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ABC Approach

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classifying inventory according to some measure of importance and allocating control efforts accordingly

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Cycle Counting

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a physical count of items in inventory.

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Cycle Stock

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the amount of inventory needed to meet expected demand.

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Economic order quantity EOQ

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the order size that minimizes annual cost answers the the question how much to order

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Excess cost

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difference between cost and salvage value of items left over at the end of a period. Excess= Cost per unit - salvage value per unit

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Fill rate

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the percentage % of demand filled by stock on hand.

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Fixed-order-interval (FOI) model

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orders placed at fixed time intervals (weekly, bi-weekly)

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Holding (carrying) cost

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cost to carry an item in inventory for a length of time, usually a year.

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Inventory

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a stock or store of goods. Vital part of business 1) necessary for operations 2) contribute to customer satisfaction. "typically" 30% current assets 90% working capital invested in inventory

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Inventory turnover

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ratio of average cost of goods sold to average inventory investment

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Lead time

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time interval between ordering and receiving the order.

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Little's Law

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the average amount of inventory in a system is equal to the product of the average demand rate and the average time a unit is in the system.

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Ordering cost

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Cost of ordering and receiving inventory.

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Periodic System

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Physical count of items in inventory made at periodic intervals (weekly, monthly)

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Perpetual inventory system

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system that keeps track of removals from inventory continuously, thus monitoring current levels of each item.

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Point-of-sale (POS) system

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record items at time of sale

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Purchase cost

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the amount paid to buy the inventory

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Quantity discounts

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Price reductions for larger orders.

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Reorder Point (ROP)

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when quantity on hand of an item drops to this amount, the item is reordered.

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safety stock

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extra inventory carried to reduce the probability of a stockout due to demand and/or lead time variability

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service level

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Probability that demand will not exceed supply during lead time.

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setup cost

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the cost involved in preparing equipment for a job.

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shortage costs

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costs resulting when demand exceeds the supply of inventory; often unrealized profit per unit. shortage cost = revenue per unit - cost per unit

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single-period model

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model for ordering of perishables and other items wit limited useful lives. (fruits, magazines, flowers) goal is to identify the order quaint that will maximize the long-run excess and shortage cost continous distribution discrete distiribtion

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two-bin system

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two containers of inventory; reorder when the first is empty. acts as a cousin for

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universal product code (UPC)

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bar code printed on a label that has information about theme to which it is attached.

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Define the major reasons for holding inventories and list the main requirements for effective inventory management

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1)establish a system for tracking items in inventory 2) make decisions about i. when to order ii. how much to order

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The two basic questions in inventory management are 1. how much to order 2. when to order

answer

True

question

Using EOQ model, if an item's holding cost increases, its order quantity will decrease

answer

True, it will crease because holding cost is the denominator of the EOQ formula EOQ= SQRT(2*annual usage in units)*(ordering cost)/annual carrying cost per unit

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Use of the fixed-interval model requires having a perpetual inventory system.

answer

False, use of a fixed interval model requires having a period inventory system.

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With the ABC approach, items which have a high unit cost are classified as "A" items.

answer

False, ABC is based on the product of unit cost and annual volume.

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When using EOQ, the ordering, the order quantity must be computed in every order cycle.

answer

False, unless demand, holding cost, or ordering cost changing, the order quantity will not change.

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Inventory might be held to take advantage of order cycle.

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True, using an economic order quantity is an example of this.

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The EOQ economic order quantity cannot be used when holding costs are a percentage of purchase.

answer

False, carrying cost is sometime stated as percentage of the price of an item rather than as a dollar amount per unit. However as long as the percentage is converted into a dollar amount, the EOQ formula is still appropriate.

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Companies that can successfully use the ABC approach can avoid using EOG models

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False, they still need to determine what to order.

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The objective of inventory managment is to minimize holding costs.

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False, the objective of inventory management is to minimize TOTAL cost, which includes ordering costs and sometimes purchase cots.

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Holding costs and ordering cost are inversely related to each other.

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True, changes in order quantity will cause one to increase and the other to decrease.

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A two-bin system is essentially a simple reorder point system.

answer

True, reorder when the first bin is empty.

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The basic EOQ model, annual ordering cost and annual cost are qual for the optimal order quantity.

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True,

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Increasing the order quantity so that it is slightly above the EOQ would not increase the total cost by very much.

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True, the total cost curve is flat to the right of the EOQ.

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A foxed-interval system would be used for items that have independent demand.

answer

true

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a store that sells daily newspapers could use the single-period model for reordering.

answer

True, the period is one day and the news is perishable beyond one day.

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Other things being equal, an increase in lead time for inventory orders will result in an increase in the :

answer

Reorder point, quantity models do not involve lead time.

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If average demand for an item is 21 units per day, safety stock is 4 units and lead time is 2 days the ROP:

answer

46 ROP=demand * lead time + safety stock ROP= 21*2+4 ROP=42+4 ROP46

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In an ABC system, B typically represents about this percentage of items:

answer

30%

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Which model does not take into account the amount of inventory on hand. FOI ROP EOQ

answer

EOQ, the EOQ factors are demand, ordering costs, & carrying costs.

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Which product is usually bought on an ROP basis? textbook wedding gifts sugar newspaper

answer

Sugar, buy more when the quantity on hand gets low.

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Which product is usually bought on a fixed interval basis? textbook wedding gifts sugar brownies

answer

textbooks, usually bought once a semester.

question

In the two-bin system the quantity in the second bin is equal to the: EOQ ROP FOI none

answer

ROP, the second bin holds the reorder point quantity.

question

using the basic EOQ model, if ordering cost doubles, the order quantity will be double its former value about 50% of its former value about 71% of its former value unaffected.

answer

71% of its former value. because S in the under the square root sign, multiplying its value be 2 will increase the EOQ by the square root of 2 which is 0.707 EOQ= SQRT(2)/2 EOQ=1.4/2 EOQ= 0.707

question

It a decrease in unit price causes the average demand rate to increase which of these would NOT increase? EOQ lead time annual holding cost ROP safety stock

answer

Lead time, every other choice is a function of demand.

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Setup cost are analogous to which of these costs? shortage holding excess ordering

answer

Ordering, both setup and ordering costs are in the numerator of the quantity formula and both are independent.

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What are the types of inventory?

answer

1. Raw materials & purchases parts 2. WIP work in process 3. finished goods, 4. tools and supplies 5. maintenance and repais (MRO) inventory 6. goods in transit to warehouse or customer (pipeline inventory)

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What is the objective of inventory control?

answer

1.level of customer service the right goods viable in the right quantity in the right place (establish a system of tracking) 2. costs of ordering and carrying inventories

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What is the OVERALL objective of inventory management?

answer

to achieve satisfactory levels of customer service while keeping inventory costs within reasonable bounds. 1. measure performance 2.customer satisfaction: (how many back orders) (how many complaints) 3. inventory turnover

question

ABC approach

answer

"A" items: very important 10%-20% # of items in inventory 70% of annual dollar value "B" moderately important "C" least important 50%-60% # of items in inventory 10%-15% of annual dollar value

question

What is the purpose of cycle counting?

answer

to reduce discrepancies between amount indicated by inventory levels and and actual quantities accuracy is important because because it leads to disruption in operations, poor customer service and unnecessary high levels of inventory cost Accuracy is needed A items: ± 0.2 % B items: ± 1 % C items: ± 5 %

question

When do you reorder?

answer

at the Reorder point When the quantity on hand of an item drops to this amount, the item is reordered. Determinants of the reorder point The rate of demand The lead time The extent of demand and/or lead time variability The degree of stockout risk acceptable to management.

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Reorder Point uncertainty

answer

Demand or lead time uncertainty creates the possibility that demand will be greater than available supply To reduce the likelihood of a stockout, it becomes necessary to carry safety stock Safety stock Stock that is held in excess of expected demand due to variable demand and/or lead time

question

EOQ answers the equation of how much to order

answer

True, but not the question when to order.

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As the amount of safety stock carried increases, the risk of stockout decreases.

answer

True, this improves customer service level.

question

How much to order: FOI

answer

saving in shipping cost

question

improving inventory process can offer significant cost reduction and customer satisfaction benefits

answer

I. record keeping II. variation reduction III. lean operations IV. supply chain management.

MGMT 339 Ch. 13 Inventory Management – Flashcards

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