Chapter 12 : Inventory Management Flashcards
Inventory Management
The objective of inventory management is to strike a balance between inventory investment and customer service
Importance of Inventory
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
Functions of Inventory
- 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
Types of Inventory
Raw Material
Work-in process
-maintenance/repair/operating (MRO)
- Finished goods
Raw Material
Purchased but not processed
Work in process
Undergone some change but not completed
A function of cycle time for a product
maintenance/repair/ operating (MRO)
Necessary to keep machinery and processes productive
Finished goods
Completed product awaiting shipment
Managing Inventory
- How inventory items can be classified
2. How accurate inventory records can be maintained
ABC Analysis
- 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
ABC Analysis Policies
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
Record Accuracy
- 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
Cycle Counting
Items are counted and records updated on a periodic basis
Often used with ABC analysis to determine cycle
Advantages to cycle counting
- Eliminates shutdowns and interruptions
- Eliminates annual inventory adjustment
- Trained personnel audit inventory accuracy
- Allows causes of errors to be identified and corrected
- Maintains accurate inventory records
Independent demand
the demand for item is independent of the demand for any other item in inventory
Dependent demand
the demand for item is dependent upon the demand for some other item in the inventory
Holding costs
the costs of holding or “carrying” inventory over time
Ordering costs
the costs of placing an order and receiving goods
Setup costs
cost to prepare a machine or process for manufacturing an order
Inventory Models for Independent Demand
Need to determine when and how much to order
- Basic economic order quantity
- Production order quantity
- Quantity discount model
Basic EOQ Model:Important assumptions
- Demand is known, constant, and independent
- Lead time is known and constant
- Receipt of inventory is instantaneous and complete
- Quantity discounts are not possible
- Only variable costs are setup and holding
- Stockouts can be completely avoided
Robust Model
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
Fixed-Period (P) Systems
- -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
Fixed-Period Systems
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
