Chapter 6 Flashcards
What are the functions of inventory?
- to decouple or separate various parts of the prod.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
What are the types of inventory we have in a firm?
- 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: necessary to keep machinery and processes productive
- finished goods: completed product awaiting shipment
What is inventory management?
- how inventory items can be classified
- how accurate inventory records can be maintained
- the objective is to strike a balance between inventory investments and customer service: minimize inventory cost needed to maximize customer service
What is ABC analysis?
- It divides inventory into 3 classes based on annual monetary 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 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 - 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
What is the difference between dependent and independent demand? (EXAM QUESTION)
Independent: the demand for item is independent of the demand for any other item in inventory
Dependent: the demand for item is dependent upon the demand for some other item in the inventory
What is cycle counting?
- Items are counted and records updated on a periodic basis
- Often used with ABC analysis to determine cycle
- Has several advantages
- 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
What are holding, ordering and setup costs?
Holding costs: the costs of holding or carrying inventory over time
Ordering costs: the costs of placing an order and receiving goods
Setup costs: costs to prepare a machine or process for manufacturing an order
What is an inventory model for independent demand?
- a need to determine when and how much to order
1. basic economic order quantity
2. production order quantity
3. quantity discount model
What are the important assumptions of the basic EOQ model?
- 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
Which model is robust?
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.
Comment on reorder points.
EOQ answers the how much question.
The reorder point (ROP) tells when to order.
ROP = (demand per day) x (lead time for a new order in days)
What is the production order quantity model?
- It’s used when inventory builds up over a period of time after an order is placed.
- Used when units are produced and sold simultaneously.
What is the quantity discount model?
- Reduced prices are often available when larger quantities are purchased.
- Trade-off is between reduced product cost and increased holding cost.
Total cost = Setup cost + Holding cost + Product cost
What are the steps in quantity discount models?
- for each discount, calculate Q*
- if Q* for a discount doesn’t qualify, choose the smallest possible order size to get the discount
- compute the total cost for each Q* or adjusted value from step 2
- select the Q* that gives the lowest total cost
