Inventory Management Exam 3 – Flashcards
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the process of identifying the material needs for business operations
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materials managememt
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demand of goods that are demanded directly by customers
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independent requirements
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it contains a random component and it is, therefore, non-deterministic (must be forecasted)
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Independent customer demand is stochastic, that is...
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it is determined externally and is independent of any internal operation.
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Demand from customers is translated into independent requirements because
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it is dependent on specic production plans internal to the organization
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Material demand from production processes becomes dependent requirements because
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a function of a process controlled by the organization, such as production
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dependent requirements
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material requirements planning (MRP)
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Dependent demand is deterministic, and can be precise calculated in a process called
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When a product is tailored to a specific customer or the customer has the opportunity of selecting among multiples options, configurations, or variants such as sizes, colors and so on), the production takes place after the order is received,
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make-to-order (MTO) production mode
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flexibility
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Materials that are highly standardized offer more _____ in demand management.
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materials that are highly standardized and can be served directly from stock
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make-to-stock (MTS) production mode
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independent requirements or from stock control
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a production order can be generated by
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production orders for internal procurement, or purchase orders for external procurement.
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stock control can generate...
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optimizing the inventories, in order to achieve the goals of customer service at minimum cost.
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goal of inventory management
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demand
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inventory management is based on matching availability with ______
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any item designed with a unique identifier, such as a material number, for which the firm desires to keep individualized control of inventory.
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stock keeping unit (SKU)
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necessary to provide with specific guidelines as to when to order, when to produce, and how much inventory to keep of each SKU and each location, with the ultimate goal of minimization of inventory costs.
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inventory management system
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finished products sub-assemblies raw materials trading goods packing materials own containers external containers
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example of main material types
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customer demand
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Finished products are sold to customers, and their optimal inventories depend on...
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the anticipated production schedule
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Semi-finished products and raw materials depend on...
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shipments
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Packing materials are used as a function of ______
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logistics
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containers are used for internal and external ______
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idle
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Inventories are ___ resources, and keeping inventories always costs money.
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minimized
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the levels of inventory should be _____ while providing the desired level of supply chain performance.
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inventory that is in process or in transit through the distribution system
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pipeline stock
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create faster and leaner production and transportation systems
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how to reduce pipeline stock
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pipeline stock cycle stock anticipation stock safety stock consignment stock
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types of inventory
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inventory that remains from larger economic order quantities, quantity discounts, or large batches of production due to economies of scale.
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cycle stock
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using inventory models with quantity discounts and optimizing production lots
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Cycle stock can be optimized by....
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an accumulation of stock for anticipated fluctuations in demand, such as seasonality, and therefore it is also called seasonal stock.
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anticipation stock
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accurate demand forecasting and production scheduling
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Anticipation stock can be optimized with...
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additional stock that is kept for unanticipated fluctuations in demand, supply, or lead time.
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safety stock
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stochastic models
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safety stock is optimized using
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inventory that its owner (the consignor) places at a customer's location (the consignee), where the consignor keeps title of the goods until the consignee sells them.
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Consignment stock
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cost of ordering, cost of holding inventory, and cost of stock outs
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three inventory costs
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a cost that is undertaken in the process of placing and delivering an individual order, regardless of its size. generally denoted by the letter S (setup cost)
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Cost of ordering inventory
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administrative work of placing and receiving the order, inspection costs, and other per-order charges such as shipping and handling
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the cost of ordering includes
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the cost of carrying inventory in stock per unit of time such as day, month, or year, usually denoted with the letter H
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Cost of holding inventory
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the interest cost of capital plus the cost of the warehouse facility, personnel, insurance, obsolescence, spoilage, and pilferage
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cost of holding inventory includes
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the firm's average cost of capital
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The financial cost of capital can be estimated with
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the cost associated with a stock out, or the inability to respond to the demand from inventory.
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Cost of stock outs
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loss of sales and profits, customer goodwill, liability costs, and the possible cost of disrupting operations
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cost of stock outs include
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safety stock
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The cost of stock outs should be balanced with the cost of holding ____ _____
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those with highest cost of stock-outs, and their stock out risk should be minimal.
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Critical materials
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asset; balance
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Inventories are accounted for as an _____, and they appear in the ____ sheet
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the calculation of cost of goods sold (COGS) and profitability analysis.
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Assigning a value to inventories is important because it allows for
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stopping the flow if inventory, counting the physical quantities, and entering the differences in the computer system.
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physical inventory
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unrestricted inventory quality inspection inventory blocked inventory in-transit inventory
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statuses of inventory
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The stock is available for any use, internal or external, without restrictions.
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Unrestricted inventory
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Stock that must undergo quality control inspection. Once it has been cleared for quality control, it becomes unrestricted and can be committed to any use
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Quality inspection inventory
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If stock is found defective, damaged, obsolete, expired, or otherwise unfit for use, stock is marked as blocked and is unavailable for use.
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Blocked inventory
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Stock that is owned by the company but is being transported, such as in an internal stock transfer, is marked as in transit and unavailable to use until arrival in the storage location of destination.
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In-transit inventory
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the order quantity that minimizes the sum of inventory holding costs and order setup costs.
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Economic Order Quantity
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ordering; holding
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The EOQ model minimizes the total inventory cost by balancing the cost of _____ with the cost of _____ inventory
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1. Constant rate of demand (D) 2. Constant order lead time (L) between order issue and delivery 3. Constant and defined order setup cost independent of order size (S) 4. Constant inventory holding cost per unit and per period (H) 5. Delivery in one single batch 6. No quantity discounts 7. Only one product per order setup
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assumptions of the EOQ model
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holding costs and order setup cost
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the total inventory cost includes
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includes all costs related to holding inventory per unit of time, including financial cost of capital, warehousing, insurance, obsolescence, pilferage, and so on
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inventory holding cost
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(Q/2)H
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holding cost for inventory (equation)
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the one-time cost to place and deliver a single order of any size
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order setup cost
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D = Demand in units per period S = Cost of processing and serving an order, or Setup cost H = Cost of holding an unit of inventory per period. Q = Order quantity.
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EOQ variables
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(D/Q)S
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order cost (equation)
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Q=√ (2DS/H)
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EOQ (equation)
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also known as the Q-model assumes that the order quantity and order time can be freely determined when placing an order.
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constant order quantity model
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What is the optimal order quantity? When is the best time to order?
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Q-model answers what questions
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order processing time + planned delivery time + goods receipt processing time
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lead time equation
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reorder point (ROP)
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(Q-model) the time of the order is determined by calculating a...
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the inventory level that is exactly enough to cover the expected demand (d) during the lead time (L)
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reorder point (ROP)
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(d bar)L
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ROP for Q-model (equation)
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service level and variability of demand during the lead time
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given what two things can a firm use historical data to automatically calculate safety stock for each material?
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the probability of completing an an ordering cycle without running out of stock
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service level (SL)
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the probability of running out of stock during an order cycle
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stock out risk (SR)
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SL+SR=1
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Service level and stockout risk are probabilities of mutually exclusive events, and therefore
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the consequences of a stock out at the end of an inventory cycle
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the key to selecting a good service level is to determine...
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z-score
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Once the service level has been selected, and assuming a normally distributed demand, its associated ____ zSL can be determined.
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zSL(σL)
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safety stock equation (SS)
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d bar * L + zSL * √(L) * σ
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reorder point (equation)
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the firm faces a fixed order and delivery interval
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The constant order period model (P-model) is used in situations when...
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R + SS - I
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p-model order quantity (equation)
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d bar(T+L)
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P-model required inventory equation
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zSL * √(T+L) * σ
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P-model SS equation
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deals with inventory in which goods not sold lose value immediately
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single period model
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balancing the risk of overestimating the demand with the risk of underestimating it
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The single period model allows us to optimize the inventories by...
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the cost of overestimating multiplied by the probability of overestimating
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single period model risk of overestimating is...
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p ≤ (Cu)/(Co+Cu)
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single period p (probability of overestimating) equation)
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service
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single period - the probability of overestimating is the desired ____ level
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d bar + Zsl *σ
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single period model quantity equation
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control the storage, retrieval, and movements of materials within and across warehouses in the organization.
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warehouse management systems (WMS)
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goods receipt goods issue stock transfer transfer posting
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four types of material movements
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A movement of a material into inventory, causing inventory to increase
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goods receipt
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A movement of a material out of inventory is a goods issue, the exact opposite of a goods receipt.
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goods issue
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When goods are physically transported from a location to another within the organization
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stock transfer
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between storage locations in the same warehouse between warehouses in the same company between subsidiaries of the same enterprise
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3 basic forms of stock transfer
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issue; receipt
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Stock transfers basically consist of a goods ___ and a goods ___
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does not involve a physical movement of the material, but only a change of its status
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transfer posting
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unrestricted in transit quality control blocked or locked in consignment (vendor owned inventory)
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possible statuses of a good
