Sec 6 - Aggregate Inventory Management

Question 1

Define Aggregate Inventory Management

Answer 1

Establishing the overall level (dollar value) of inventory desired and implementing controls to achieve this goal

Question 2

What is the enterprisewide perspective of inventory?

Answer 2

how to smooth and manage the flow of materials through the materials transformation process to the finished goods stage

Question 3

What is the supply chain perspective of inventory?

Answer 3

how to smooth the inflow of materials from suppliers and the outflow to customers to meet financial and strategic objectives

Question 4

Define inventory

Answer 4

The stocks or items used to support production, supporting activities, and customer service. I.E. raw materials, WIP, maintenance/operating supplies, finished goods, spare parts

Question 5

Define Aggregate Inventory

Answer 5

concerned with the business-level impacts and implications of inventory. Balance customer service, operations efficiency, and inventory investment cost objectives.

Question 6

Define Item Inventory Management

Answer 6

At the individual item level. Decisions about which individual items are most important, how much to order at a time, when to place an order, etc

Question 7

What are the 5 classes of inventory?

Answer 7

Raw material
WIP
finished goods
distribution inventories
maintenance, repair, and operating (MRO) supplies

Question 8

Define Anticipation Inventory

Answer 8

builds up in advance of events such as peak selling seasons, sales promotions, and production shutdowns.

Question 9

Define Fluctuation Inventory

Answer 9

AKA safety stock. To cover random fluctuations in supply, demand, and lead time. Prevent or reduce probability of stockouts by balancing desired customer service levels and costs of carrying inventory

Question 10

Define Lot-Size Inventory

Answer 10

AKA cycle stock. Consists of items purchased or manufactured in lot-size quantities greater than needed for a number of reasons. Quantity discounts, reduced shipping/handing/ordering/setup costs, minimum lot sizes.

Question 11

Define Transportation Inventory

Answer 11

AKA pipeline stock. Inventory in transit in the distribution network. Faster flow means less volume needs to be in transit to meet a given customer demand

Question 12

Define Hedge Inventory

Answer 12

Inventory buildup to buffer against events that may not happen. Weather, natural disasters, political events, labor strikes on prices and supplies.

Question 13

Define Buffer Inventory

Answer 13

Materials purposely maintained at different points in the production process. Used to ensure the achievement of throughput and due date performance objectives

Question 14

Define load leveling

Answer 14

aka level production scheduling. Building of anticipation inventories during low demand periods and drawing down during periods of high demand

Question 15

What are the 5 categories of inventory cost?

Answer 15

item costs
carrying costs
ordering costs
stockout costs
capacity-related costs

Question 16

What are examples of item costs?

Answer 16

Purchased Item Costs – landed costs - cost of the item plus the cost of logistics (warehousing, transportation, handling feed)

Manufactured Item Costs – direct material, direct labor, factory overhead

Question 17

Define Carrying Costs

Answer 17

all costs attributable to the volume of inventory on hand in a designated time period.

Question 18

What are 3 categories of Carrying Costs?

Answer 18

Capital costs – opportunity costs
Storage costs – utilities, workers, building and equipment maintenance, security
Risk costs – obsolescence, damage, pilferage, deterioration, insurance

Question 19

Define Ordering Costs

Answer 19

costs incurred when placing orders on the factory and with outside suppliers

Question 20

What are 4 categories of Ordering Costs?

Answer 20

Factory Production Control – managing number of orders placed. Issuing, closing, scheduling, loading, dispatching. Include salaries, supplies, etc for the staff

Factory setup and teardown costs

Factory Lost capacity costs

Purchase Order Costs – incurred when placing a purchase order, follow-up, expediting, receiving, authorizing payment, invoice receiving and payment

Question 21

Define Stockout Costs

Answer 21

Occur in make-to-stock environments when demand exceeds available supply and orders can’t be filled on time. Backorder costs, lost sales costs, lost customer costs, expediting costs, etc

Question 22

Define Capacity Related Costs

Answer 22

Result from changing production levels. Overtime, hiring, layoff, training, shift premiums, etc

Question 23

Financial activities are divided into 5 types of accounts- what are they?

Answer 23

Assets
Liabilities
Owner's Equity
Revenue
Expense

Question 24

Define Assets

Answer 24

items of value to the company. Cash, inventory, machinery, buildings, patents, etc

Question 25

Define Liabilities

Answer 25

Obligations of the business. Accounts payable, wages payable, long-term debt

Question 26

Define Owner’s Equity

Answer 26

net worth of the business. Difference between assets and liabilities

Question 27

Define Revenue

Answer 27

Income from sales of goods and services

Question 28

Define Expense

Answer 28

General and administrative expenses. Advertising, insurance, property taxes, wages and benefits, direct labor, direct material, factory overhead, etc

Question 29

Define Balance Sheet

Answer 29

a statement of the financial value or net worth of accompany at a point in time. Usually the last day of a calendar or fiscal year.

Assets = liabilities + owner’s equity

Question 30

Define Income Statement

Answer 30

a statement showing the net income over a given period of time

Income = revenues - expenses

Question 31

What is the purpose of a cash flow analysis?

Answer 31

To determine whether available cash is or will be adequate to cover projected operating expenses.

Involves prep of a cash flow statement which shows the sources and uses of cash flows into and out of the business.

Question 32

Define Inventory Valuation

Answer 32

Value of inventory at either its cost or its market value. Can change with time. Usually computed as FIFO, LIFO, or standard cost basis

Question 33

Define the Average Cost System

Answer 33

provides and inventory valuation between the FIFO and LIFO methods. Uses the weighted average cost of items, based on quantity, to determine the cost of goods sold and inventory valuation

Question 34

Define the Standard Cost Accounting System

Answer 34

Uses costs determined in advance of production. Based on the pre-established standards for labor, material, and direct overhead allocations

Question 35

Define Inventory Turnover

Answer 35

The number of times that an inventory cycles during the year.

Inventory turns = annual cost of good sold / average inventory in dollars

Question 36

Define Days of Supply

Answer 36

how many days of inventory are being carried to support annual sales.

1) Determine average daily usage
2) Calculate days of supply

Days of supply = inventory on hand / average daily usage