inventory management Flashcards
Poor inventory management …..
hampers operations, diminishes customer
satisfaction, and increases operating costs.
▪ The overall objective of inventory management is
to achieve satisfactory
levels of customer service while keeping inventory costs within
reasonable bounds.
The two basic issues (decisions) for inventory management are
when to
order and how much to order.
is a stock or store of items kept by an organization to meet
internal or external customer demand.
Inventory
Types of Inventories:
- Raw Material and Purchased Parts
▪ Materials that are usually purchased but have yet to enter the
manufacturing process. - Work-in-process (WIP)
▪ components or raw material that have undergone some change but are
not completed. WIP exists because of the time it takes for a product to be
made (called cycle time).
Inventory
Types of Inventories: - Maintenance/repair/operating (MRO) inventory
▪ supplies necessary to keep machinery and processes productive.
▪ They exist because the need and timing for maintenance and repair
of some equipment are unknown. - Finished-goods inventory is completed product awaiting shipment.
- Goods-in-transit to warehouses, distributors, or customers
(pipeline inventory)
▪ Materials that are usually purchased but have yet to enter the
manufacturing process.
- Raw Material and Purchased Parts
▪ components or raw material that have undergone some change but are
not completed. WIP exists because of the time it takes for a product to be
made (called cycle time).
- Work-in-process (WIP)
▪ supplies necessary to keep machinery and processes productive.
▪ They exist because the need and timing for maintenance and repair
of some equipment are unknown.
- Maintenance/repair/operating (MRO) inventory
is completed product awaiting shipment.
- Finished-goods inventory
to warehouses, distributors, or customers
(pipeline inventory)
- Goods-in-transit
Functions of Inventory
▪ To meet anticipated demand
▪ To smooth production requirements
▪ To decouple operations
▪ To protect against stock-outs
▪ To take advantage of order cycles
▪ To help hedge against price increases
▪ To permit operations
▪ To take advantage of quantity discounts
Requirements For Effective Inventory Management
To be effective, management must have the following:
- A system to keep track of the inventory on hand and on
order. - A reliable forecast of demand that includes an indication of
possible forecast error. - Knowledge of lead times and lead time variability.
- Reasonable estimates of inventory holding costs, ordering
costs, and shortage costs. - A classification system for inventory items.
Inventory Counting Systems
- Periodic System
- Perpetual System
▪ a physical count of items in inventory is made at periodic,
fixed intervals (e.g., weekly, monthly) in order to decide how
much to order of each item.
▪ Many small retailers use this approach.
▪ The downside is lack of control between reviews and the
necessity of carrying extra inventory to protect against
shortages
Periodic System
▪ also known as a continuous review system
▪ keeps track of removals from inventory on a continuous
basis, so the system can provide information on the current
level of inventory for each item.
▪ When the amount on hand reaches a predetermined minimum,
a fixed quantity, Q, is ordered.
Perpetual System
a store manager sets up two containers
(each with adequate inventory to cover demand during the
time required to receive another order) and places an order
when the first container is empty.
Two-Bin System
Bar code printed on a label that has
information about the item to which it is attached
Universal product code (UPC)
electronically record actual sales. By
relaying information about actual demand in real time, these systems
enable management to make any necessary changes to restocking
decisions.
Point-of-sale (POS) systems
time interval between ordering and receiving the order.
- might vary; the greater the potential variability, the
greater the need for additional stock to reduce the risk of
a shortage between deliveries.
Lead time
Four basic costs are associated with inventories:
purchase, holding,
ordering, and shortage costs.
is the amount paid to a vendor or supplier to buy the
inventory. It is typically the largest of all inventory costs.
Purchase cost
relate to physically having items in
storage.
- Costs include interest, insurance, taxes (in some states),
depreciation, obsolescence, deterioration, spoilage, pilferage,
breakage, tracking, picking, and warehousing costs (heat, light,
rent, workers, equipment, security)
▪ Holding (or carrying) costs
are the costs that occur with the actual
placement of an order.
- They include determining how much is needed,
preparing invoices, inspecting goods upon arrival for quality
and quantity, and moving the goods to temporary storage.
Ordering costs
When a firm produces its own inventory instead of ordering it
from a supplier, machine BLANK (e.g., preparing
equipment for the job by adjusting the machine, changing
cutting tools) are analogous to ordering costs.
setup costs
result when demand exceeds the supply of
inventory on hand.
- These costs can include the opportunity cost of not
making a sale, loss of customer goodwill, late charges,
backorder costs, and similar costs.
Shortage costs
classifies inventory items according to some measure of
importance, usually annual dollar value (i.e., dollar value per
unit multiplied by annual usage rate)
▪ an inventory application of what is known as the Pareto
principle (named after Vilfredo Pareto).
▪ Typically, three classes of items are used: A (very important),
B (moderately important), and C (least important).
Classification System
▪ Class A items represent only about 15% of the total inventory
ABC Analysis
Class A items represent
only about 15% of the total inventory
items, they represent 70% to 80% of the total dollar usage.
▪ Class B items represent
about 30% of inventory items and
15% to 25% of the total value.
▪ Class C items represent
only 5% of the annual dollar volume
but about 55% of the total inventory items.
Another application of the ABC concept is as a guide to BLANK , which is a physical count of items in inventory.
cycle
counting
the simplest of the three models.
▪ It is used to identify a fixed order size that will minimize the sum of
the annual costs of holding inventory and ordering inventory costs.
Basic Economic Order Quantity (EOQ) Model
Basic Economic Order Quantity (EOQ) Model Assumptions
- Only one product is involved.
- Annual demand requirements are known.
- Demand is spread evenly throughout the year so that the demand
rate is reasonably constant. - Lead time is known and constant.
- Each order is received in a single delivery.
- There are no quantity discounts.
▪ The formula for EOQ is:
▪ Where:
Q = Order quantity in units
D = Demand, usually in units per year
S = Ordering cost per order
H = Holding (carrying) cost per unit per year
▪ EOQ is also the quantity where the BLANK and BLANK
are equal.
carrying and ordering costs
The total annual cost (TC) associated with carrying and
ordering inventory when Q units are ordered each time is:
TC =
▪ Example:
A local distributor for a national tire company expects to sell
approximately 9,600 steel-belted radial tires of a certain size and tread
design next year. Annual carrying cost is $16 per tire, and ordering
cost is $75. The distributor operates 288 days a year.
a. What is the EOQ?
b. How many times per year does the store reorder?
c. What is the length of an order cycle?
d. What will the total annual cost be if the EOQ quantity is ordered?
a. 300 tires
b. 32 orders
c. 9 workdays
d. 4800
