Inventory and Ordering


Types of Inventory

1.      Raw Materials (RAW)

a.       Inputs into manufacturing

b.      Normally longest lead time inventory type

c.       Valued at standard cost while in inventory (what was paid for them)

2.      Work in Process (WIP)

a.      Material in various stages of completion

b.      Value includes direct labor hours and overhead.

3.      Finished Goods (FG)

a.      Completed part

b.      Sold to the customer – external or internal (e.g. a different division)

c.       Stored at either the production facility, warehouse, or distribution center

4.      Maintenance, Repair, and Operating Supplies (MRO)

a.      Large quantities but low cost

b.      Include office and custodial supplies

c.       Maintenance and spare parts

d.      Replenishment:  visual review, use and replace, reorder point


Categories related to Time-Fences

·         Excess

·         Surplus

·         Inactive

·         Obsolete

·         Consignment:  Supplier physically gives customer inventory but retains ownership until customer uses inventory

·         Vendor Managed:  differs from consignment… supplier has more visibility of customer’s forecasts


Order Review Methodologies

·         Material Requirement Planning (MRP)

a.      Primary benefit:  accommodates ordering strategies for parts with variable dependent and independent demand.

b.      Different from end-item inventories:

                                                              i.      End-item demand based on forecast/master schedule

                                                            ii.      Demand lumpy and discontinuous if not scheduled in daily batches (more noticeable at lower BOM levels)

                                                          iii.      Lower level demand not forecasted if has defined BOM relationship, it’s calculated

                                                           iv.      Little or no safety stock needed for 100% service for parts subject only to dependent demand and have sufficient lead time.

·         Reorder Point

a.      ROP = DDLT + SS

                                                              i.      ROP:  Reorder Point

                                                            ii.      DDLT:  Demand During Lead Time

                                                          iii.      SS:  Safety Stock

b.      Assumes steady demand

·         Time-Phased Order Point

a.      Allows lumpy withdrawals instead of time periods

b.      Advantage over reorder point because combines dependent and independent demand in time-phased manner

c.       No assumption of steady demand


·         Periodic Review (fixed-interval order system, or fixed reorder cycle inventory model)

a.      Independent demand model

b.      Order quantity is variable

c.       Order is placed every n times (as required)


                                                              i.      M = Maximum inventory level

                                                            ii.      DDL = Demand During Lead Time

                                                          iii.      DDR = Demand During Review Period

                                                           iv.      SS = Safety Stock


                                                              i.      Q = Order Quantity

                                                            ii.      X = Inventory on hand

                                                          iii.      O = Inventory on order

·         Visual Review

a.      Actually look at inventory on hand

b.      Used for low-value items

c.       Min-max is common technique

·         Kanban

a.      Signal for replenishment

b.      Each Kanban is same quantity

c.       Station upstream only produces parts when it gets signal (empty bin, ticket, empty floor space, etc…)

d.      Quantity for replenishment determined from rate-based MRP as fixed order quantity



Order Quantity Constraints:  Take precedence over Modifiers

·         Upper limits restrict days of supply or dollar amount for an order –

o   E.G.  Order quantity can’t exceed $100 or 14 days of stock for a certain item

·         Lower limits restrict from placing too many orders for inexpensive parts

o   E.G.  Order 7 widgets on Monday instead of 1 widget a day for 7 days


Order Quantity Modifiers

·         Adjusts order quantity to supplier indicated multiples

o   E.G.  GreatSupplier Inc. sells material only by 100 piece lots, you can’t by 101 pieces.

·         Price break adjustments

o   E.G.  500 piece order costs $2 per piece while a 600 piece order costs $1.90 per piece.  We would modify our quantity to take advantage of the cost savings.

·         Scrap and Yield factors

o   E.G.  We want to produce 1,000 widgets but have a 90% yield in our process so we need to order a total of 1,100 parts.


Lot-Sizing Techniques

1.      Economic Order Quantity (EOQ)

a.      Assumes uniform annual demand

b.      EOQ , carry, order, and total cost equations


2.      Fixed Order Quantity

a.      Usually because of something relating to shipping, handling, or line replenishment

b.      Consistent order regardless of demand variability

c.       Determined informally or based on long term EOQ calculation

3.      Period Order Quantity

a.      Equal to net requirements for a given number of periods

b.      Number of planner periods established by planner or on EOQ calculation

c.       Equations

4.      Lot for Lot

a.      Sum of requirements for a period

b.      MRP replanning nightly, periods can be as short as one day


Advantages to using MRP for the ordering process

·         Common computer system for all planning and ordering

·         Same item may be subject to lot-for-lot ordering for certain order types, and regular period or other type of ordering technique for other order.

o   Business doing contract work for military and uses same items in commercial  business

·         Residuals may exist… these will be applied automatically by MRP prior to triggering new order.


7 Comments (+add yours?)

  1. Chris Andri
    Apr 07, 2013 @ 22:22:56

    Hey Cam,

    Thanks for the notes and advice, I’m through the BSCM and MPR, but have since failed DSP twice, by 1 and 2 questions respectively. I had a question about standard cost that stuck with me long after both attempts:

    The exam asks if you have a finished good that is also sometime used as an MRO part, how do you account for it if you follow the standard cost method.

    Would it be best practice to have 2 separate part #’s to designate a finished good from an MRO for the exact same product? Or would you record the part with different standard costs?

    Thanks again!

    Chris Andri


    • Leo
      Aug 25, 2016 @ 18:34:01

      Hi Chris,

      Did you ever work this out? Thanks


    • Leo
      Aug 31, 2016 @ 07:25:37

      Hi Chris,

      Wouldn’t you know it this question came up in my exam yesterday! I chuckled to myself and thought of you…. still had no clue what the correct answer was so I opted for the first recommendation you made……. I passed with a 316!


      • Jackie Boggs
        Oct 14, 2016 @ 20:17:40

        Hi Leo,

        How long did you study? 316 is pretty impressive!


    • Sonia
      Mar 24, 2017 @ 03:00:36


      what was the answer to your question? I have same issue

      “The exam asks if you have a finished good that is also sometime used as an MRO part, how do you account for it if you follow the standard cost method.

      Would it be best practice to have 2 separate part #’s to designate a finished good from an MRO for the exact same product? Or would you record the part with different standard costs? “


  2. Poggi
    Jun 24, 2013 @ 12:43:00

    I am feeling so much better since I did read your site. I have failed DSP twice by one question and really felt like giving up.
    I decided maybe I have to find tricks for this exam:
    1-My teacher recommended I take the exam it again at the end.
    2-He also advised me to read another book
    I will take it again in a few months. I just took the MPR and I feel confident I really hope I made it.
    a very difficult exam but very interesting program.
    Really interesting notes I will go through for my next exam ECO.



  3. Michal
    Dec 03, 2013 @ 12:40:14


    What is that another book, which tacheer adviced you to read?



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