Chapter 12 : Inventory Management

Question 1

Inventory Management

Answer 1

The objective of inventory management is to strike a balance between inventory investment and customer service

Question 2

Importance of Inventory

Answer 2

One of the most expensive assets of many companies representing as much as 50% of total invested capital
Operations managers must balance inventory investment and customer service

Question 3

Functions of Inventory

Answer 3

• To decouple or separate various parts of the production process
• To decouple the firm from fluctuations in demand and provide a stock of goods that will provide a selection for customers
• To take advantage of quantity discounts
• To hedge against inflation

Question 4

Types of Inventory

Answer 4

Raw Material
Work-in process
-maintenance/repair/operating (MRO)
- Finished goods

Question 5

Raw Material

Answer 5

Purchased but not processed

Question 6

Work in process

Answer 6

Undergone some change but not completed

A function of cycle time for a product

Question 7

maintenance/repair/ operating (MRO)

Answer 7

Necessary to keep machinery and processes productive

Question 8

Finished goods

Answer 8

Completed product awaiting shipment

Question 9

Managing Inventory

Answer 9

1. How inventory items can be classified

2. How accurate inventory records can be maintained

Question 10

ABC Analysis

Answer 10

• Divides inventory into three classes based on annual dollar volume
  - Class A - high annual dollar volume
  - Class B - medium annual dollar volume
  - Class C - low annual dollar volume
• Used to establish policies that focus on the few critical parts and not the many trivial ones
• Other criteria than annual dollar volume may be used
  - Anticipated engineering changes
  - Delivery problems
  - Quality problems
  - High unit cost

Question 11

ABC Analysis Policies

Answer 11

Policies employed may include

   - More emphasis on supplier development for A items
  - Tighter physical inventory control for A items
   - More care in forecasting A items

Question 12

Record Accuracy

Answer 12

• Accurate records are a critical ingredient in production and inventory systems
• Allows organization to focus on what is needed
• Necessary to make precise decisions about ordering, scheduling, and shipping
• Incoming and outgoing record keeping must be accurate
• Stockrooms should be secure

Question 13

Cycle Counting

Answer 13

Items are counted and records updated on a periodic basis

Often used with ABC analysis to determine cycle

Question 14

Advantages to cycle counting

Answer 14

1. Eliminates shutdowns and interruptions
2. Eliminates annual inventory adjustment
3. Trained personnel audit inventory accuracy
4. Allows causes of errors to be identified and corrected
5. Maintains accurate inventory records

Question 15

Independent demand

Answer 15

the demand for item is independent of the demand for any other item in inventory

Question 16

Dependent demand

Answer 16

the demand for item is dependent upon the demand for some other item in the inventory

Question 17

Holding costs

Answer 17

the costs of holding or “carrying” inventory over time

Question 18

Ordering costs

Answer 18

the costs of placing an order and receiving goods

Question 19

Setup costs

Answer 19

cost to prepare a machine or process for manufacturing an order

Question 20

Inventory Models for Independent Demand

Answer 20

Need to determine when and how much to order

1. Basic economic order quantity
2. Production order quantity
3. Quantity discount model

Question 21

Basic EOQ Model:Important assumptions

Answer 21

1. Demand is known, constant, and independent
2. Lead time is known and constant
3. Receipt of inventory is instantaneous and complete
4. Quantity discounts are not possible
5. Only variable costs are setup and holding
6. Stockouts can be completely avoided

Question 22

Robust Model

Answer 22

The EOQ model is robust
It works even if all parameters and assumptions are not met
The total cost curve is relatively flat in the area of the EOQ

Question 23

Fixed-Period (P) Systems

Answer 23

• -Orders placed at the end of a fixed period
• -Inventory counted only at end of period
• -Order brings inventory up to target level
  - Only relevant costs are ordering and holding
  - Lead times are known and constant
  - Items are independent from one another

Question 24

Fixed-Period Systems

Answer 24

Inventory is only counted at each review period
May be scheduled at convenient times
Appropriate in routine situations
May result in stockouts between periods
May require increased safety stock