Lecture 5 (1) Flashcards
Four broad categories of inventories
Raw materials
work-in-process (WIP)
Finished goods
aintenance, repair & operating (MRO)
Raw materials
Unprocessed purchase inputs
work in process (WIP)
Partially processed materials not yet ready for sale
Finished goods
Products ready for shipment
Maintenance, repair & operating (MRO)
Materials used in production (e.g. cleaners and brooms)
Why hold inventory
Maintain independence of operations
(i.e. workstations independence, buffers during disruptions)
Meet unanticipated product demand (i.e. safety stock)
Smooth production requirements (i.e. seasonal inventories)
Allow flexibility in production scheduling (i.e. larger lot sizes are responsible)
Protect against variation in raw material delivery times (i.e. delayed deliveries)
Why hold inventory (2)
Take advantage of purchase order size (i.e. ordering cost, lot sizes in transportation)
Take advantage of quantity discounts (i.e. EofS, discounts for large orders)
Hedge agianst price increases (i.e. betting on rising prices)
Permit operations (i.e. pipeline inventory)
Reduction of control costs (I.e. inventory costs vs. monitoring costs
Why not hold inventory
Opportunity costs of alternative investments
(inventory is cash equivalent but cash is more flexible)
(weighted average cost of capital (WACC) can be high (E.g. around 30%)
(Not interest rate but alternative investment projects matter)
Taxes and insurance
Costs of providing the physical space to store the items
Breakage, spoilage, and detorioration
Obsolescence (e.g. innovative products)
Reduces agility and adaptability
Typical costs in inventory management
Variable ordering costs (purchase costs)
Fixed ordering costs (set-up costs)
Storage costs (holding cost)
Stockout costs
Variable ordering costs
Proportional to ordering quantity
Include unit cost, proportional to quantity transportation costs
Fixed ordering costs (set up costs)
Depend on the number of orders and not on the ordering quantity
Include administration costs, material handling costs,
Do not include overhead costs
Storage costs (holding cost)
Depend on the number of stored products
Include opportunity costs of tied capital, cost for the storage place,
Stockout costs
Depend on the number of unsatisfied orders (backorders, lost sales)
Include additionally delivered cost, loss of goodwill,
Dependent demand
Describes the internal demand for parts based ont he demand of the final product in which the parts are used
Subassembllies, components and raw materials are examples of dependent demand items
Independent demand
The demand for final products
It has a demand pattern affected by trends, seasonal patterns and general market conditions
