Inventory management today. Got our grades back on the projects; 95 on the case study. Also got a 92 on the test.Inventory is often the most expensive and valuable asset of an organization. Figuring out how much inventory you should maintain and how quickly it should be turning over is critical.
Dealing with excess inventory or insufficient inventory can get expensive quickly.
Inventory encompasses many different types of goods. Essentially, it’s anything which is kept in stock. This can be ordinary-use supplies, raw materials for production, finished goods for sales, and so forth.
The five functions of inventory are:
- Decoupling — Essentially, keep extra materials on hand to prevent problems in one portion of a process from stopping the entire process.
- Storing Resources — If production or consumption of inventory is irregular, it may be necessary to store inventory.
- Responding to irregular supply and demand
- Taking advantage of economies of scale
- Avoiding stockouts and shortages.
Economic Order Quantity (EOQ) is one of the best established inventory techniques. It is widely used, but makes certain assumptions about the inventory process. To work perfectly, EOQ needs demand to be known and constant, the lead time of orders needs to be known and constant, the receipt of inventory should happen instantaneously, quantity discounts are not considered, and stockouts and shortages are avoided completely.
In EOQ, essentially the inventory is constantly being consumed at a fixed rate, and is periodically replenished. The replenishment cycle is such that just before a shortage would occur, a new shipment of inventory would arrive. The trick of EOQ is finding the most economic replenishment cycle. More frequent, smaller replenishments will lower the amount of inventory kept in stock, and thus the inventory carrying costs. Less frequent, larger replenishment reduce total ordering costs. Therefore, the higher the ordering cost, the fewer orders should be place, and the larger the orders should be. In contrast, the higher the carrying cost, the smaller each order should be and the more frequently orders should be placed.
The optimal point is where the total costs, including both carrying costs and order costs, are smallest. This is also the point where the carrying costs are equal to the order costs.
It is possible to relax the instantaneous receipt assumption of the EOQ model. This is useful for situations where inventory continuously flows or builds up over a period of time after an order has been placed, or when units are produced and sold simultaneously.
This model is the OPQ model, for finding Optimal Production Quantity.