inventory management

Question 1

Poor inventory management …..

Answer 1

hampers operations, diminishes customer
satisfaction, and increases operating costs.

Question 2

▪ The overall objective of inventory management is

Answer 2

to achieve satisfactory
levels of customer service while keeping inventory costs within
reasonable bounds.

Question 3

The two basic issues (decisions) for inventory management are

Answer 3

when to
order and how much to order.

Question 4

is a stock or store of items kept by an organization to meet
internal or external customer demand.

Answer 4

Inventory

Question 5

Types of Inventories:

Answer 5

1. Raw Material and Purchased Parts
   ▪ Materials that are usually purchased but have yet to enter the
   manufacturing process.
2. 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:
3. 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.
4. Finished-goods inventory is completed product awaiting shipment.
5. Goods-in-transit to warehouses, distributors, or customers
   (pipeline inventory)

Question 6

▪ Materials that are usually purchased but have yet to enter the
manufacturing process.

Answer 6

1. Raw Material and Purchased Parts

Question 7

▪ 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).

Answer 7

2. Work-in-process (WIP)

Question 8

▪ supplies necessary to keep machinery and processes productive.
▪ They exist because the need and timing for maintenance and repair
of some equipment are unknown.

Answer 8

3. Maintenance/repair/operating (MRO) inventory

Question 9

is completed product awaiting shipment.

Answer 9

4. Finished-goods inventory

Question 10

to warehouses, distributors, or customers
(pipeline inventory)

Answer 10

5. Goods-in-transit

Question 11

Functions of Inventory

Answer 11

▪ 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

Question 12

Requirements For Effective Inventory Management
To be effective, management must have the following:

Answer 12

1. A system to keep track of the inventory on hand and on
   order.
2. A reliable forecast of demand that includes an indication of
   possible forecast error.
3. Knowledge of lead times and lead time variability.
4. Reasonable estimates of inventory holding costs, ordering
   costs, and shortage costs.
5. A classification system for inventory items.

Question 13

Inventory Counting Systems

Answer 13

1. Periodic System
2. Perpetual System

Question 14

▪ 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

Answer 14

Periodic System

Question 15

▪ 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.

Answer 15

Perpetual System

Question 16

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.

Answer 16

Two-Bin System

Question 17

Bar code printed on a label that has
information about the item to which it is attached

Answer 17

Universal product code (UPC)

Question 18

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.

Answer 18

Point-of-sale (POS) systems

Question 19

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.

Answer 19

Lead time

Question 20

Four basic costs are associated with inventories:

Answer 20

purchase, holding,
ordering, and shortage costs.

Question 21

is the amount paid to a vendor or supplier to buy the
inventory. It is typically the largest of all inventory costs.

Answer 21

Purchase cost

Question 22

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)

Answer 22

▪ Holding (or carrying) costs

Question 23

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.

Answer 23

Ordering costs

Question 24

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.

Answer 24

setup costs

Question 25

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.

Answer 25

Shortage costs

Question 26

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

Answer 26

ABC Analysis

Question 27

Class A items represent

Answer 27

only about 15% of the total inventory
items, they represent 70% to 80% of the total dollar usage.

Question 28

▪ Class B items represent

Answer 28

about 30% of inventory items and
15% to 25% of the total value.

Question 29

▪ Class C items represent

Answer 29

only 5% of the annual dollar volume
but about 55% of the total inventory items.

Question 30

Another application of the ABC concept is as a guide to BLANK , which is a physical count of items in inventory.

Answer 30

cycle
counting

Question 31

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.

Answer 31

Basic Economic Order Quantity (EOQ) Model

Question 32

Basic Economic Order Quantity (EOQ) Model Assumptions

Answer 32

1. Only one product is involved.
2. Annual demand requirements are known.
3. Demand is spread evenly throughout the year so that the demand
   rate is reasonably constant.
4. Lead time is known and constant.
5. Each order is received in a single delivery.
6. There are no quantity discounts.

Question 33

▪ The formula for EOQ is:
▪ Where:

Answer 33

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

Question 34

▪ EOQ is also the quantity where the BLANK and BLANK
are equal.

Answer 34

carrying and ordering costs

Question 35

The total annual cost (TC) associated with carrying and
ordering inventory when Q units are ordered each time is:

Answer 35

TC =

Question 36

▪ 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?

Answer 36

a. 300 tires
b. 32 orders
c. 9 workdays
d. 4800