
Inventory
A stock or store of goods

Independent Demand Items
Items that are ready to be sold or used

Dependent Demand Items
Components of finished products, rather than the finished products themselves.

ROI
Return on Investment Profit after taxes / total assets

Inventory Turnover
Ratio of annual cost of goods sold to average inventory investment

Periodic System
A physical count of items in inventory is made at periodic intervals (weekly, monthly) in order to decide how much to order of each item

Perpetual Inventory System
AKA Continual System Keeps track of removals from inventory on a continuous basis, so the system can provide information in the current level of inventory for each item.

TwoBin System
 Once bin #1 items are gone = Reorder time.
 Bin #2 contains enough stock to satisfy expected demand.

UPC
Universal Product Code Bar code on product.

Lead Time
Time interval between ordering and receiving the order

PointofSale System (POS)
 Record items at the time of sale
 Done electronically... Target

Holding (carrying) Costs
 The cost of physically having the item (inventory) in storage for a length of time (usually a year)
 e.i: Interest, insurance, taxes, depreciation, spoilage, breakage, warehouse (light, heat, rent, security).

Ordering Costs
 Costs of ordering and receiving inventory
 ei: Shipping, prepare invoices, inspection of quality upon arrival

Shortage Costs
 Demand exceed supply of inventory
 e.i: cost of not making a sale, loss of customer goodwill, late charges

ABC Approach
 Classifies inventory items according to some measure of importance, usually annual dollar value and then by control efforts.
 Annual $ amt (dollar value per unit multiplied by annual usage rate (demand))

Cycle Counting
Physical count of inventory. To reduce discrepancies btwn records and actual quantities on hand.

EOQ
Economic Order Quantities Optimal order quantity that minimizes annual cost

EOQ Model
Identify a FIXED order size that will minimize the sum of the annual costs of holding inventory and ordering inventory.

Assumptions of EOQ Model
 1 product is involved
 No discounts
 Demand is known and is constant throughout the year
 Lead time does not vary
 Each order is received in a single delivery
Pg. 559

Optimal Order Quantity
Is a balance between Carrying and Holding Costs
Pg. 560

Annual Carrying Costs (Equation)
 Avg. amt of inventory on hand X Cost of holding 1 item for 1yr. (annual carrying cost per unit)
 (Q/2)(H)

# of orders per year (Equation)

How is Q (Annual Demand) related to Carrying Costs & Ordering Costs?

Annual Ordering Costs (Equation)

How is annual ordering costs related to order size?

Total annual cost (Equation)

EOQ (Equation)
Optimal Order Quantity

Length of Order Cycle (Equation)

At EOQ, ordering and carrying costs are________.
Equal

EPQ
Economic Production Quantity production in batches

Assumptions of EPQ
Almost same as EOQ
pg. 564

Inventory Rate (Equation)
Inventory rate = Production  Usage rate

When will you achieve Max Inventory?
What is the equation
 When Production ceases
 (Q_{p}/p)(pu)

EPQ has ______ instead of ordering costs
setup costs prepare equipment for use, cleaning, adjusting, changing tools & fixtures


Annual Setup Cost (Equation)
 # of runs X Setup cost per run
 (D/Q)(S)

Carrying Cost for EPQ (Equation)
(I_{max}/2) (H)

Economic Run Quantity (Equation)
Q_{p}=(Square root (2DS/H)) (Square root(p/pu))

Cycle Time. What does it show n (Equation)
 Time between orders or Time between beginning of runs
 Q_{p}/u

Run Time. What does it show. (Equation)
 Production phase of the cycle
 Q_{p}/p

Average Inventory Level (Equation)
I_{max}/2

Quantity Discounts
Price reductions for large orders

Buyers goal with quantity discounts is to select an order quantity that will ___________.
 select an order quantity that will minimize total cost.
 Where total cost = carrying cost + ordering cost + PURCHASING Cost

With quantity discounts there are 2 different ways to determine overall EOQ
 1. Carrying Costs are Constant
 2. Carrying Costs are expressed as a percentage

Quantity Discounts  What are the steps to determine Optimal Order Quantity when carrying costs are constant?
 1. Find EOQ (common min pt) = (Square root (2DS/H))
 2. Find TC for EOQ as well as the min. EOQ of cheaper options and compare.
 Optimal Order Quantity will be the cheapest TC

Quantity Discounts  What are the steps to determine Optimal Order Quantity when carrying costs are expressed as a percentage?
 1. Determine Holding costs for each price range
 2. Starting with the lowest price first, find the EOQ that matches the price for that range.
 3. Starting with the EOQ you found in step 2, calculate the TC. Then calc the TC for all the cheaper options avail.
 4. Lowest TC = Optimal Order Quantity

ROP
Reorder Point When the quantity on hand of an item drops to this amount, the item is reordered. (perpetual inventory is required)

Safety Stock
Stock that is held in excess of expected demand due to variable demand and/ or lead time

Service Level
Probability that demand will not exceed supply during lead time

