Chapter 10. Inventory Decision Making

Chapter 10. Inventory Decision Making

1. Fundamental Approaches to Managing Inventory

   • How much to order from vendors and when to reorder
     • Increasing investments in inventory may result in higher levels of customer service
   • Key Differences among approaches to managing inventory
     • Dependent vs independent demand
     • Pull versus push
     • Systemwide versus Single-Facility Solutions

2. Fixed Order Quantity Approach (Condition of Certainty)

   • Stock ordering level
   • Inventory Cycles
     • Simple EOQ Model
       • Inventory carrying costs and order or setup costs
   • Reorder Point (when)
   • Min-Max Approach
   • EOQ model

3. Fixed Order Quantity Approach (Condition of Uncertainty)

   • Safety stock
   • How much product customers will demand during the lead time

4. Fixed Order Interval Approach

   • Involves ordering inventory at fixed or regular intervals
   • The amount ordered depends oh how much is in stock and available at the time of review.

5. Additional Approaches to Inventory Management

   • Just-In-Time
     • Inventories should be available when a firm needs them- not any earlier, nor any later
     • Kanban system
     • Zero inventories; short lead times; small, frequent replenishment quantities; and high quality, or zero defects
     • Minimize inventory costs and enhace customer service
   • Materials Requirements Planning
     • Deals with supplying materials and component part whose demand depends upon the demand for a specific end product
     • Goals: ensure availability of materials for planned productos and for customer delivery; maintain the lowest possible inventory level; plan manufacturing activities, delivering schedules and purchasing activities.
     • It begins by determining how much end product customers desire and when they need it.
     • Key elements: MPS, Bill of materials file, inventory status file, MRP program, outputs and reports
   • Distribution Resource Planning
     • It forecasts demand and explode that info back for use in developing production schedules
     • Companies can minimize inbound inventory by using MRP in conjuntion with production schedules. Outbound inventory is minimized through the use of DRP.
     • DRP Table: SKU, forecast, BOH, etc

6. Inventory at Multiple Locations - The Square Root Law

   • Consolidate inventories into fewer stocking locations in order to reduce aggregate inventories and their associated costs.
     • SRL: total safety stock inventories in a future number of facilities can be approximated by multiplying the total amount of inventory at existing facilities by the square root of the numer of future facilities divided by the number of existing facilities.

7. Demand Pull Approaches to Managing Inventory

   • It focuses on lowering cost while also improving service to customers
   • CPFR
     • To develop a single forecast for each SKU at the final customer level and to develop replenishment requirements at each level of the supply chain to satisfy these requierments.

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