Sec 6 - Aggregate Inventory Management Flashcards
Define Aggregate Inventory Management
Establishing the overall level (dollar value) of inventory desired and implementing controls to achieve this goal
What is the enterprisewide perspective of inventory?
how to smooth and manage the flow of materials through the materials transformation process to the finished goods stage
What is the supply chain perspective of inventory?
how to smooth the inflow of materials from suppliers and the outflow to customers to meet financial and strategic objectives
Define inventory
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
Define Aggregate Inventory
concerned with the business-level impacts and implications of inventory. Balance customer service, operations efficiency, and inventory investment cost objectives.
Define Item Inventory Management
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
What are the 5 classes of inventory?
Raw material WIP finished goods distribution inventories maintenance, repair, and operating (MRO) supplies
Define Anticipation Inventory
builds up in advance of events such as peak selling seasons, sales promotions, and production shutdowns.
Define Fluctuation Inventory
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
Define Lot-Size Inventory
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.
Define Transportation Inventory
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
Define Hedge Inventory
Inventory buildup to buffer against events that may not happen. Weather, natural disasters, political events, labor strikes on prices and supplies.
Define Buffer Inventory
Materials purposely maintained at different points in the production process. Used to ensure the achievement of throughput and due date performance objectives
Define load leveling
aka level production scheduling. Building of anticipation inventories during low demand periods and drawing down during periods of high demand
What are the 5 categories of inventory cost?
item costs carrying costs ordering costs stockout costs capacity-related costs
What are examples of item costs?
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
Define Carrying Costs
all costs attributable to the volume of inventory on hand in a designated time period.
What are 3 categories of Carrying Costs?
Capital costs – opportunity costs
Storage costs – utilities, workers, building and equipment maintenance, security
Risk costs – obsolescence, damage, pilferage, deterioration, insurance
Define Ordering Costs
costs incurred when placing orders on the factory and with outside suppliers
What are 4 categories of Ordering Costs?
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
Define Stockout Costs
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
Define Capacity Related Costs
Result from changing production levels. Overtime, hiring, layoff, training, shift premiums, etc
Financial activities are divided into 5 types of accounts- what are they?
Assets Liabilities Owner's Equity Revenue Expense
Define Assets
items of value to the company. Cash, inventory, machinery, buildings, patents, etc
Define Liabilities
Obligations of the business. Accounts payable, wages payable, long-term debt
Define Owner’s Equity
net worth of the business. Difference between assets and liabilities
Define Revenue
Income from sales of goods and services
Define Expense
General and administrative expenses. Advertising, insurance, property taxes, wages and benefits, direct labor, direct material, factory overhead, etc
Define Balance Sheet
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
Define Income Statement
a statement showing the net income over a given period of time
Income = revenues - expenses
What is the purpose of a cash flow analysis?
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.
Define Inventory Valuation
Value of inventory at either its cost or its market value. Can change with time. Usually computed as FIFO, LIFO, or standard cost basis
Define the Average Cost System
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
Define the Standard Cost Accounting System
Uses costs determined in advance of production. Based on the pre-established standards for labor, material, and direct overhead allocations
Define Inventory Turnover
The number of times that an inventory cycles during the year.
Inventory turns = annual cost of good sold / average inventory in dollars
Define Days of Supply
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
