Book 21-3 Flashcards
Particularly important in manufacturing because delays caused by lack of materials or parts can be costly.
- Sales can be maximized by completing production in a timely manner and by stocking an appropriate assortment of merchandise for distribution to wholesale establishments and retail stroes.
- Protecting inventory from theft, misplacement, deterioration likewise contributes to operational efficiency and business profits.
Ensuring Continuous Operations
- Inadequate forecasting
- Lost or misplaced inventory
- Poor shelving or storage systems
- Inadequate stock measurements
72% of the Root Causes of Running out of Stock can be Found in the Store:
Would increase costs but would not improve service equality in these cases because customers will still be prevented from accessing that stock efficienty due to these fundamental problems.
Having More Inventory
The level that minimizes stockouts and eliminates excess inventory saves money and contributes to operating profits.
Maintaining Optimal Inventory
- economic order quantity
- Statistical inventory control
Methods of Inventory Cost Control
A relatively simple index that determines the purchase quantity of an item (some of which will be carried in inventory) that will minimize total costs.
- Traditional Method
Economic order quantity
Accommodates the variability of supply and demand using a targeted service level. This method allows you to determine statistically the appropriate amount of inventory to carry.
- More advanced method
Statistical Inventory Control
- Storage (land and buildings, shelving and organization systems)
- Theft, weathering, spoilage, and obsolescence
- Cost of capital (from tying up cash in inventory that could be better used elsewhere).
- Transaction costs (from ordering, receiving, inspecting, transporting, and distributing inventory).
- Insurance and security
- Disposal costs ( of inventory that cannot be sold)
Costs Related to Inventory to Consider
Classifies items into three categories based on dollar velocity (purchase price X annual quantity consumed). Its purpose is to focus managerial attention on the most important items.
ABC Method
Holds a few high-value inventory items that account fo rhte largest percentage of total dollars or are otherwise critical in the production process and, therefore, deserve close control.
- keep running record of recepits, withdrawals, and balances of each item.
- a company can avoid unnecessarily heavy investment in costly inventory items.
Category A (ABC Method)
Less costly but deserve moderate managerial attention because they still make up a significant share of the firm’s total inventory investment.
Category B (ABC Method)
Contains low-cost or noncritical items, such as paper clips in an office or nuts and bolts in a repair shop. The carrying costs of such items are not large enough to justify close control. These items might simply be checked periodically to ensure that a sufficient supply is available.
Category C (ABC Method)
Designed to cut inventory carrying costs by making or buying what is needed just as it is needed.
- Prevents buildup of unnecessary inventory
Just-In-Time Inventory Systems
Items are made or bought in response to demand.
Pull
Response to what is planned or anticipated
Push