SCM: Inventory UPDATED ACTUAL Questions and CORRECT Answers
Inventory can be visualized as stacks of money sitting on
forklifts, on shelves, and in trucks and planes while in
transit.
For many businesses, inventory is the largest asset on the
balance sheet at any given time.
Inventory management
Inventory can be diflcult to convert back into cash.
It is a good idea to try to get your inventory down as far as
possible.
The average cost of holding inventory per year in the US
is 30-35% of its value.
Classification of inventory manufacturing, distribution, services
- Raw materials.
- Finished products.
manufacturing - Component parts.
- Supplies.
- Work-in process
in-transit
distribution
warehouse
Tangible goods to be sold and the supplies necessary to
services
administer the service
the stock of any item or resource used in an organization.
Direct spend (materials that will eventually be sold to cus-
tomers)
inventory
Indirect spend (supplies that keep the operations/supply
chain running, e.g., the MRO--maintenance, repair, and
operations inventory)
RMI --> Op 1 --> WIP --> Op 2 --> FGI
Inventory exists to meet customer demands.The demand
Customer Demand
can be either dependent or independent.
independent demand items: not related to other items
, Dependent demand items:determined by other item's re-
quirement.
Maintain independence of operations
Allow flexibility in production scheduling
Meet variation in product demand
Provide a safeguard for variation in raw material delivery
Purposes of inventory time
Take advantage of economic purchase order size
Other domain-specific reasons, e.g., in-transit inventory,
fuel for jet planes.
MRO (maintenance, repair, and operations)
holding/carrying costs
ordering costs
Inventory costs
shortage costs
setup/production change costs
holding/carrying costs Costs for storage, handling, insurance, and so on
ordering costs costs of placing an order
costs of running out, e.g. lost sales/customer or produc-
shortage costs
tion time
setup (production change) costs Costs for arranging specific equipment setups, and so on
Minimize the sum of the inventory carrying, ordering and
shortage costs by determining:
fThe type of inventory control system?
objective inventory management fHow much to order?
fWhen to order?
When to order?
How much to order?Inventory control systems
One time purchasing decision (Ex: vendor selling t-shirts
single-period inventory model
at a football game).
, Seeks to balance the costs of inventory overstock and
understock
Fixed-order quantity models: Event triggered (Ex: running
out of stock).
Multi-period inventory models
Fixed-time period models: Time triggered (Ex: monthly
sales call by supplier's sales representative).
Goal: determine the optimal number of newspapers to
order (denoted as x) to meet a specific service level (the
probability of not running out of stock).
Given Information:
The mean demand (μ) for newspapers is 90.
The standard deviation (σ) of the demand is 10.
Single-period inventory model: solving the newspaper The probability distribution of newspaper sales is as-
problem sumed to follow a normal distribution.
Consider a mean of 90 papers and a standard deviation Service Level:
of 10 papers. The service level is the probability of meeting customer
Assume that the probability distribution associated with demand without running out of stock.
newspaper sales is normal. In this example, the manager wants an 80% service level,
Approach 1: Manager/company decides the service level meaning an 80% chance of not running out of stock.
Suppose we want an 80 percent chance of not running Baseline Probability:
out. Stocking exactly 90 newspapers (the mean demand) cor-
Note that stocking 90 papers yields a 50% chance of responds to a 50% chance of running out, as the demand
stocking out. is symmetrically distributed around the mean.
How to find x (number of newspapers to order with an Finding x (the order quantity for an 80% service level):
80% service level) ? To achieve an 80% service level, we need to identify the
value of x where 80% of the demand lies below x in the
normal distribution.
This is equivalent to finding the z-score for 80% in the
standard normal distribution and then converting it back
to the actual demand scale.
How to Calculate x:
Inventory can be visualized as stacks of money sitting on
forklifts, on shelves, and in trucks and planes while in
transit.
For many businesses, inventory is the largest asset on the
balance sheet at any given time.
Inventory management
Inventory can be diflcult to convert back into cash.
It is a good idea to try to get your inventory down as far as
possible.
The average cost of holding inventory per year in the US
is 30-35% of its value.
Classification of inventory manufacturing, distribution, services
- Raw materials.
- Finished products.
manufacturing - Component parts.
- Supplies.
- Work-in process
in-transit
distribution
warehouse
Tangible goods to be sold and the supplies necessary to
services
administer the service
the stock of any item or resource used in an organization.
Direct spend (materials that will eventually be sold to cus-
tomers)
inventory
Indirect spend (supplies that keep the operations/supply
chain running, e.g., the MRO--maintenance, repair, and
operations inventory)
RMI --> Op 1 --> WIP --> Op 2 --> FGI
Inventory exists to meet customer demands.The demand
Customer Demand
can be either dependent or independent.
independent demand items: not related to other items
, Dependent demand items:determined by other item's re-
quirement.
Maintain independence of operations
Allow flexibility in production scheduling
Meet variation in product demand
Provide a safeguard for variation in raw material delivery
Purposes of inventory time
Take advantage of economic purchase order size
Other domain-specific reasons, e.g., in-transit inventory,
fuel for jet planes.
MRO (maintenance, repair, and operations)
holding/carrying costs
ordering costs
Inventory costs
shortage costs
setup/production change costs
holding/carrying costs Costs for storage, handling, insurance, and so on
ordering costs costs of placing an order
costs of running out, e.g. lost sales/customer or produc-
shortage costs
tion time
setup (production change) costs Costs for arranging specific equipment setups, and so on
Minimize the sum of the inventory carrying, ordering and
shortage costs by determining:
fThe type of inventory control system?
objective inventory management fHow much to order?
fWhen to order?
When to order?
How much to order?Inventory control systems
One time purchasing decision (Ex: vendor selling t-shirts
single-period inventory model
at a football game).
, Seeks to balance the costs of inventory overstock and
understock
Fixed-order quantity models: Event triggered (Ex: running
out of stock).
Multi-period inventory models
Fixed-time period models: Time triggered (Ex: monthly
sales call by supplier's sales representative).
Goal: determine the optimal number of newspapers to
order (denoted as x) to meet a specific service level (the
probability of not running out of stock).
Given Information:
The mean demand (μ) for newspapers is 90.
The standard deviation (σ) of the demand is 10.
Single-period inventory model: solving the newspaper The probability distribution of newspaper sales is as-
problem sumed to follow a normal distribution.
Consider a mean of 90 papers and a standard deviation Service Level:
of 10 papers. The service level is the probability of meeting customer
Assume that the probability distribution associated with demand without running out of stock.
newspaper sales is normal. In this example, the manager wants an 80% service level,
Approach 1: Manager/company decides the service level meaning an 80% chance of not running out of stock.
Suppose we want an 80 percent chance of not running Baseline Probability:
out. Stocking exactly 90 newspapers (the mean demand) cor-
Note that stocking 90 papers yields a 50% chance of responds to a 50% chance of running out, as the demand
stocking out. is symmetrically distributed around the mean.
How to find x (number of newspapers to order with an Finding x (the order quantity for an 80% service level):
80% service level) ? To achieve an 80% service level, we need to identify the
value of x where 80% of the demand lies below x in the
normal distribution.
This is equivalent to finding the z-score for 80% in the
standard normal distribution and then converting it back
to the actual demand scale.
How to Calculate x:
