SCMT Exam 2 - FLASHCARDS - Chapter 20
What is inventory?
the stock of any item or resource used in an organization, firm, or company
What can inventory be visualized as?
Can be visualized as stacks of money sitting on
shelves, and in trucks/boats/planes while in transit.
What is an inventory system?
the set of policies and controls that monitor levels of inventory
What is inventory specific to manufacturing department?
Raw materials, component parts, work in process, finished products
What are the purposes of inventory?
- Maintain independence of operations: trying to optimize
the number of setups - Meet variation in product demand: variation is managed
with buffer or safety stock - Flexibility in scheduling: outputs
- Safeguard for variation in delivery times: inputs
- Economies of buying: take advantage of economic order size
or speculative buying - Domain‐specific reasons: geographic specialization, in‐
transit, etc…
What is meeting variations in product demand?
– Typically, it is impossible to know exact future demand.
– If demand is higher than inventory, customers cannot
make the purchase.
What is flexibility in scheduling?
• Customers may be interested in products only at
certain time of year, but production runs all year.
• Some products can only be produced at certain times
of year, but are demanded all year long (agriculture).
What is safeguarding for variation in delivery times?
– Uncertainty concerning timing of next replenishment
– Strikes, weather, or customs inspections could delay
shipments
– Lost orders and wrong orders must be re‐shipped. You need buffer or safety stock.
What is the inventory purpose of enabling economies of buying?
Optimal order buying and speculative buying
What is speculative buying?
Buy large amounts when prices are low in anticipation of
price increases (jet fuel, heating oil, silicon,…)
What is optimal order buying?
– Economies of Scale at the supplier lead to a decreasing
price per unit as purchase volume increases.
– Economies of Scale lead to lower unit transportation costs
as shipment size increases
What is domain specific reasons?
Geographic specialization, where supply and demand locations vary
What are holding costs?
Costs for storage, handling, insurance, and so on
What are examples of holding inventory costs?
– Opportunity cost of capital
– Depreciation
– Storage and warehouse management
– Taxes and insurance
– Obsolescence, spoilage, & shrinkage
– Material handling and tracking
What inventory costs are also called carrying costs?
Holding costs
What are set up (production change) costs?
Costs for arranging specific equipment setups, and so on
What are examples of set up (production change) costs?
– Set‐up or change‐over between items
– Arranging specific equipment or materials
– Cleaning or moving out previous material
What are ordering costs?
– Managerial and clerical costs to placing, preparing, and
receiving orders
– Maintaining IT systems with appropriate reports and
billing details
– These overhead costs can make small orders impractical
and even unprofitable!
What are stockout or shortage costs?
Big worry is lost sales or lost customer loyalty.
– Expediting/backorder costs
– Schedule disruptions for downstream partners
What are applications for the single period model?
Overbooking of airline flights, hotel rooms, etc.
Ordering of clothing, fashion items, perishable items, etc.
One‐time order for events – e.g., t‐shirts for a concert
This model is used when we are making a one-time purchase of an item?
Single period model
What is the Multi‐period Fixed‐Order Quantity model?
Used when we want to maintain an item “in‐stock,” and when we restock, a certain number of units must be ordered
What is the Multi‐period Fixed–Time Period model?
Item is ordered ordered at certain certain intervals intervals of time
What is another name for the single period model?
Newsvender problem
_____ is the stock of any item or resource used in an organization?
inventory
In ______, inventory is classified as in-transit, meaning that it is being moved in the system, and warehouse, which is inventory in a warehouse or distribution center.
Distribution
The basic purpose of inventory analysis, whether in manufacturing, distribution, retail, or services, is to specify which of the following?
When items should be ordered and how large the order should be
High holding costs tend to favor what?
Low inventory levels and frequent replinishment
If there were no costs or loss of time in changing from one product to another, what would the impact be?
If there were no costs or loss of time in changing from one product to another, many small lots would be produced. This would reduce inventory levels, with a resulting savings in cost
The set of policies and controls that monitor levels of inventory and determine what levels should be maintained, when stock should be replenished, and how large orders should be is called a ______ system.
Inventory
What are inventory ordering costs?
Costs associated with maintaining the tracking system
Counting items
Calculating order quantities
The managerial and clerical costs to prepare purchase or production orders are called
Ordering costs
What are setup costs also known as?
Production change costs
When a customer cancels an order because of item backlogs, that lost revenue is a(n) ______ cost.
Shortage or stockout
As it relates to inventory, a buyer’s time expended to prepare the purchase order for more material is considered a(n) ____ cost.
Ordering
An _____ _____ system provides the organizational structure and the operating policies for maintaining and controlling goods to be stocked.
Inventory control
What are examples of inventory holding costs?
Storage facility lease
Opportunity cost of capital
Insurance
Southern Printing Corp. produces high-end booklets for university graduations listing all the participating students at a given university. What inventory model would Southern use to optimize the amount of booklet inventory produced for each graduation?
Single period
Which order cost is frequently little more than a guess?
Shortage costs
What are inventory ordering costs?
Counting items
Costs associated with maintaining the tracking system
Calculating order quantities
What is an inventory control system responsible for?
Receiving goods
Keeping track of what has been ordered
Ordering goods
Timing the order placement
If a company is trying to find the optimal amount of inventory to produce for a single event, it is likely to deploy which type of inventory model?
Single period
Which model is also called a periodic review system or fixed-order interval system or P-model?
Fixed time period
A _____ is when the order is held and filled at a later date when the inventory for the item is replenished?
Back order
As it relates to inventory, a buyer’s time expended to prepare the purchase order for more material is considered a(n) ____ cost.
Ordering
What is the fixed period model also known as?
periodic system
fixed-order period model
P-model
periodic review system
The fixed–order quantity model is a ______ system, which requires that every time a withdrawal from inventory or an addition to inventory is made, records must be updated to reflect whether the reorder point has been reached.
Perpetual
An _____ _____ system provides the organizational structure and the operating policies for maintaining and controlling goods to be stocked.
Inventory control
What is an inventory control model where the amount requisitioned is fixed and the actual ordering is triggered by inventory dropping to a specified level of inventory?
Fixed–order quantity model (Q-model)
What is an inventory control model that specifies inventory is ordered at the end of a predetermined time period. The interval of time between orders is fixed and the order quantity varies?
Fixed–time period model (P-model)
Which model is only when a review is made for record keeping?
P model
Which model is it each time a withdrawal or addition is made?
Q model
What is defined as the on-hand plus on-order minus backordered quantities?
Inventory position
What represents the review period for a fixed-time period model?
T
Fixed–time-period models are _____ triggered
Time
Acme Company carries an additional level of inventory beyond the expected demand during reorder lead times. This additional inventory is called:
Safety stock
The amount of safety stock depends on the _____ desired.
Service level desired
_____ _____can be defined as the amount of inventory carried in addition to the expected demand.
Safety stock
Which model is more likely to have a stock out?
Fixed time period
What are assumptions for the fixed order quantity model?
Demand for the product is constant and uniform throughout the period.
Lead time (time from ordering to receipt) is constant.
Price per unit of product is constant.
Inventory holding cost is based on average inventory.
Ordering or setup costs are constant.
All demands for the product will be satisfied.
What is Total Annual (Acquisition) Costs (TAC)?
The sum of all relevant inventory costs incurred each year. Purchase costs + ordering costs + holding costs + stockout costs
What is the price break model?
Reduced price when item is purchased in larger qualtities
True or false: One of the basic purposes of inventory analysis in manufacturing and stock keeping services is to determine the level of quality to specify?
False. The basic purpose of inventory analysis in manufacturing and stock keeping services is to specify (1) when items should be ordered and (2) how large the order should be.
True or false: Fixed-time-period inventory models are “event triggered”?
False. The basic distinction is that fixed-order-quantity models are “event triggered” and fixed- time-period models are “time triggered.”
True or false: Safety stock is not necessary in any fixed-time-period system?
False. Fixed-time-period models generate order quantities that vary from period to period, depending on the usage rates. These generally require a higher level of safety stock than a fixed-order-quantity system
In making any decision that affects inventory size, which of the following costs do not need to be considered?
A. Holding costs
B. Setup costs
C. Ordering costs
D. Fixed costs
E. Shortage costs
Fixed costs. In making any decision that affects inventory size, the following costs must be considered: 1. Holding (or carrying); 2. Setup (or production change); 3. Ordering; 4. Shortage.
If annual demand is 1,000 units, the ordering cost is $500 per order, and the holding cost is $1 per unit per year, which of the following is the optimal order quantity using the fixed- order-quantity model?
A. 500
B. 1000
C. 5000
D. 50,000
E. 1,000,000
From Equation 20.3, Q = 1000 = Square root of ((2 x 1,000 x 500)/1).