Chapter 20 Flashcards
Supply Chain Managment:
-Buyer and seller act in partnership
-Goal is to manage and control the cost of inventory and ensure a smooth flow of production
Grocery stores have perishable goods so they have large inveotries
Inventory Management:
Inventory carries:
The faster inventory turnover:
5 Ways to icnrease quality and accuray of inventory:
The planning, coordinating, and control of activties related to the flow of inventory
High opportunity cost
the more profitable a business will be(less carrying cost)
- Scheduling, inventory control and costing system software
- Bar code/RFID tags
- Regular inventory counts
- Strict receiving and shipping policies
5.Trained and fairly compensated staff
6 Costs Associated with goods for sale:
- Purchasing cost (Acquisition costs of good acquired)
- Ordering Costs (Prepare and issue a purchase order)
- Carrying Costs (holding inventories)
- Stockout Costs (run out of an item when there is demand)
- Cost of Quality (Prevention, appraisal, internal failure, external failure)
- Shrinkage Cost (theft, embezzlement, misclassification, clerical error)
Economic Order Quantity (EOQ) Procurement Model
Procurment:
First Step:
Reorder Point:
Reorder math formula:
The placement of a purchase order in enough time to continue processing
How much to order
The quantity level of inventory on hands that trigger a new order
Number of units sold in period * purchase order lead time
Basic EOQ Assumptions:
- The same quantity is ordered at each reorder point
- Demand, purchase order lead time, ordering cost, and carrying cost are certian
- Purchasing cost per unit are unaffected by the quantity ordered
- No stockouts occur
- Cost of quality and shirnkage are only considered if they affect ordering or carrying cost
EOQ Formula:
EOQ= Square root of (2DP)/C
D= Demand in units for the period
P=Relevant ordering cost per purchase order
C= Relevant carrying cost of one unit in stock for [period
Total Relevant Cost Formula
Total Relevant Cost= Total relvant order cost + Total relevant carrying costs
Total relevant ordering cost= # of purchase order per year * relevant ordering cost per purhcase order
Total annual relevant carrying cost= average unit in inventory * annual relevant carrying cost of one unit for a year
TRC= (DP/Q) + (QC/2)
D= Demand
P= Cost per Product order
Q= Economic order quantity
C= carrying cost per unit
Do an EOQ exercise please
Safety Stock:
3 Causes of
stockout
Optimal safety stock level=
Inventory held at all times, regardless of inventory orde,r using EOQ
- Unexpected increase in demand
- Unexpected increase in lead time
- Unavailability of stock from supplier
The quanity that minimizes the sum of the relevant annual stockout and carrying costs
Just-In-Time Procurement:
Requires:
Can be implemented:
Three factors causing reductions in the cost of placing orders:
Strategy to buy goods so they are delivered immediately before use
Restructure relationship with suppliers + place smaller, more frequent orders
In both retail and manufacturing sector
- Long purchasing arrangments
- Increade usage of technology
- Increased usafe of credit card
4 Benefits of Just In Time
- Reduced need for materials handling = lower overhead costs
- Lower inventory levels + lower carrying cost of inventory
- Heighted emphasis on improving quality
- Shorter manufacturing lead times
3 Challenges in supply-chain cost management
- Estimating the relevant cost of a supply chain
- Cost of a prediction error
- Goal-congruence issues
Relevant cost of quality and time delivery
Timely, quality delivery is essential—defective or late materials disrupt production.
Drives the use of JIT purchasing to reduce stockout costs.
Careful supplier selection and long-term relationships help:
-Ensure consistent quality and delivery
-Enable pre-negotiated pricing and lower inspection costs
-Allow frequent orders with minimized purchasing costs
-Support predictable, scheduled deliveries
-Purchasing decisions should compare relevant ordering, carrying, purchasing, and stockout costs.
Choose the option with the lowest total annual relevant cost
Inventory Systems
Material Requirement Planning:
It uses three information sources to determine the necessary output at each stage of production, which are:
- a push-through system that manufactures finished goods for inventory on the basis of demand forecast
- Demand forecast for final products
- Bill of materials
- Quantities of materials
Takes into account the lead time to purchase materials
Inventory Systems:
Enterprise Resource Planning:
ERP systems enhance info flow and improve inventory cost control.
Include integrated modules (accounting, distribution, manufacturing, HR, etc.).
Use a real-time, centralized database to reveal process interdependencies and bottlenecks.
Provide access to operating data for managers, workers, customers, and suppliers.
Enable quick adjustments to manufacturing/distribution based on supply & demand changes.
Often come as standardized packages (e.g., SAP, Oracle) with customization options—at a high cost.
Backfluck costing:
A costing system that omits recording some or all journal entries relating to the cycle from purchase or direct materials to sale of finished goods
Reduces the accounting cycle to a single step initiated by the immediate payment for a finished good
No inventory because costs flow without delay to COGS for which payment has already been made
