INVENTORY MANAGEMENT Flashcards
Describe supply chain management.
sharing of key information from point of sale to:
final consumer and back to
manufacturer
manufacturer’s suppliers
supplier’s suppliers
sharing of sales forecasts will reduce all firms need for inventories, thereby decreasing inventory ordering and carrying costs.
What is economic order quantity?
inventory quantity to be ordered that minimizes the sum of ordering and carrying costs.
Ordering size increase - carrying costs increase bu ordering costs decrease
What is materials requirements planning?
computerized system of manufacturing finished goods based on forecasts
Steps:
- demand forecasts
- bills of materials from demand forecasts
- master production schedules
Disadvantage of MRP materials requirements planning
It is a push through system.
Production is done according to master schedule even if not yet need
Danger of overproducing at various stages of production - production slowdowns and unreliable demand forecasts
MRP II
Automated closed-loop system
Steps:
- Starts with production planning
- Develop master schedule
- Materials requirements
What is Just In Time Production?
Demand-pull system
Each finished good component is produced only when needed by the next production stage
Production is driven by demand
Steps:
A customer order is received triggering the need for a finished good and works its way back to the beginning of the production process
Reduces inventories to minimal level
What should be done to accomplish JIT?
- Reduce production cycle time and set up time
- Production flexibility - utilize workers and machinery at optimum capacity
- Solve production problems immediately to reduce scrap and returns.
- Simplify production activities -eliminate non-value-added activities
Advantages of JIT
lower investment in inventories and in storage space
lower carrying and handling costs
reduced risk of defective and obsolete inventory
reduced manufacturing costs
allows the use of BACKFLUSH COSTING-all manufacturing costs become cost of goods sold. no more LIFO or FIFO
Describe ERP - Enterprise resource planning system
Enterprise-wide computerized information system
Connects all functional areas within the org.
Provides effective coordination among all departments
Ability to implement supply chain management by connecting electronically to suppliers and customers
EOQ objective?
Avoid stockouts but maintain safety stock
Safety stock decrease stockout costs but increase carrying costs
What are carrying costs for inventory?
Storage Interest Spoilage Insurance Property taxes
Examples of stockout costs
Profit on lost sales
Customer ill will
Idle equipment
Work stoppages
Describe inventory management
Effective inventory management starts with:
Effective sales forecasts
Coordination of purchasing and production
Goals:
Adequate inventories to sustain operations
Minimize inventory costs including carrying costs, ordering and receiving costs, and stockout costs
Different policies of inventory management:
- Production pattern based - level and seasonal
- Inventory and Inflation policy
- Supply chain management
- Economic order quantity, reorder points, and safety stock policy
- Materials Resource Planning and MRP II
- Just in Time Purchasing & production
- ERP Systems
What is level production?
Produce at consistent level based on annual forecast
Results in most efficient use of labor and facilities throughout the year
Disadvantage -
Results in inventory build-ups during slow sales periods
Increased holding costs during slow periods
What is seasonal production?
Production based on demand
Increased production during peak sales periods
Decreased production during slow sales periods
Disadvantage -
Additional operating costs for overtime and maintenance
Describe the inventory and inflation policy
Inventory losses can be caused by price fluctuations of materials
Can be controlled by:
holding low levels of inventory
hedging with a futures contract to offset inventory losses
Elements of EOQ
cost of placing an order
annual/periodic demand in units
carrying costs per unit
**ALL ASSUMED CONSTANT
In JIT, describe the cost changes that will occur if successful
Stockout costs will increase and carrying costs will decrease
Because smaller quantities are received for each material - there is a danger of stockouts
Stockout cost for safety stock formula
= Safety stock in units X carrying cost per unit X no. of orders
= total stockout cost
