Chapter 13: Inventory Management Flashcards
Inventory
A stock or store of goods
Different Kinds of Inventories
Raw materials and purchased parts
Partially completed goods, called work-in-process (WIP)
Finished goods inventories or merchandise
Tools and supplies
Maintenance and repairs inventory
Goods-in-transit to warehouse, distributors, or customers (pipeline inventory)
Functions of Inventory
- To meet anticipated customer demand
- To smooth production requirements
- To decouple operations
- To protect against stockouts
- To take advantage of order cycles
- To hedge against price increase
- To permit operations
- To take advantage of quantity discounts
Little’s Law
The average amount of inventory in a system is equal to the product of the average time a unit is in the system
Inventory Turnover
Ratio of average cost of goods sold to average inventory investments
Requirements for Effective Inventory Management
- Keep track of the inventory
- Forecast of demand
- Lead times variability
- Holding costs, ordering costs, and shortage costs
- Classification system
Periodic System
Physical count of items in inventory made at periodic intervals (weekly, monthly)
Perpetual Inventory System
Two containers of inventory; reorder when the first one is empty
Universal Product Code (UPC)
Bar code printed on a label that has information about the item to which it is attached
Point-of-sale (POS) Systems
Record items at time of sale
Lead Time
Time interval between ordering and receiving the order
Purchase Cost
The amount paid to buy the inventory
Holding (Carrying) Cost
Cost to carry an item in inventory for a length of time, usually a year
Ordering Costs
Costs of ordering and receiving inventory
Setup Costs
The costs involved in preparing equipment for a job
Shortage Costs
Costs resulting when demand exceeds the supply of inventory; often unrealized profit per unit
A-B-C Approach
Classifying inventory according to some measure of importance, and allocating control efforts accordingly
Cycle Counting
A physical count of items in inventory
Cycle Stock
The amount of inventory needed to meet expected demand
Safety Stock
Extra inventory carried to reduce the probability of a stockout due to demand and/or lead time variability
Economic Order Quantity (EOQ)
The order size that minimizes total annual costs
Service Level
Probability that demand will it exceed supply during lead time
Single-period Model
Model for ordering of perishables and other items with limited useful lives
Shortage Cost
Generally, the unrealized profit per unit
Excess Cost
Difference between purchase cost and salvage value of items left over at the end of a period
