Chapter 4- Inventory Management – Flashcards
Unlock all answers in this set
Unlock answersquestion
inventory
answer
the quantities of goods and materials that are held in stock
question
4 categories of inventory
answer
raw materials work-in-progress (WIP) finished goods maintenance, repair, and operating (MRO) supplies
question
raw materials
answer
purchased items or extracted materials that are converted via the manufacturing process into components and products
question
work-in-process
answer
a good or goods in various stages of completion throughout the plant, spanning from raw material that has been released for initial processing up to fully processed material awaiting final inspection and acceptance as finished goods
question
finished goods
answer
items on which all manufacturing operations, including final testing, have been completed. These items are available for sale and/or shipment to the customer
question
MRO
answer
(maintenance, repair, and operating) items used in support of general operations and maintenance such as maintenance supplies, spare parts, and consumables used in the manufacturing process and supporting operations
question
service inventory
answer
activities carried out in advance of the customer's arrival
question
Why hold inventory?
answer
1. to meet customer demand (cycle stock) 2. to buffer against uncertainty in demand and/or supply (safety stock) 3. to decouple supply from demand (strategic stock) 4. to decouple dependencies in the supply chain
question
Inventory Management
answer
The function of planning and controlling inventories Goal is to help a company be more profitable by lowering COGs and/or by increasing sales
question
What is the right amount of inventory?
answer
It depends on the supply chain strategy and set up, the types of products, etc
question
3 Levels of Internal Inventory
answer
1. Cycle Stock 2. Safety Stock 3. Strategic Stock
question
cycle stock
answer
inventory that a company builds to satisfy its immediate demand; gradually depletes as customer orders are received
question
safety stock
answer
inventory that is above and beyond what is actually needed to meet anticipated demand
question
strategic stock
answer
additional inventory beyond cycle and safety stock, generally used for a very specific purpose or future event, and for a defined period of time
question
pipeline inventory
answer
inventory that is already out in the market held by wholesalers, distributors, retailers, and even consumers; also in-transit
question
obsolete inventory
answer
inventory that is expired, damaged, or no longer needed; will never be used or sold at full value
question
inventory costs
answer
- direct costs - indirect costs - fixed costs - variable costs - order costs - carrying costs
question
direct costs
answer
directly traceable to unit produced
question
indirect costs
answer
cannot be traced directly to the unit produced
question
fixed costs
answer
independent of hte unit volume produced
question
variable costs
answer
dependent on the unit volume
question
order costs
answer
labor costs associated with placing an order for inventory and the cost of receiving the order; incurred each time an order is placed
question
carrying costs
answer
costs for physically having inventory on-site and for maintaining the infrastructure needed to store the inventory and to secure and insure it over time; incurred for holding inventory
question
effects of having too much inventory
answer
financial resources tied up in inventory underlying problems being hidden rather than being exposed and solved no incentive for process improvements
question
effects of having too little inventory
answer
production disruptions longer delivery replenishment lead times reduced responsiveness
question
measures of inventory investment
answer
Absolute inventory Value Inventory Turnover
question
Absolute Inventory Value
answer
the value of the inventory at either its cost or its market value
question
inventory turnover
answer
the # of times that an inventory cycles or "turns over", during the year *the more the better ratio = COGS/Average Inventory @ Cost
question
Inventory policy
answer
establishing target inventory levels for all products and materials 1. When to review? 2. When to order? 3. How much to order?
question
2 Models for Determining When to Review
answer
1. Continuous Review System 2. Periodic Review System
question
continuous reiew system
answer
inventory levels are continuously reviewed; as soon as inventory falls below a pre-determined level, a replenishment order is triggered
question
periodic review system
answer
inventory levels are reviewed at a set frequency; at the time of review, if the stock levels are below the pre-determined level, an order for replenishment is placed, other wise no action is taken until the next cycle
question
Reorder Point
answer
(ROP) the lowest inventory level at which a new order must be placed to avoid a stockout - set at a level that provides enough inventory so demand is covered during the lead time (L) needed to replenish inventory
question
Common Inventory Ordering System Categories
answer
Fixed-Order Quantity System Fixed-Time Period System
question
Fixed-Order Quantity System
answer
a continuous inventory review system in which the same order quantity is used from order to order - when inventory position drops to a predetermined reorder point, a predetermined fixed order quantity is placed
question
Fixed-Time Period System
answer
inventory is checked in fixed time periods against a target inventory level - if inventory is less than target, a quantity necessary to bring inventory back up to the target level is ordered Q = R - IP where Q = order quantity, R = target inventory level, and IP = inventory position
question
EOQ
answer
(Economic Order Quantity) a quantitative decision model based on the trade-off b/t annual inventory carrying costs and annual order costs sq[(2*D*S)/H)] Where D = annual demand, Q = order quantity (units), and S = ordering costs (per order)
question
Total Cost
answer
Purchase Cost + Order Cost + Carrying Cost
question
Annual carrying costs
answer
(Q/2)*H Where Q = order quantity and H = holding costs (per unit)
question
annual ordering costs
answer
(D/Q)*S Where D = annual demand, Q = order quantity (units), and S = ordering costs (per order)
question
Practical Considerations of EOQ
answer
Volume Economies of Scale Constraints
question
Volume Economies of Scale
answer
Individual Item Purchase Price Discounts Multiple-Item Purchase Price Discounts Transportation Freight-Rate Discounts
question
Individual Item Purchase Price Discounts
answer
discounts for ordering purchase price discounts; if volume discount is sufficient to offset the added cost from carrying additional inventory, then order a larger volume may be desirable
question
Multiple-Item Purchase Price Discounts
answer
based on total volume across all the items purchased rather than just an individual item's volume
question
Transportation Freight-Rate Discounts
answer
ordering a larger quantity may mean that you can take advantage of Transportation Freight Rate Discounts which will lower per unit costs
question
Constraints
answer
Limited Capital storage capacity transportation obsolescence production lot size unitization
question
Limited Capital
answer
company doesn't have sufficient available funds to purchase at one time
question
storage capacity
answer
company doesn't have sufficient storage capacity to handle at one time
question
transportation
answer
item being ordered and transported may require specialized or dedicated transportation, impacting the quantity per order
question
production lot size
answer
supplier may require the company to order an item in full production lot sizes
question
unitization
answer
supplier may require company to order an item in full pack, case, or pallet configurations
question
Other Types of inventory Systems
answer
- ABC System - Bin System - Base Stock Level System - "Single-Period" Inventory Model
question
ABC system
answer
classifies inventory based on the degree of importance A: Highest Value B: Moderate Value C: Least Valuable
question
Bin System
answer
inventory system that uses either one or two bins to hold quantity of the item being inventoried; mainly used for small or low value items
question
Base Stock Level System
answer
a type of inventory system that issues an order whenever a withdrawal is made from inventory
question
single-period model
answer
a type of inventory system is only ordered for one-time stocking - goal is to maximize profits Ex) Newspaper stands
question
barcode systems
answer
help businesses track products and stock levels for inventory management Types: Linear 1D, 2D, barcode reader
question
common metrics for inventory
answer
units, dollars, weeks of supply, inventory turns
question
units
answer
the # of units available
question
dollars
answer
the amount of dollars tied up in inventory
question
weeks of supply
answer
(avg. on-hand inventory)/(avg weekly usage)
question
inventory turns
answer
(COGS)/(avg. inventory value)
