Chapter 12 – Inventory Management – Flashcards
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Type of Inventories
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1. Raw Materials (RM) and purchased parts 2. Partially completed goods (WIP) 3. Finished goods inventory (FG) 4. Replacement parts, tools, supplies 5. Goods in transit to warehouse or customer(FedEx)
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What happens to production AND sales if you don't have the inventory you need?
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can't produce product, stop production, and stops products from entering the market, and stops revenue.
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Dependent demand
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inventory items that are components of FG. Demand is derived from # of desired Fgs.
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What is Safety Stock?
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Extra inventory
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take advantage of order cycles
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This is when we buy quantities of inventory that exceed our need to minimize purchasing costs and inventory costs. Example: shopping at Sams
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hedge against price increases
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betting the price now is cheaper than the future
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Inadequate control of inventory results in:
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(1) understocked items, and/or (2) overstocked items
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Problems with understocking. Understocking inventory results in :
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opportunity cost lost of money
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Problems with overstocking. Overstocking inventory causes problems with:
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wasting money and can't use it anywhere else.
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Inventory Management
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attempts to balance the issues.....to have enough inventory on hand to satisfy the customer, while minimizing inventory so as not to unnecessarily use $ or space.
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periodic systems
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physical count
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perpetual systems
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continual system, usually on-line. E.g. scanning UPC codes 1. Advantages: real time totals of inventory 2. Disadvantages: expensive and you still need a periodic system.
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forecast of demand
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must have reliable estimates of amount and time of demand.
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knowledge of lead times
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time interval between ordering and receiving the order.
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Holding costs
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cost to store inventory
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how much does it cost to store inventory?
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interest, insurance, taxes, obsolescence, deterioration, spoilage, heat, light, security, and opportunity costs for not being able to spend $ elsewhere.
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ordering costs
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cost of ordering and receiving inventory. Includes preparing invoices, shipping costs, inspection costs.plus the salaries of people involved
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shortage costs
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costs that result when we fail to meet demand, including the cost of NOT making a sale, loss of customer good will, etc.
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classification systems
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classify inventory on the basis of relative importance
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What do EOQ Models identify ?
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optimal order quantity by minimizing the sum of certain annual costs that vary with order size.
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What is The Basic EOQ model is used to identify ?
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the order size that will minimize the sum of the annual costs of holding inventory and ordering inventory.
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WHY does Large Order - lower ordering cost, but higher carrying cost?
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not ordering as much
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WHY does Small Order - higher ordering cost, but lower carrying cost?
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constantly ordering
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Quantity discounts
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are price reductions for large orders offered to customers to induce them to buy in large quantities (like shopping at SAM=s).
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Reorder Point
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when inventory on hand drops to a predetermined amount
