BUS300 Study Guide

Unit 8: Inventory

8a. Explain the relationship between demand planning and inventory control

  • How does demand planning add value to products?
  • In what ways does collaboration with supply chain partners benefit an organization?
  • What are the inventory factors that impact demand planning?

Demand planning enables a company to determine how much of their goods and services customers will buy. A company can determine how much they need to produce and the materials required for that production by having this information. Companies can plan their production schedules, manage their resources, and determine the lead time needed to bring their goods to market.

Companies also work with their suppliers for help with demand planning. Collaborative planning, forecasting, and replenishment are all part of the process of sharing information and coordinating operations to ensure that an organization has the resources needed to meet demand. The growing trend is toward this increased level of shared information known as supply chain visibility. When a supplier has a greater understanding of what an organization's sales, operations, and marketing efforts entail, they are better positioned to enable the company to meet customer needs.

Demand forecasting is part of a company's overall inventory control activities, with inventory control ensuring that the company has the supply to meet customer demand. If a company does not have sufficient inventory, a stockout occurs, and customers will buy their goods from someone else. As part of demand forecasting, companies can ensure that they have safety stock, a backup inventory in case demand changes.

To review, read Demand Planning and Inventory Control.


8b. Describe the three general classifications of inventory

  • What is the ABC analysis method of inventory management?
  • How are inventory items defined by their stages of completion?

The ABC analysis helps an organization control inventory costs by using specific inventory policies to control the process. These factors, also known as "selective inventory control", identify those items that impact overall industry costs but are not of equal value. These include three categories that describe inventories that require tight controls and accurate records; those that are less tightly controlled, with good records; and those items with the simplest of controls and minimal records.

Inventory refers to both finished and unfinished goods that have not yet been sold. Finished goods are those that are ready to be sold to customers. However, unfinished goods encompass the raw materials that will be used to make a product and work-in-progress, which includes materials that are already being transformed into finished goods.

To review, read ABC Technique and Inventory Management.


8c. Explain the inventory management models that help plan the timing and volume of inventory orders

  • How are projected inventory levels tied to sales and production?
  • What are the practices that maximize product storage while also minimize holding and handling costs?

One method of projecting needed inventory levels is to tie that inventory directly into sales and production activities. Sales and inventory projections are evaluated against actual figures and input into MIS systems. This data is used to plan production schedules. Altogether, this information is used to plan future activities to ensure adequate inventory levels.

This approach also reflects how a perpetual inventory system operates. In this method, the sale or purchase of inventory is immediately recorded into computerized systems, allowing for an accurate reflection of the goods available at any point in time and aids in production planning.

All inventory management systems must find a balance between the availability of the product, customer needs, and the costs of meeting those needs. Material and goods must be continually monitored and may use ABC analysis, as previously discussed, as well as lot tracking and cycle counting support. These practices enable organizations to enjoy economies of scale and minimize costs associated with inventory levels.

To review, read Benefits of Inventory Management and The Operations Plan.


8d. Apply the EOQ Model to calculate inventory order volume

  • What are the characteristics of the EOQ Model for calculating inventory volume, and under what conditions is this model used?
  • What are the variables used to calculate the EOQ?
  • What are some of the extensions to the EOQ as they relate to quantity discounts?

The economic order quantity (EOQ) minimizes the total holding costs and ordering costs and is one of the oldest production scheduling models. Also known as the Wilson EOQ Model, Wilson Formula, or Andler Formula, this model is applied when demand for a particular product is constant over a year. New orders are delivered in full when the current inventory reaches a zero level. Costs for each order are fixed no matter how many items are ordered, and there is a cost associated with each unit held in storage. This is known as a holding cost and may be calculated as a percentage of the item's purchase price.

The variables that are used to determine total cost include the purchase unit price/unit production cost (P), the quantity ordered (Q), the optimal order quantity (Q*), the annual demand quantity (D), and the fixed cost per order (K).

There are two types of quantity discounts under the EOQ model. These are all-units, where the optimal discount will occur at the breakpoint) and incremental, where the optimal discount will always occur at a specific EOQ value. The design of these discount schedules can be complex and challenging when the customer is unsure of demand. Additionally, other extensions such as back-ordering and multiple items can enable cost savings. For example, if a company is willing to accept backorders, costs will be lower since it reduces the holding costs. A discount can be realized for multiple items when the same reorder interval is used for families of items with similar ordering and carrying costs.

To review, read Economic Order Quantity.


8e. Calculate the reorder point to prevent a stock-out from occurring

  • What is the formula for the reorder point?
  • What is the benefit of an inventory point of sale system?

The reorder point is the level at which inventories need to be replenished to ensure that there is sufficient stock to meet demand. Different types of goods required different amounts of time to be ordered and received, so a formula for ensuring that stock-outs (not having sufficient inventory) is necessary.

The formula for calculating the reorder point is ROP=d*LT. This means that the reorder point is a function of the demand rate (d = units per period/day/week) times the lead time (LT = lead time for the units in demand). For example, if a ski shop expects to sell 30 pairs of skis during a weak at peak ski season, and the lead time is 5 days, the reorder point is 150.

An inventory point-of-sale (POS) system can electronically record all items at the time of their sale and help companies more accurately forecast demand. By having this information and knowing the required lead time for receiving merchandise, companies can be better equipped to meet customer demand.

To review, read Inventory Management.


Unit 8 Vocabulary

This vocabulary list includes terms that might help you with the review items above and some terms you should be familiar with to be successful in completing the final exam for the course.

Try to think of the reason why each term is included.

  • demand planning
  • supply chain partners
  • supply chain visibility
  • inventory control
  • ABC analysis
  • finished goods
  • raw materials
  • work-in-progress
  • perpetual inventory systems
  • economies of scale
  • EOQ
  • all-units discount
  • incremental discount
  • EOQ variables
  • reorder point formula
  • inventory POS system