Chap 7 Flashcards
Raw materials and component parts
items brought from suppliers to use in production of a productt
work in process inventory
once items enter the productions process
finished goods inventory
manufacturing is complete and products are ready for sale to a customer, Held by retailers and wholesalers
MRO inventory
maintenance, repair, and operating supplies
Everything needed to work/manufacture items (Cleaning supplies, toilet paper, tools)
an item can be classified as…
several different types of inventory, depending on who has it and for what purpose
4 roles of inventory
balancing supply and demand
buffering uncertainty in demand and supply
enabling economies of buying
enabling geographic specialization
Cycle stocks
enables firms to produce or ship inventories in batches to take advantage of economies of scale
seasonal al stocks
inventories used for the purpose of dealing with seasonality
buffer stock
holding products to guard against potential uncertainties in demand or supply
speculative stock
buying ahead of need when they believe that prices may increase or that there may be supply disruptions/shortages in the future
transit stock
inventory being transported from one place to another (from plant to warehouse to retail store)
which type of inventory matches with a role of inventory
balancing supply and demand (cycle and seasonal)
Buffering uncertainty (buffer)
enabling economies of buying (speculative)
enabling geographic specialization (transit)
product cost
amount paid to suppliers for products that are purchased
carrying cost
costs that come from holding inventory
examples of carrying costs
Opportunity cost, including the cost of capital.
Cost of owning and maintaining storage space.
Taxes.
Insurance.
Costs of obsolescence, loss, and disposal.
Costs of materials handling, tracking, and management.
order cost
replenishing inventories, placing and receiving orders, order preparation, order transmittal, order receiving
setup cost
Administrative expenses and the expenses of rearranging a work center to produce an item. EX: cleaning after making a batch of food
stockout cost
company does not have inventory available to meet demands
two common measures of inventory asset productivity
inventory turnover
days of supply
inventory turnover
ratio between the average amount of inventory the company holds and its level of sales
companies that achieve high turnover rates see:
-Increased sales volume due to having rapid flow of new or fresh items.
-Less risk of obsolescence or need to mark down or discount prices.
-Decreased expenses related to holding inventory.
-Lower asset investment and increased asset productivity.
dangers if the inventory rate is too high
-Possible lowered sales volume due to running out of needed items (see the discussion of stockouts).
-Increased cost of goods sold due to inability to produce or purchase in quantity.
-Increased purchasing, ordering, tracking, and receiving time, effort, and cost.
turnover rates differ based on…
financial strategy (cost of capital), their marketing strategy (aggressiveness in meeting demand), and their operational effectiveness (how tightly they control inventories).
days of supply
number of days of business operations that can be supported with the inventory on hand, given no more inventory is bought or produced
service level
metrics to track how well this objective is accomplisheds
stockout
demand for an item, and no inventory is available.
how to stockout impact different types of items
raw/components: production is halted
finished goods: lost sales and customer dissatisfaction
how to measure stockouts
as the number or percentage of inventory items for which there is no inventory on hand at the time of demand
continuous review model
inventory is constantly monitored to decide when a replenishment order needs to be placed
when is a replenish order triggered
when inventory decreased to a level known as the reorder point
assumptions in review models
both demand for an item and the suppliers lead time to replenish are constant and known with no variation
total acquisition cost
the sum of all relevant inventory costs incurred each year. (holding +Carrying)
economic order quantity
where carrying cost and order cost meet. the order quantity
assumptions underlying the EOQ formulation that often dont hold true
-No quantity discounts—Product cost (production cost and transportation cost) is constant regardless of quantity ordered.
-No lot size restrictions—It is possible to order a lot size equal to the EOQ (there are no minimum or maximum order size requirements and capital is unlimited).
-No partial deliveries—The product is produced and delivered in a single batch (the entire replenishment order of inventory becomes available all at the same time).
-No variability—Product demand and replenishment lead time are known and constant, and there are no quality or other problems that would introduce uncertainty in either supply or demand.
-No product interactions—The ordering of one product is not tied to the ordering of some other product.
periodic review model
Management system built around checking and ordering inventory at some regular interval.
order interval
the time period that passes between each inventory review
quainty ordered in each review depends on
how much inventory is on hand at the time of review
uncertainty period
period of time in which you are uncertain about how much inventory is on hand
