Chapter 12- Inventory Management – Flashcards
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Objective of inventory management
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Strike a balance between inventory investment and customer service
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Four functions of inventory
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1. To provide a selection of goods for anticipated customer demand and to separate the firm from fluctuations in that demand 2. Decouple various parts of the production process 3. Take advantage of quantity discounts 4. Hedge against inflation
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Types of inventory
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Raw material inventory; work-in-process inventory; maintenance/repair/operating supply (MRO) inventory, and finished-goods inventory
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Raw material inventory
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Materials that are usually purchased but have yet to enter the manufacturing process
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Work-in-process (WIP) inventory
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Products or components that are no longer raw materials but have yet to become finished products
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Maintenance/repair/operating (MRO) inventory
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Maintenance, repair, and operating materials
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Finished-goods inventory
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end item ready to be sold, but still an asset on the company's books
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ABC analysis
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Method for dividing on-hand inventory into three classifications based on annual dollar volume A = high dollar volume B = medium " " C = low " "
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Cycle counting
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Continuing reconciliation of inventory with inventory records
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advantages of cycle counting
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- eliminates shutdown and interruption of production necessary for annual physical inventories - eliminates annual inventory adjustments - trained personnel audit the accuracy of inventory - allows cause of errors to be identified and remedial action to be taken - maintains accurate inventory records
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Shrinkage
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Retail inventory that is unaccounted for between receipt and sale
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Pilferage
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Small amount of theft
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Independent demand
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demand for item is independent of the demand for any other item in inventory
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Holding costs
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Costs associated with holding or "carrying" inventory over time
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Ordering cost
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Cost of ordering process; includes costs of supplies, forms, order processing, purchasing, clerical support, etc.
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setup cost
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cost to prepare a machine or process for manufacturing an order
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setup time
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time required to prepare a machine or process for production
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Three independent demand models
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basic economic order quantity (EOQ) model; production order quantity model; quantity discount model
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Economic order quantity (EOQ) model
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inventory-control technique that minimizes the total of ordering and holding costs
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EOQ model assumptions
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- demand for an item is known, reasonably constant, and independent of decisions for other items - lead time is known and consistent - receipt of inventory is instantaneous and complete - quantity discounts are not possible - only variable costs are the cost of setting up or placing an order and the cost of holding or storing inventory over time - stockouts (shortages) can be completely avoided if orders are placed at the right time
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Optimal order quantity
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Point where the ordering-cost curve and the carrying-cost curve intersect
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Annual setup cost
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number of orders placed per year x setup or order cost per order ((D/Q)) (S)
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Annual holding cost
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average inventory level x holding cost per unit per year ((Q/2)) (H)
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expected number of orders
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N = (D / Q)
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Expected time between orders
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T = (number of working days per year / N)
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total annual cost
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Setup (order) cost + holding cost
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Robust
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giving satisfactory answers even with substantial variation in the parameters; EOQ is a robust model
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lead time
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In purchasing system, the time between placing an order and receiving it; in production system, the wait, move, queue, setup, and run times for each component produced
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Reorder point (ROP)
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inventory level (point) at which action is taken to replenish the stocked item ROP = d x L
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Safety stock (ss)
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Extra stock to allow for uneven demand; a buffer
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Production order quantity model
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economic order quantity technique applied to production orders
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probabilistic model
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Statistical model applicable when product demand or any other variable is not known but can be specified by means of a probability distribution annual stockout costs = (sum of the units short for each demand level) x (probability of that demand level) x (the stockout cost/unit) x (the number of orders per year)
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demand is variable and lead time is constant
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ROP = (average daily demand x lead time in days) + Z(standard deviation of demand per day x standard deviation lead time in days)
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demand is constant and lead time is variable
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ROP = (daily demand x average lead time in days) + Z x daily demand x standard deviation of lead time in days
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both demand and lead time are variable
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ROP = (average daily demand x average lead time in days) + Z(standard deviation of demand per day x standard deviation lead time in days)
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single-period inventory model
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System for ordering items that have little or no value at the end of a sales period (perishables) -underestimated: Cs = Sales price per unit - cost per unit - overestimated: Co = cost per unit - salvage value per unit
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Service level
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Probability of not stocking out Cs / (Cs + Co)
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Fixed-period (P) system
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System in which inventory orders are made at regular time intervals
