Chapter 9

Question 1

Inventory

Answer 1

• Inventory is an asset on the balance sheet and a variable expense on the income statement.
• Inventories also have an impact on return on investment (ROI) for the firm and an organization

Question 2

Gross National Product (GNP)

Answer 2

Measures the total amount of goods and services that a country’s citizens produce over a specified period, typically a year, REGARDLESS OF WHERE THEY PRODUCE THEM

Question 3

Gross Domestic Product (GDP)

Answer 3

Measures the total amount of goods and services that are produced WITHIN A COUNTRY’S GEOGRAPHIC BORDERS

Question 4

Inventory Classes

Answer 4

• Inventory includes all flow units within the process boundaries
• Inventory Classification:
  
  • Inputs Inventory: flow units awaiting to begin processing
  • In-Process/Work-In-Process Inventory: flow units that are being processed
  • Outputs Inventory: flow units that have been processed but not yet exited process boundaries

Question 5

Process Flows and Inventory

Answer 5

LITTLE’S LAW:

Flow Rate = Inflow Rate = Processing Rate = Outflow Rate (WITH A STABLE PROCESS)

Question 6

Inventory Benefits

Answer 6

• Often companies maintain input inventories in excess of process requirements and output inventories in excess of demand typically to assure high customer service levels
  -Other Reasons:
  
  • Economies of scale, fixed order costs, fixed setup costs
    Production and Capacity Smoothing
  • Stockout Protection, Unexpected or Expected Supply Disruptions or Surge Demands, Poor Demand Forecasting, Maintain Safety Stock or Safety Inventory
  • Price Speculation

Question 7

Relationship Between Inventory and Customer Service Level

Answer 7

The higher the Investment in Inventory => high Customer Service Level

Question 8

Uncertainty or Safety Stock

Answer 8

• All organizations are faced with uncertainty
• On the demand side, there is usually uncertainty in how much customers will buy and when they will buy it
• On the supply side, there might be uncertainty about obtaining what is needed from suppliers and how long it will take for the fulfillment of the order

Question 9

Time/In-Transit & WIP Stocks

Answer 9

• The time associated with transportation means that even while goods are in motion, an inventory cost is associated with the time period. The longer the time => the higher the cost
• WIP Inventories are associated with manufacturing, length of time the inventory sits should be evaluated in relationship to scheduling techniques and the actual manufacturing/assembly technology

Question 10

Seasonal Stocks

Answer 10

• Seasonality can occur in the supply of raw materials, in the demand for finished product, or in both
• Those faced with the seasonality issues are constantly challenged with determining how much inventory to accumulate
• Seasonality can impact transportation

Question 11

Anticipatory Stocks

Answer 11

Reason to hold inventory arises when an organizational anticipates that an unusual event might occur that will negatively impact its source of supply

Question 12

Inventory Costs

Answer 12

Ordering Costs:

 - Order Costs- Cost of placing order which may have both fixed and variable components
 - Setup Costs- expenses incurred each time an organization modifies a production or assembly line to produce a different item for inventory
 - As Size of Order increases => Annual Costs decrease

Question 13

Carrying Costs(Holding Costs)

Answer 13

Storage Space Cost:
- included handling costs associated with moving products into and out of inventory, as well as such costs as rent, heat, and light
Inventory Service Cost:
- includes insurance and taxes
Inventory Risk Cost:
- Reflects the possibility that inventory value might decline for reasons beyond firm’s control

Carrying Inventory is Expensive:
- Could limit responsiveness to new markets
- Delay introduction of design improvements
- Large WIPs discourage teamwork and coordination
Inventory Holding Cost( Opportunity cost per unit + Storage cost per unit)

• As Size of Order increases => Annual Carrying Cost increases

Question 14

Expected Stockout Cost

Answer 14

Several Consequences Might Occur:
- Back order, which results in the vendor incurring incremental variable costs associated with processing and making extra shipment
- Customer might decide to purchase a competitor’s product resulting in a direct loss for the supplier
Customer might decide to permanently switch to a competitor’s product with loss of income

Question 15

In-Transit Inventory Carrying Cost

Answer 15

• Owner of product while it is intransit will incur resulting carrying costs
• In-transit inventory carrying cost becomes especially important on global moves since both distance and time from the shipping location both increase
• Owner should consider its delivery time part of its inventory carrying cost

Question 16

Techniques for Inventory Management

Answer 16

• Fixed Order Quantity model involves ordering a fixed amount of product each time reordering takes place
• Economic Order Quantity is the quantity that exactly balances annual order costs and holding costs
• Basic Assumptions of the simple EOQ model:
  1. A continuous, constant, and known rate of demand
  
  2. A constant and known replenishment or lead time
  3. All demand is satisfied
  4. A constant price or cost that is independent of the order quantity (i.e., no quantity discounts)
  5. No inventory in transit
  6. One item of inventory or no interaction between items
  7. Infinite planning horizon
  8. Unlimited capital

Question 17

Total Annual Purchasing Cost

Answer 17

Total Order Cost + Inventory Holding Cost + Material Purchase Cost

Question 18

The Just-in-Time Approach

Answer 18

1. “pull” vs. “push” from inventory and/or supplier
2. zero inventories
3. short, consistent lead times
4. small, frequent replenishment quantities
5. high quality, or zero defects

Question 19

Materials Requirements Planning(MRP)

Answer 19

• Deals specifically with supplying materials and component parts whose demand depends on the demand for a specific end product
• Consists of a set of logically related procedures, decision rules, and records
• MRP is an information system designed to plan the material that is required to produce components & sub-assemblies which eventually are put together to become an end item or final product.
• MRP is a system designed specifically to manage dependent-demand items.
• Dependent-demand items are those that eventually become part on an independent-demand item or end item.

Question 20

Elements of MRP System:

Answer 20

• Master Production Schedule
• Bill of materials file
• Inventory status file
• MRP program
• Outputs and reports

Question 21

Distribution Requirements Planning

Answer 21

• Purpose: to more accurately forecast demand and to explode that information back to develop production schedules
• Firm can minimize inbound inventory in conjunction with production schedules
• Outbound (finished goods) inventory is minimized
• DRP develops a projection for each SKU requiring the following:
  
  • Forecast of demand for each SKU
  • Current inventory level of the SKU
  • Target safety stock
  • Recommended replenishment quantity
  • Lead time for replenishment

Question 22

Vendor-Managed Inventory

Answer 22

The Basic Principles:

 - The supplier and its customer agree on which products are to be managed using in the customer's distribution centers
 - An agreement is made on reorder points and economic order quantities for each of these products
 - As these products are shipped from the customer's distribution center, the customer notifies the supplier, by SKU, of the volumes shipped on a real-time basis - This notification is also called "pull" data

Question 23

ABC Inventory Classification Analysis:

Answer 23

Assigns inventory into 3 groups according to the relative impact or value of the items:

 - A items are considered to be the most important(20%)
 - B items being of lesser importance(50%)
 - C items being the least important(30%)

Pareto’s Law (80-20 Rule):
- High $ Value are dominated by a relatively few SKU units