Exam Structure:
A formula sheet will be provided during the exam to assist students in calculations and concepts.
Types of questions:
Math and Calculation Questions: These will involve numerical problems requiring calculations based on the course material.
Conceptual Questions: Focus on the understanding of core concepts discussed throughout the course.
Full Conceptual Questions: These require comprehensive answers demonstrating a deeper understanding of multiple concepts and their interconnections.
Supply Chain Club Meeting Details:
Time: 05:15 PM
to promote punctuality.Location: Sark Lecture Hall, a central location on campus ideal for gatherings.
Dinner Provided: Free Pizza will be served during the meeting to encourage attendance and engagement.
Officer Application for Next Year Announced: Details regarding the applications for leadership positions within the club will be discussed; all interested students are encouraged to attend and participate.
Economic Order Quantity (EOQ):
Purpose: Focused on minimizing total costs associated with inventory management, optimizing purchase and storage strategies.
Total Cost (TC): Comprises two main components:
Ordering Cost: Calculated as (Number of Orders per Year) × (Cost per Order).
Number of Orders: Determined by the formula, Annual Demand (D) / Order Quantity (Q), which highlights the efficiency of order quantities.
Holding Cost: Calculated as (Average Inventory) × (Holding Cost per Unit).
Average Inventory: The average inventory level is derived from Quantity (Q) / 2, affecting storage costs.
As Quantity (Q) increases:
Ordering Costs Decrease: Fewer orders are made throughout the year, reducing transaction costs.
Holding Costs Increase: As more inventory is held, costs related to storage, insurance, and deterioration rise.
Total Cost Graph Dynamics: The total cost associated with inventory shows a U-shape curve; the lowest point indicates the optimal order quantity (EOQ), which balances both ordering and holding costs.
EOQ Formula Derivation:
EOQ Equation:
EOQ = √((2 × D × S) / H)
Where:
D: Annual Demand (total units expected to be sold)
S: Cost per Order (total cost incurred each time an order is placed)
H: Holding Cost per Unit (cost of holding one unit of inventory over a specific period).
Assumptions for EOQ Model:
Demand remains constant and known throughout the year.
Lead time for receiving new orders is consistent and known.
No discounts are offered for larger quantities purchased, keeping unit prices stable.
Only a single SKU (Stock Keeping Unit) is considered for simplicity.
The budget is unlimited for payments and purchasing.
Both holding and ordering costs remain constant, ensuring stability in calculations.
At the EOQ, the cost of ordering is equal to the cost of holding inventory, creating an optimal balance.
Reorder Point Calculation:
Reorder Point (ROP): Indicates when new inventory must be ordered to replenish stock before depletion.
ROP Formula: Calculated as:
ROP = Demand During Lead Time (the time it takes for new stock to arrive).
ROP Calculation: Can be represented as: ROP = Demand/Lead Time.
Importance of ROP: Ensures timely delivery and stock replenishment to avoid back orders or stock shortages, contributing to maintaining customer satisfaction.
Safety Stock Concept:
Purpose of Safety Stock: Acts as a buffer against variability in demand or lead times, ensuring availability even when unexpected events occur.
Buffer Insights: Provides additional coverage beyond the average inventory to prevent stockouts during fluctuations in demand or delays in supply chain processes.
Standard Deviation and Demand During Lead Time:
If both demand and lead time are variable, calculate safety stock using standard deviations, accommodating for unexpected increases in demand.
The objective is to establish service levels by determining necessary safety stock amounts based on the variability of the demand.
Normal Distribution and Stockouts:
Understanding Normal Distribution:
Mean represents the average outcome while standard deviation (σ) reflects variations from the mean.
In a normal distribution:
68% of outcomes fall within ±1 standard deviation of the mean.
95% of outcomes fall within ±2 standard deviations of the mean.
These statistical measures help establish safety stock needs based on standard deviation calculations, ultimately managing probabilities of stockouts effectively.
Z Scores and Service Levels:
Z Scores Explained: Correspond to specific desired service levels (e.g., achieving a 95% service level typically corresponds to a z score of approximately 1.65).
Application of Z Scores: Used to adjust safety stock calculations to meet desired stockout probabilities, indicating that a higher service level will necessitate a greater safety stock to minimize stockout risks.
Inventory Holding Costs:
Total Holding Costs Characterization:
The total holding cost encompasses both cycle stock and safety stock contributions.
Average Inventory for Cycle Stock: Calculated as Q/2, presents a standard way to project basic holding costs for regular inventory.
Safety Stock: Counts fully in calculations as it isn't segmented into cycles, emphasizing its cost burden completely on the inventory management.
Calculating Holding Costs Example:
When average demand is known and safety stock is established, overall holding costs can be projected:
Total Holding Cost = (Average Cycle Stock Cost + Safety Stock Cost).
Expected Demand and Forecasting:
Independent Demand Management: Often requires accurate forecasts, noting that these forecasts can introduce variances in expected versus actual demand outcomes.
Mean Absolute Deviation (MAD): A tool used to measure forecasting accuracy, serving a fundamental role in calculating standard deviations that are essential for determining safety stock levels based on demand forecasts.