Chapter 12- Inventory Management – Flashcards
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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
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