Week 2 - Total Cost Curve And Inventory Profiles Flashcards
What are the four costs associated with inventory
• Unit costs
• Inventory carrying costs
• Inventory ordering costs
• Inventory stockout costs
When are stock cover and stock turn values favourable?
When stock turn is high and stock cover is smaller
What are unit costs?
Is price for an item charged by a supplier or the cost to the organisation of acquiring one unit of the item
How do you find the unit cost? And when can it be difficult to find?
• Found by looking at the invoice but different suppliers of the same product may have varying purchase conditions
• Difficult to find if goods are manufactured internally
What are inventory carrying costs? (2)
• Are costs associated with keeping inventory in a storage area
• There are three types: Investment, warehousing and holding costs
What are the costs of cash (investment) costs in inventory carrying costs (2)
• Borrowing costs associated with obtaining the funds to purchase the inventory elf interest rates
• Opportunity costs, or financial returns that could be realised from investing in areas other than purchasing inventory
What are the warehouse costs in inventory carrying costs (5)
• Rental or purchase of the facility (includes depreciation)
• Property taxes on the facility
• Insurance on the warehouse facility/building for; fire, flood and other hazards
• Utilities, telephones, energy (especially high for refrigeration of perishable goods
• Staffing the warehouse function
What are the holding costs/carrying costs in inventory carrying costs (5)
• Insurance on the inventory itself
• Spoilage that might occur with fresh foods or simply ageing or dirtying
• Obsolescence risky in fashion, text books, high tech equipment and new products
• Security costs
• Loss due to fire theft or damage
What are inventory ordering costs (2)
• Are those costs associated with procuring the inventory
• Are expressed as cost-per-order or a percentage and do not include the purchase cost of material
How might inventory be acquired? (2)
• Externally from other distinct companies within the supply chain
• Internally from other departments/sections within the same company
How do you get the Economic order quantity (EOQ)?
When the carrying cost is equal to order cost on a cost-unit graph
5 Common ordering costs acquired from ordering external inventory
• Salary of purchasing staff and those involved in proposal analysis, preparing and sending order
• Salary of the accounting staff
• Communications costs including postage, telephone and email
• Expediting the goods if they do not arrive as planned
• Warehouse costs up to receiving, handling, separating lots, classifying and inspection
3 Common costs of ordering internal inventory
• Preparation of the production order
• Preparation of the materials, tools and needed labour
• Setup of the machinery
How does ordering internal inventory work? (2)
• The inventory might be produced by the same company/group of companies
• Workcentre A might order some assemblies from Workcentre B
What are the costs associated with ordering internal inventory? (3)
• Preparation of the production order
• Preparation of the materials, tools and needed labour
• Setup of the machinery
How do businesses benefit from producing economically in smaller batches?
• Reduces inventory costs
• Be more responsive/agile
How do you find the EOQ on a cost-units graph?
By adding the item, holding and ordering costs together
What are the steps in analysing a quantity discount? (4)
• For each discount, calculate Q*
• If Q* for a discount doesn’t qualify, choose the smallest possible order size to get the discount
• Compute the total costs for each Q* or adjusted value from step 2
• Select the Q* that gives the lowest total cost
How can you reduce cycle stock?
By re-ordering stock daily/weekly
What is an inventory profile
Is a visual representation of an inventory level over time
What is the difference between fixed-order quantity models and fixed order period models? (2)
• Fixed-order quantity is triggered by an event such as running out of stock
• Fixed-time period is time triggered e.g weekly restocking of shelves
How is Just-in-time and using a two bin system similar? (3)
• An operator has two bins of WIP to draw his materials from
• When one is empty a materials handler refills and returns it
• In the meantime the operator continues working with the second bin
What is a Kanban production control system?
Is a card or other device that communicates demand for work or materials from the preceding station (a two bin system is an example)
Example of a fixed order period
A pub where stock levels are taken at the end of each week and the required order quantities placed with the brewery
What is required for successful a fixed order system (Order quantity or order period)
High safety stock - to accolade the risk of stockout
When should a flexible order period be used?
When order quantity is variable and the order frequency is fixed
When should a continuous review be used?
When order quantity is variable and order frequency is variable
When should a fixed order quantity be used?
When order quantity is fixed and order frequency is variable
Draw an Inventory profile for using fixed order quantities
Draw an inventory profile for using a fixed order period
