Operations Management 2

What is the main reason inventory represents a major asset for a firm

Inventory often represents around half of total invested capital making its management critical

What is the role of inventory for operations managers

Operations managers must balance customer service level and total cost

What does inventory allow regarding processes

Inventory decouples processes to provide flexibility

What role does inventory play regarding demand fluctuation

Inventory helps meet demand variation and avoid stockouts

What benefit do companies obtain when buying in large quantities

Large quantity buying allows access to quantity discounts

Why does inventory help against inflation

Inventory protects against expected price increases by buying earlier

What are the four main types of inventory

MRO items raw material work in progress finished goods

What is MRO inventory

Maintenance repair and operations items needed to maintain facilities and equipment

What is raw material inventory

Items purchased but not yet transformed

What is work in progress inventory

Items partly transformed between operations

What is finished goods inventory

Completed items ready for sale

What is the purpose of holding inventory during lead time

Inventory covers demand during the time between order and delivery

What is demand uncertainty

Unpredictable variation in customer orders

What is supply uncertainty

Unpredictable variation in supplier deliveries lead time or quantity

Why does inventory improve purchasing conditions

Inventory allows larger economical orders and reduces cost per unit

Why does inventory support anticipation decisions

Inventory can be built before known seasonal or promotional peaks

Why manage inventory ?

Seize market opportunities, optimize transport and delivery, decouple activities and to value appreciation

What are functionla stocks useful for

Supply Uncertainty:

* Compensate for uncertainties and risks within the process.

* Related to Supply Chain Constraints and Equipment (e.g., capacity, scheduling, units).

Demand Uncertainty (Flexibility Stocks):

* Absorb demand fluctuations and guarantee service levels.

What is inventory procurement / replenishment lead time ? 

This is the time lag between placing an order and receiving the inventory.

It encompasses the period from the Ordering date to the Delivery date

What is a stockout situation ? 

Occurs when inventory levels drop to zero and demand cannot be met.

Why does inventory support logistics economies

Inventory can be increased to fill transport units and lower shipping cost per unit

What is cycle stock (Regular demand)

This is the inventory held to meet average, predictable demand during the replenishment cycle. It's the "Quantity ordered" to cover expected consumption.

What is safety stock

Safety stock protects against uncertainties of demand and lead time

What is anticipation stock

Stock held in preparation of a future planned peak in demand

Why is too much inventory harmful (Overstock)

Too much inventory increases holding cost capital cost and obsolescence risk

Why is too little inventory harmful (Out of stock)

Too little inventory causes stockouts lost sales and disruptions

What are the four main inventory costs

Purchasing ordering holding shortage

What is purchasing cost

Unit price multiplied by quantity purchased

What is ordering cost

Administrative and logistical cost of placing and receiving an order

What is holding cost

Cost to store finance insure and protect inventory

How is holding cost often estimated

Holding cost = holding ratio x unit cost

What is shortage cost

Cost of missing items such as lost sales and penalties

What is ABC classification

Method that groups items by value and importance to prioritize control

What characterizes A items in ABC

A items are few in number and high in value thus tightly controlled

What characterizes B items in ABC

B items have medium quantity and value and are moderately controlled

What characterizes C items in ABC

C items are numerous but low in value thus simply controlled

What is a periodic inventory system

Inventory checked at fixed time intervals

What is a perpetual inventory system

Inventory updated continuously with ongoing monitoring

What is cycle counting

Regular counting of selected items usually A class items

What factors define replenishment policies

Order quantity and order timing

What does a fixed quantity policy mean

The quantity ordered is always the same when triggered

What does a variable quantity policy mean

The ordered quantity changes depending on need

What does a fixed order date mean

Orders occur at regular planned intervals

What does a variable order date mean

Orders occur whenever inventory conditions trigger them

What is the reorder point method

An order is placed when stock reaches a predefined level

What is the mathematical formula of the reorder point

Reorder point = demand times lead time + safety stock

What is the main use of the reorder point method

It is primarily used for A items with high importance

What are deterministic inventory models

Models assuming known stable demand

What is the EOQ model

EOQ finds the optimal order quantity minimizing ordering and holding cost

What other deterministic models exist

Models include production quantity multi product and discount EOQ

What are stochastic inventory models

Models that include randomness in demand or lead time

What is an r Q model (Continuous Review)

A continuous review system with reorder point r and fixed quantity Q

What is an R S model (Periodic Review)

A periodic review system ordering up to level S every review period R

What is the newsvendor model

A single period model for perishable or seasonal products

What costs does EOQ minimize

EOQ minimizes ordering cost plus holding cost

What is the total cost function in EOQ

Total cost =(C x D) + (A x D / Q) + (H x Q / 2)

Where:

(C x D): Total annual purchase cost

(A x D / Q): Total annual ordering cost

(H x Q / 2): Total annual holding cost

C: Unit purchase cost (e.g., Euros per item)

D: Demand (number of items per unit of time, e.g., items per year)

A: Ordering cost (e.g., Euros per order)

h: Unit carrying cost (e.g., Euros per item per unit of time, representing the cost to hold one item for one unit of time)

Q: Ordering quantity (number of items in each order)

What is the optimal order quantity in EOQ

Q = √2AD / h

Where : 

A = Ordering costs (euros per order
D = Demand (number of items)
h = Unit carrying cost (e.g., Euros per item per unit of time, representing the cost to hold one item for one unit of time)

What is the EOQ cycle time

Teoq =Qeod / D

What is the EOQ order frequency

Neoq = D / Qeoq

What happens if Q is lower than EOQ

Ordering cost increases more than holding cost decreases

What happens if Q is higher than EOQ

Holding cost increases more than ordering cost decreases

Why does EOQ not include shortage cost

EOQ assumes no stockout is allowed

Why is the EOQ model widely used

Because it provides a simple efficient rule for stable demand situations

Why do companies use safety stock in stochastic systems

To achieve a target service level despite variability

What is service level

Probability that demand will be met without stockout during a cycle

What does demand during lead time represent

Expected consumption from order placement to order reception

What does lead time variability affect

It affects the amount of safety stock needed

What does demand variability affect

It impacts safety stock size and reorder point

What does high lead time require

High lead time requires larger inventory cover

What does unstable supply require

Unstable supply requires more safety stock to avoid disruptions

Why is ABC classification important for cycle counts

It identifies which items deserve frequent counting and monitoring

What is the purpose of categorizing inventory types

Categorization helps assign the correct policy and control method

What is the relationship between cycle stock and EOQ

Cycle stock typically equals half of order quantity

What is the impact of inflation anticipation on inventory

Companies may increase stock to avoid higher future purchase prices

What is a key drawback of large orders

Large orders increase holding cost and risk of obsolescence

What is a key drawback of small orders

Small orders increase ordering cost and risk of stockout

What is the main objective of inventory management

The main objective is to find the optimal balance between cost and service

What is the main role of reorder point calculation

Reorder point ensures replenishment arrives before running out of stock

What is the impact of inaccurate demand forecasts

Inaccurate forecasts increase risk of either stockouts or excess inventory

What is the impact of poor lead time information

Poor lead time data can cause wrong reorder points and service level drops

What do MRO items enable

MRO items enable maintenance activities to run without interruption

Why are WIP items held

WIP items are held to support flow between production stages

Why are finished goods held

Finished goods ensure availability for customer demand

What is the purpose of inventory simplification

Inventory simplification reduces cost and increases responsiveness

What is the link between inventory and customer service

Stock availability directly affects service level and satisfaction

What is inventory obsolescence

The risk that items lose value due to age expiration or innovation

What is the purpose of safety stock setting

Safety stock targets a specific acceptable risk level

What is the advantage of fixed order interval policies

They simplify planning and combine orders for logistics efficiency

What is the advantage of continuous review policies

They react instantly to inventory changes and reduce risk of stockout

What is the main disadvantage of periodic review policies

They may require more safety stock due to review infrequency

What is the main disadvantage of continuous review

It requires real time tracking systems

What happens in the newsvendor model if the order quantity is too high

Excess units must be liquidated at low value

What happens in the newsvendor model if the order quantity is too low

Lost sales reduce profit

What is the main challenge of stochastic models

Uncertainty requires statistical methods to set correct parameters

What does lean management aim regarding inventory

Lean aims to reduce waste and minimize unnecessary stock

What is just in time

JIT is a system that seeks to minimize inventory through precise timing

Why does JIT conflict with high uncertainty

JIT requires stable demand and reliable supply to function properly

Why do firms still hold safety stock even under modern systems

Safety stock protects against real world variability impossible to eliminate

What is the importance of data accuracy in inventory management

Accurate data is essential to correct decisions and cost control