INV Chap 3

INV Chap 3

1. 4 characteristics of order point

   • Average inventory= (beginning and ending inventory)/2
   • Determined by DDLT, if there are changes in demand and there is no changes to the order point than there should be changes to the safety stock
   • The intervals for replenishment might not be fixed, instead, it depends on the demand during the order cycle
   • The order point is constant or fixed

2. 5 factors affecting safety stock

   • Variability of demand, increase in variability results in increase in safety stock
   • Frequency of order if the frequency of order is high then variations in demand or change in demand will be identified earlier
   • Service level, if the company has a higher service level, then a higher safety stock will ensure accommodate the higher periods of demand
   • Length of lead time, longer lead time require more safety stock to meet service level

3. Two bin system

   • It is a bin which the quantity = order point quantity, it is not touched until all main stock has been utilised
     • Once it is used, the production control or purchasing management will be notified and a replacement order will be made
       • There are many variations to it, a commonly is used one is called the red tag system, which is a tag placed in a stock which in equivilent to the order point
         • Commonly used in book stores which the tags are placed in the book in a stacking position and when the customer purchases the book, the staff will know that it is time for reorder
           • Simple and effective way to control "C" item
             • Low volume so do not require much time and money
               • However a person should be assigned to ensure that the reserve stock has reached and orders are placed

4. Difference between EOQ and PRD

   • Order Point refers to ordering at when the quantity on hand falls below a predetermined level, usually EOQ
     • DDLT +SS, order point must be able to meet demand during lead time and safety stock is to incase of stockout
       • PRD, is ordering the quantity a specific time. Quantity on hand will be determined at a specific and fixed time
         • Which the review time is fixed and the amount to order varies
           • Quantity on hand+ quantity ordered must be able to meet the demand till the shipment arrivres
             • Order quantity= Target level - quantity on hand at review period
               • T =D(R+L)+SS

5. Stockout categories

   • Back order , lost customer and lost sales
     • Varies depending on the item, market served, competition and customer