Chapter 12: Inventory Management

Question 1

Functions of Inventory

Answer 1

1. Decouple the production process
2. Decouple the firm from fluctuations in demand
3. Take advantage of quantity discounts
4. Hedge against inflation

Question 2

Types of inventory

Answer 2

1. Raw material
2. WIP
3. MRO
4. Finished Goods

Question 3

Cycle Counting (Advantages)

Answer 3

1. Eliminates the shutdown and interruption of production necessary for annual physical inventories
2. Eliminates annual inventory adjustments
3. Trained personnel audit the accuracy of inventory
4. Allows the cause of errors to be identified and remedial action to be taken
5. Maintains accurate inventory records

Question 4

Inventory Management

Answer 4

strike a balance between inventory investment and customer service

Question 5

ABC Analysis

Answer 5

Divides an organization’s on-hand inventory into 3 classes based upon annual dollar volume

Question 6

Managing inventory record access

Answer 6

1. ABC analysis
2. Cycle counting
3. Control of service inventories
4. Record accuracy (Periodic vs Perpetual)

Question 7

Cycle counting

Answer 7

is a process by which inventory records are verified.

Question 8

Ordering costs

Answer 8

Order processing, clerical support, cost of supplies

Question 9

Holding costs

Answer 9

Pilferage, scrap, and obsolescence,
Storage costs
Insurance on inventory

Question 10

Setup cost

Answer 10

cost to prepare a machine or process for​ production

Question 11

Inventory Control Models (Assumptions)

Answer 11

either independent of or dependent on the demand for other items.

Question 12

safety stock

Answer 12

Extra units that are held in inventory to reduce stockouts
The appropriate level of safety stock is typically determined by choosing the level of safety stock that assures a given service level.

Question 13

EOQ model (Assumptions)

Answer 13

Receipt of inventory is instantaneous and complete
Demand for an item is known.
Lead time is known and consistent

Question 14

Production Order Quantity model (Assumptions)

Answer 14

The production rate is finite

Question 15

Probabilistic model

Answer 15

A statistical model applicable when product demand or any other variable is not known but can be specified by means of a probability distribution.
Increasing service level will increase the cost of inventory policy
Probabilistic models are a​ real-world adjustment because demand and lead time will not always be known and constant.

Question 16

Single-Period Inventory model

Answer 16

a system for ordering items that have little or no value at the end of a sales​ period

Question 17

Fixed Period Systems

Answer 17

Pros: A​ fixed-period system is appropriate when vendors make routine visits to customers to take fresh orders or when purchasers want to combine orders to save ordering and transportation costs.
Pros: The advantage of the​ fixed-period system is that there is no physical count of inventory items after an item is withdrawn.

Cons: The disadvantage of the​ fixed-period system is that because there is no tally of inventory during the review​ period, there is the possibility of a stockout during this time.

Assumptions:
Lead times are known.
The only relevant costs are the ordering and holding costs.
Items are independent of one another.