Class 7 Flashcards
Define: Inventory
an idle material or product, usually in a warehouse or storeroom
Define: Inventory Management
planning and controlling the inventories
Define: Economic order quality (EOQ)
The order size that minimizes total inventory control cost
Define: ABC classification system
classifying inventory according to some measure of importance and allocating control efforts accordingly
Why is inventory important?
it is very expensive, it can be used to hide/avoid problems, and it can be used to decouple the firm from its customers
List 5 types of inventory
1) raw materials and purchased parts
2) partially completed goods (WIP)
3) finished goods
4) replacement parts, tools and supplies
5) goods-in-transit to warehouses or customers
List 7 functions of inventory
1) to meet expected sales or usage
2) to wait while being transported
3) to protect against stock-outs
4) to take advantage of economic lot size and other quantity discounts
5) to smooth seasonal production requirements
6) to decouple operations
7) to hedge against price increases
List 2 ways to measure inventory
1) inventory turnover (turns) - the ratio of annual cost of goods sold to the average inventory investment
2) days of supply (days) - the ratio of the inventory value to the average days usage
List 3 types of inventory cost
1) holding/carrying cost - the cost to keep an item in inventory
2) ordering cost and/or setup cost - includes source selection, order processing, transportation, receiving, inspection
3) shortage cost
List 3 sub categories of holding or carrying cost
1) warehousing costs (heat, cooling, light, rent, security)
2) insurance, spoilage, pilferage, breakage, taxes
3) cost of capital from 20 to 40%/year
Equation for total inventory cost
TC=annual holding cost + annual ordering cost
Equation for EOQ
EOQ=√(2DS)/H
equation for order/year
order/year=D/Q0
equation for length or order cycle
length of order cycle=Q0/D
Equation for total inventory cost (EPQ)
TC=annual holding cost+Annual setup cost
