GDS
Chapter 1: Inventory Management Basics
Learning Objectives
Develop a solid understanding of inventory management concepts, terminology, and principles.
Specific objectives include:
Importance of inventory management.
Connection to planning and scheduling.
Use of statistical tools for problem-solving.
Basics of forecasting and inventory control.
Understanding inventory classification, costing methods, control techniques, demand forecasting, reorder points, safety stock, supply chain integration, and technology's role.
Definition of Terms
Stocks: Materials stored until needed, like goods in a shop or raw materials in a factory.
Stock: All goods and materials stored for future use.
Inventory: List of items held in stock.
Item: Distinct products in stock (e.g., one-liter bottles of Diet Coke).
Unit: Standard size/quantity of an item (e.g., a bottle for Diet Coke, a tin for baked beans).
Material: General term for anything kept in stock.
Organizations: All types of entities including non-profits and government bodies.
SKU (Stock Keeping Unit): Alternative term for 'item.'
Inventory Defined
Inventory includes stocks used for production (raw materials and work-in-process), supporting activities (maintenance supplies), and customer service (finished goods).
Functions include:
Anticipation
Hedge
Cycle (lot size)
Fluctuation (safety, buffer, reserve)
Transportation (pipeline)
Service parts.
Inventory represents tangible assets intended to sell or utilize for revenue generation.
Inventory Management
Involves planning, procurement, storage, tracking, and distribution of inventory items to meet customer demand, minimizing costs and maximizing efficiency.
Ensures product availability, controls costs, and meets demand by managing all manufactured, stored, and used inventories.
Objectives of Inventory Control
Achieve satisfactory customer service levels while keeping inventory costs reasonable.
Balance customer service level with ordering and carrying costs.
Importance of Inventory
One of the most expensive company assets, up to 50% of total invested capital.
Less inventory lowers costs but raises the risk of stockouts; more inventory increases costs but satisfies customer demand.
Why Inventory Management?
Essential for:
Tracking available items.
Ordering more as needed.
Avoiding waste.
Meeting customer demand.
Reducing costs.
Managing working capital.
Fostering supplier relationships.
Enabling data-driven decisions.
Types of Inventories
Raw materials and purchased parts.
Partially completed goods (WIP).
Finished goods (merchandise for retail).
Replacement parts, tools, supplies.
Goods-in-transit to warehouses/customers.
Material flow cycle: input, waiting, moving, setup, running, output.
Chapter 2: Key Concepts in Inventory Management
Economic Order Quantity (EOQ)
EOQ: A model to determine optimal order quantity minimizing total inventory costs by balancing ordering and holding costs.
Known as the Wilson EOQ model.
Key Inventory Terms
Lead Time: Time from ordering to receiving.
Holding Costs: Costs associated with storing inventory.
Ordering Costs: Costs incurred when placing orders.
Shortage Costs: Costs from demand exceeding supply.
Item Cost: Purchase price of an item.
Inventory Costs Breakdown
Carrying Costs: Include capital costs and risks like obsolescence.
Order Costs: Include setup and receiving costs.
Purchase Costs: Total amount paid for stocked inventory.
Assumptions of EOQ Model
Only one product; annual demand is known and constant; lead time is constant; orders are received in one delivery; no quantity discounts; stockouts can be avoided.
EOQ Model Derivation and Formula
EOQ formula:
Q* = √((2DS)/H), where:
D = annual demand
S = setup/ordering cost per order
H = holding cost per unit.
Annual holding cost = (Q/2) * H.
Annual ordering cost = (D/Q) * S.
EOQ Advantages and Limitations
Advantages:
Minimizes total costs.
Avoids overstocking and shortages.
Limitations:
Assumes constant demand and instant restocking.
Chapter 3: Economic Production Quantity (EPQ)
Introduction
EPQ: Also known as Economic Manufacturing Quantity; determines optimal batch size to reduce holding and setup costs.
Used when a company produces its own products incrementally.
Assumptions of EPQ
Similar to EOQ with continuous usage and periodic production.
EPQ Model Components
Holding Cost: Cost to carry an item in inventory.
Setup Cost: Cost to prepare for production.
Total Cost (TC) = sum of annual setup and holding costs.
EPQ Formulas
Qp = √((2DS)/H) * √((p)/(p-u))
p = Production rate.
u = Usage rate.
Chapter 4: Quantity Discount Model
Overview
The model is used when suppliers offer discounts for purchasing larger quantities.
Optimal Order Quantity
Requires testing combinations to find the lowest total cost across price breaks.
Example of Quantity Discount Model
A hospital example demonstrates calculating total costs at different price thresholds for cleansing liquid.
Chapter 5: Reorder Point (ROP)
ROP Definition
The ROP indicates when to replenish stock, calculated as ROP = d x L (d = demand rate; L = lead time).
ROP Calculation
Safety stock included if demand/lead time is variable:
ROP = expected demand during lead time + safety stock.
Benefits of Using ROP
Ensures optimal stock levels and prevents stockouts.
Chapter 6: Stock Levels
Stock Level Definition
Refers to the quantity of goods or raw materials that should be maintained to avoid understocking or overstocking.
Types of Stock Levels
Maximum Level: Upper limit to avoid overstocking.
Minimum Level: Lower limit to avoid production stoppages.
Reorder Level: Quantity at which new orders should be placed.
Average Level: Average of maximum and minimum levels.
Danger Level: Urgent action point below minimum stock.
Example Calculation
Demonstrates calculating maximum and minimum stock levels based on consumption and reordering periods.