirements planning (MRP)

Limited Quantity (Inventory Systems)

Constrained by physical space or capital

Fixed Quantity/Fixed-Order Quantity (Inventory Systems)

Reorders the same set amount every time stock hits a threshold

Economic Quantity/EOQ (Inventory Systems)

Calculates mathematically optimal order size to minimize total holding and setup costs

Forecasting: Smoothing (How)

By averaging past data using moving averages or exponential smoothing

Forecasting: Smoothing (Why)

To remove random fluctuations (noise) from the data, making underlying trends and patterns easier to see

Periodic Review Approach

An inventory management system where stock levels are checked at fixed time intervals (ex, every Friday). An order is then placed to bring inventory up to a predetermined target level

Reorder Point (ROP)

The specific inventory level that triggers a new order

Reorder Point (ROP) Calculation

ROP = Expected Demand during Lead Time + Safety Stock

Replenishment Triggers

The conditions that initiate a restock
- Continuous Systems Trigger: hitting the reorder point
- Periodic Systems Trigger: the arrival of the scheduled review date

Underage Cost

The cost of stocking out

Underage Cost Calculation

Lost Profit = Selling Price - Cost

Overage Cost

The cost of ordering too much

Overage Cost Calculation

Overage Cost = Cost - Salvage Value

Optimal Order Quantity Calculation

Continuous Inventory: Q = (square root of) 2DS / H
Single-Period Items: Cu / Cu + Co

Dependent Demand

Demand for components driven by the production of finished goods (ex: the wheels needed for a bike)

Independent Demand

Demand for finished goods driven by the external market (ex: a bike)

Safety Stock & Quantity Needed

Extra inventory held as a buffer against demand variability and lead time delays. The amount needed depends on the desired service level (Z-score), lead time length, and standard deviation of demand