Chapter 7 Flashcards
Inventory
a supply of items held by a firm to meet demand
MRO Inventory
maintenance, repair, and operating supplies
Transit Inventory
items being transported from one location to another
Buffer (Safety) Stock
extra inventory held to guard against uncertainty in demand or supply
Product Cost
the amount paid to suppliers for products that are purchased
Carrying (holding) Costs
several expenses that are incurred due to the fact that inventory is held
Order Cost
the expenses incurred in placing and receiving orders from suppliers
Setup Cost
administrative expenses and the expenses of rearranging a work center to produce an item
Stockout (Shortage) Cost
cost incurred when inventory is not available to meet demand
Inventory Turnover
the ratio between average inventory and the level of sales
Benefits of Low Inventory (3)
- Increased sales volume, fast moving inventory
- less risk of obsolescence
- decreased inventory holding costs
Risks of Low Inventory (2)
- possible shortages
- higher cost of goods, not buying in bulk
Days of Supply
the number of days of business operations that can be supported with the inventory on-hand
Service Level
a measure of how well the objective of meeting customer demand is met
Independent Demand Inventory Systems
inventory management systems used when the demand for an item is beyond the control of the company
Dependent Demand Inventory Systems
management systems used when the demand for an item is derived from the demand for some other item
Total Acquisition Cost =
Annual Ordering Cost + Annual Carrying Cost + Product Cost
=C0 (D/Q) + UC1 Q/2 + Product Cost
Total Acqusition Cost (def.)
the sum of all relevant inventory costs incurred each year
Economic Order Quantity=
sqrt(2DCo/UCi)
Economic Order Quantity (def.)
the order quantity that minimizes the sum of annual inventory carrying cost and annual ordering cost
EOQ Extensions
- No quantity discounts
- No lot size restrictions
- No partial deliveries
- No variability
- No Product interactions
Demand During Lead Time (DDLT) (def.)
the amount of demand that occurs while awaiting receipt of an inventory replenishment order
Service Level Policy
specification of the amount of risk of incurring a stockout that a firm is willing to incur
Order Interval
a fixed time period that passes between inventory reviews
ABC Analysis
the ranking of items of inventory according to importance
Pareto’s Law
a small percentage of items account for a large percentage of sales, profits, or importance to a company
Cycle Counting
a process where each item in inventory is physically counted on a routine schedule
Bullwhip Effect
a small disturbance generated by a customer produces successively larger disturbances at each upstream stage in the supply chain
Vendor-Managed Inventory
the vendor is responsible for managing the inventory located at the customer’s facility
Components of Holding Costs (6)
opportunity costs cost of storage taxes insurance obsolescence, loss, and disposal materials handling, tracking, and management
Enabling Economies of Buying (3)
price discounts
economies associated with transporting larger quantities
speculative holdings/futures
Two Components of Inventory Performance Metrics
Asset Productivity (inventory turnover, days of supply) Service Level
