ADDIA - MA - Lecture 02 (L02A) (Students)

The Re-order Level is calculated as R = m + Z δ, incorporating mean demand and safety stock.

Costs of obsolescence refer to the opportunity cost of capital that cannot be directly derived from historical records but can only be estimated based on current financial considerations, including costs of storage and the difficulty in separating fixed and variable components.

The re-order level (R) is defined as R = m + s, where m is the mean demand over the lead time and s is the safety stock.

Safety Stock is the extra inventory held to prevent stockouts due to uncertainties in demand or supply.

The Re-order Level is the stock level at which a new order should be placed to replenish inventory before it runs out, calculated based on expected usage and lead time.

The loss of goodwill or future business associated with stock-outs, which is difficult to calculate and often managed by specifying an acceptable stock-out risk level.

Stock-out cost reflects the economic consequences of running out of stock, which can result in back-orders or lost sales, and includes costs such as administration on backorders, loss of profit from forgone sales, and savings on holding less inventory.

Safety stock is the extra inventory kept on hand to prevent stock-outs due to uncertainties in demand or supply.

Item Cost refers to the total cost associated with purchasing an item, which may include freight costs, import duties, and can be estimated accurately from historical records.

Holding / carrying costs of inventory include variable space costs, pilferage and breakage costs, interest forgone from the investment, but may not include transportation costs to the warehouse that carries the inventory.

The holding / carrying cost is associated with keeping items in inventory for a period of time, charged as a percentage of the item cost per unit time. It usually consists of three components: opportunity cost of capital, cost of storage, and costs of obsolescence, deterioration, and loss.

The re-order level (R) is set equal to the mean (m) of the probability distribution plus a specified number (Z) of standard deviation (δ) of the distribution.

Economic Order Quantity (EOQ) is the optimal order quantity that minimizes total inventory costs, including ordering and holding costs.

If a firm carries no Safety Stock, the reorder level will be set at 240 units, and stock-outs will occur if actual usage exceeds this amount.

The Re-order Point is influenced by expected usage, lead time, and safety stock to account for uncertainties in demand and lead time.

The Re-order Level System is completely determined by two parameters: Q (the quantity ordered) and R (the re-order level).

EOQ = √(2 x D x Co / Cc), where D is demand in units for a specified time period, Co is ordering costs per order, and Cc is the cost of carrying one unit in stock for that time period.

The Re-order Point is the inventory level at which a new order should be placed to replenish stock before it runs out, calculated based on average demand and lead time.

The EOQ – Tabulation Method involves tabulating the total annual costs of ordering and carrying inventory under various order sizes.

The four decision problems are: 1. Which items should be carried in stock? 2. How much should be ordered? 3. When should an order be placed? 4. What type of inventory control system should be used?

The expected value method can be applied for more complex situations where both demand and lead time are uncertain.

Safety stocks are maintained to protect against uncertainties in supply, demand, and lead time in inventory systems.

The Re-Order Level System Without Stockout is a system where new orders are placed just as stock levels reach zero, ensuring that there are no stockouts.

Carrying costs are the costs associated with holding inventory, typically expressed as a percentage of the item cost per annum.

The Economic Order Quantity (EOQ) is the optimal order quantity that minimizes the total inventory costs, including holding costs and ordering costs.

A system that determines the optimal order size by balancing ordering frequency and inventory level, ensuring no stock-out costs occur.

A system where decisions to re-order stock are based on the total on-hand plus on-order quantity, with a predetermined order point triggering a fixed quantity order.

The average monthly usage of raw materials A for ABC Company is 1,500 units.

The Cost of Storage includes variable space cost, insurance, wages, and protective clothing/containers, focusing only on variable costs as fixed costs remain unchanged for different sizes of reorder quantity.

The Periodic Review System is a method where the stock position drops on an irregular basis until a fixed review time (P) is reached, at which point a quantity is ordered to bring the stock position up to a target level (T).

The inventory level over time becomes a perfect 'saw-tooth' pattern.

The preferred conditions for the Periodic Review System include situations where orders must be placed and delivered at specified intervals, when multiple items are ordered from the same supplier for consolidation, and for inexpensive items not maintained on perpetual inventory records.

The Reorder Level is the inventory level at which a new order should be placed to replenish stock before it runs out.

Costs associated with holding and managing inventory, which can be difficult to assess but can be estimated accurately for decision-making purposes.

The Reorder Point is set at 300 units, which includes the average usage during the lead time of 240 units plus a safety stock of 60 units.

When items are carried in inventory, the capital invested is not available for other purposes. For example, if a company spends its capital to carry the inventory, it may lose the opportunity to earn interest/dividends by investing its capital in the stock market.

Safety stock (s) can be expressed as s = Z δ, where Z is the safety factor and δ is the standard deviation of demand over the lead time.

Stock-out costs are the costs incurred when inventory is insufficient to meet demand, leading to lost sales and customer dissatisfaction.

Safety stock is the extra inventory kept to prevent stock-outs, calculated based on the desired probability of not running out of stock.

Maintaining a Safety Stock of 180 units ensures that stock-outs will not occur, even if actual usage exceeds the reorder level.

Safety Stock is the extra inventory held to mitigate the risk of stockouts caused by uncertainties in demand and lead time.

Total cost in inventory management is the sum of carrying costs, stock-out costs, and any other relevant costs associated with maintaining inventory.

D represents the demand in units for a specified time period.

A Stock-Out occurs when inventory is depleted and cannot meet customer demand.

A supplier might prefer the Periodic Review System for multiple items to consolidate different colors of cloth into a single order rather than delivering them at different times.

A 95% service level indicates that there is a 5% chance of stock-out, meaning that the inventory is sufficient to meet demand 95% of the time.

The purpose of keeping stock of raw materials A at a level not less than 1,500 units is to reduce the stock-out probability.

ABC Limited uses 6,000 kgs of material X per annum.

The Re-order Point is calculated by multiplying the weekly usage by the lead time; for example, if weekly usage is 120 units and lead time is 2 weeks, the Re-order Point is 240 units.

The cost incurred when inventory is unavailable to meet demand, leading to lost sales and customer dissatisfaction.

A system where Q is set equal to the Economic Order Quantity (EOQ), and the value of R can be based on either stock-out cost or stock-out probability.

A calculation that determines the optimal order quantity that minimizes total inventory costs, based on the assumptions of constant demand and no stock-outs.

The EOQ is the optimal order quantity that minimizes total inventory costs, including ordering and carrying costs.

Carrying costs are the total costs associated with holding inventory, including storage, insurance, and depreciation.

The Periodic Review System is completely determined by two parameters: P (the fixed review time) and T (the target stock level).

When demand and lead time are uncertain, the Re-order Point is calculated by adding safety stock to the average usage during the average lead time.

The Re-order Level is the inventory level at which a new order should be placed to replenish stock before it runs out, calculated based on usage and lead time.

The average stock is calculated as one-half of the quantity ordered, assuming there are no stocks when the order is received and the units are used at a constant rate.

The supplier offers no discount for below 1,000 kgs, a 2% discount for 1,000 kgs to 1,599 kgs, a 5% discount for 1,600 kgs to 3,599 kgs, and a 10% discount for 3,600 kgs to 6,000 kgs.

A maximum stock-out probability of 10% indicates that the company is willing to accept a 10% chance of running out of stock before the next order arrives.

Because the stock position is monitored continuously after each transaction, in contrast to the Periodic Review System.

The Transaction Motive refers to the economic rationale for producing or purchasing materials in lots, allowing the setup or ordering costs to be spread over a larger number of items, even if part of the lot is held in inventory for later use or sale.

The Speculative Motive involves maintaining higher or lower inventory levels based on expectations of future price changes for input factors, allowing firms to take advantage of current prices when future prices are anticipated to rise.

Calculations for Safety Stock should be repeated if demand is expected to vary throughout the year, requiring adjustments for the probability distributions for each period.

When the stock position reaches the re-order level R, an order for Q units is placed.

EOQ, or Economic Order Quantity, is the order quantity that minimizes the total annual cost, which is determined to be 1,200 kgs in this case.

Add the annual item cost for different order quantities to the respective annual ordering cost and annual carrying cost to get the total annual cost, then select the order quantity with the lowest total annual cost as the EOQ.

Service Level is the percentage of customer demands satisfied from inventory.

The ordering cost should include only the fixed costs for each order irrespective of its size for decision making purposes.

Cc represents the cost of carrying one unit in stock for a time period used for D, usually one year.

The tradeoff involves balancing ordering frequency against inventory levels; ordering more units reduces the number of orders but increases holding costs.

On average, 30 orders will be placed per year in this inventory system.

The underlying assumptions of a Periodic Review System are basically the same as those of the reorder level system.

The carrying costs are 5% of the item cost per annum.

The optimal level of investment in inventories must ensure sufficient stock to meet production and sales requirements while avoiding unnecessary surplus that increases the risk of obsolescence.

Safety Stock is the level of inventory maintained to mitigate the risk of stockouts caused by uncertainties in demand or lead time, represented in this case as 60 units.

By controlling Z, we can control not only the re-order level but also the service level; a high value of Z will result in a high re-order level and a high service level.

The reorder level is the inventory level at which a new order should be placed to replenish stock before it runs out.

The disadvantages include requiring more safety stock than the reorder level system for the same service level, as it must provide coverage over a time of P + L, while the reorder level system only needs to protect against stock-out over the time L.

The disadvantage of the Periodic Review System is that it requires a larger safety stock.

Lead time L is the duration it takes for the order to arrive after it has been placed.

The average stock is calculated as one-half of the quantity ordered when there are no stocks when the order is received.

In the example, EOQ is calculated as 1,200 kg/order using the formula EOQ = √((2 x 6,000 kgs x $15/order) / ($2.5/kg x 5%)).

Fewer orders lead to larger average stocks being maintained, which increases holding costs.

The ordering costs for ABC Limited are $15 per order.

It is realistic to assume a normal probability distribution for the demand of an independent stock item.

Trade discounts can lower the item cost for bulk purchases, making it more economical to buy larger quantities.

The Tabulation method involves calculating and displaying the total annual costs of ordering, carrying, and item costs of inventory for various order sizes.

Stock-out probability is the likelihood that inventory will run out before new stock arrives, leading to potential lost sales.

Setup / Ordering Cost is the cost associated with placing an order for a batch of items to be produced, regardless of the number of items in the batch, including paperwork, machine setup, and order tracking.

The precautionary motive refers to maintaining safety stocks to absorb changes in demand and avoid immediate changes in production.

The Economic Order Quantity (EOQ) is the order quantity that minimizes the total annual cost, which in this case is 6,000 kgs with a total annual cost of $13,890.

EOQ is the optimal order size that minimizes total inventory costs, including ordering and carrying costs.

Co represents the ordering costs per order.

In the simplest EOQ model, the unit item cost is constant, there is a fixed setup cost for each lot, holding costs vary linearly with average stock, and there are no stock-out costs.

The ordering cost declines as stock levels and order quantities are increased.

The costs associated with Safety Stock include stock-out costs, which are incurred when inventory runs out, and carrying costs, which are the costs of holding excess inventory.

The cost per unit of material X for ABC Limited is $2.5.

Safety Stock is maintained to protect against uncertainties in demand, lead time, and supplier availability, ensuring that an organization can meet unexpected increases in demand.

A fixed quantity is placed on order when the stock position reaches the predetermined order point.

This point represents the optimal order quantity where total costs are minimized.

Elements of cost of inventory include item costs with settlement discounts, insurance costs, custom import duties, and preventing costs for deterioration, but may not include bank charges on L/C documents.

The Economic Order Quantity (EOQ) is the optimal order quantity that minimizes the total inventory costs, including ordering and holding costs.

These costs include obsolescence costs for items that may go out of fashion, deterioration costs for perishable goods, and loss costs related to pilferage and breakage associated with holding items in inventory.

Safety Stock is the extra inventory held to prevent stock-outs due to uncertainties in demand or lead time.

A system where an order for Q units is placed when the stock position drops to the re-order level at R units, followed by a lead time L before the order arrives.

The ordering cost is associated with ordering a batch or lot of items, not dependent on the number of items ordered; it is assigned to the entire batch and includes costs such as typing and postage of the purchase order, bank charges, expediting the order, and receiving and inspection costs.

It includes typing cost and postage of the purchase order, bank charges on letter of credit and bill process, expediting the order, and receiving and inspection costs.

EOQ, or Economic Order Quantity, is the optimal order quantity that minimizes total inventory costs, which include carrying and ordering costs, as illustrated in the graphical method.

If these sources of variations can be reduced, then safety stocks and inventories can be correspondingly reduced.

1. The lead time is constant and known. 2. Materials are ordered or produced in a lot or batch, placed into inventory all at once. 3. The materials are independent products, with demand having no interaction with other products.

Safety Stock is the amount of inventory held in excess of expected demand during the lead time, used to cushion against unexpected increases in demand or delays in supply.

The total of on-hand and on-order materials, which is monitored after each transaction.

The re-order level is based on the notion of a probability distribution of demand over the lead time.

In the EOQ Graphical Method, the vertical axis represents the annual cost for the investment in stock.

The average time between orders in this inventory system is 10 working days.

Economies of scale can lower the item cost by reducing the per-unit cost as production increases.

The demand rate is constant, recurring, and known, and no stock-outs are allowed.

In a constant demand scenario, the order interval becomes constant, meaning orders are placed at regular intervals.

EOQ = sqrt((2 * Demand * Order Cost) / Carrying Cost per Unit)

Safety Stock is unnecessary because each new order is received exactly when the stock level falls to zero, eliminating the need for extra inventory.

The Re-order Level (R) is the inventory level at which a new order should be placed to replenish stock, calculated as R = m + Z δ, where m is the average demand, Z is the safety factor, and δ is the standard deviation of demand.

Safety Stock is the additional inventory held to prevent stock-outs, calculated to minimize the combined costs of stock-out and carrying excess inventory.

The carrying cost increases when the order quantity increases.

Establishing a sound quantitative procedure for Safety Stock is important to minimize stock-out costs and carrying costs of excess inventory.

The safety factor Z is used to account for variability in demand and lead time, helping to determine the additional stock needed to maintain a desired service level.

EOQ stands for Economic Order Quantity, which is the optimal order quantity that minimizes total inventory costs, including ordering and holding costs.

The number of orders is calculated by dividing the total annual demand by the order quantity, which is 6,000 kgs in this example.

In the EOQ Graphical Method, the horizontal axis represents the various order quantities.

The time between orders will vary depending on the random nature of demand, since the order quantity is fixed.

The Periodic Review System is an inventory management approach that provides scheduled replenishment and, in some cases, requires less record keeping, but necessitates a larger safety stock.

Safety stocks of raw materials are maintained to absorb uncertainties in delivery by vendors.

The optimal order size that minimizes the total of ordering and holding costs in inventory management.

Safety stock is the extra inventory kept on hand to prevent stock-outs due to uncertainties in demand or supply.

A stock-out occurs when inventory is depleted, preventing the company from fulfilling customer orders, which can lead to lost sales and customer dissatisfaction.

Setup cost is usually applied to production, while ordering cost is usually applied to purchase.

The cost of buying or producing individual inventory items, which may be lowered by mass production due to economies of scale or by bulk purchase discounts.

Average demand over lead time is calculated as the lead time multiplied by the average demand per day.

The standard deviation of daily demand measures the variability or uncertainty in daily demand, which is crucial for calculating safety stock and reorder levels.

The total cost of holding inventory, including storage, insurance, and depreciation costs.

Cash discounts do not affect item cost within the inventory management system, as they relate to payment timing rather than inventory valuation.

When firms obtain discounts on bulk purchases, the assumption that the unit item cost is constant is no longer applicable, requiring the item cost to be considered in determining the Economic Order Quantity.

Monthly holding costs are the costs associated with storing inventory, including insurance and financing costs, typically expressed as a percentage of the unit cost.

The annual total inventory cost at EOQ represents the total cost incurred for ordering and holding inventory when the order quantity is optimized.

The three methods to determine EOQ are the Tabulation Method, Graphical Method, and Formula Method.

The Periodic Review System is suitable for inexpensive items that are not maintained on perpetual inventory records, such as nuts or bolts used in manufacturing.

The annual carrying cost is determined by multiplying the average stock by the carrying cost per kg, which is $0.125 in this case.

A Periodic Review System is a method where the stock position is reviewed at fixed intervals and ordered up to a target inventory level during each review.

The standard deviation of demand over lead time is calculated by multiplying the lead time by the standard deviation of daily demand, considering that variance is additive.

The Periodic Review System should be used when orders must be placed and/or delivered at specified intervals, such as in cases where legal requirements necessitate escorted deliveries.

Safety Stock is the additional inventory kept on hand to prevent stock-outs, ensuring that the probability of running out of stock does not exceed a specified level, such as 10%.

The setup / ordering cost can be determined from company records, although difficulties may arise in separating fixed and variable cost components.

The Re-order Level is the point at which an order should be placed to obtain additional stocks, calculated by multiplying the lead time by the daily or weekly usage.

The stock-out percentage is equal to 100 minus the service level.

The annual carrying cost is calculated by multiplying the average stock by the carrying cost per kg, which is $0.125 in this case.

The total cost line represents the summation of both the carrying and the ordering costs.

The stock-out cost per unit in the provided example is $5.

The total cost line is at a minimum for an order quantity of 1,200 kgs.

Economic Order Quantity (EOQ) is the optimal order quantity that minimizes total inventory costs, including ordering and holding costs.

Costs associated with placing an order or setting up production, which can include administrative expenses and labor costs.

The re-order level can be set sufficiently high to reduce the stock-out probability to any desired level.

A 95% Desired Service Level indicates that the organization aims to meet customer demand without stock-outs 95% of the time, influencing safety stock calculations.

When an order has been placed, the inventory is exposed to stock-out until the order arrives.

The carrying cost per unit in the provided example is $1.

The annual demand is calculated as 300 days multiplied by 150 units per day, resulting in 45,000 units.

A system where inventory levels are reviewed at specific intervals and orders are placed to replenish stock.

Ordering costs and holding costs.

A system that determines the point at which new inventory should be ordered to avoid stockouts.

To ensure efficient management of stock levels and meet customer demand.

By considering safety stock and lead time demand variability.