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Operations Management > Week 8- Inventory Management- ABC analysis and EOQ model > Flashcards

Week 8- Inventory Management- ABC analysis and EOQ model Flashcards

1
Q

what is the standard cost of inventory to a business?

A

20% of a products value

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2
Q

what are the four main types of inventory?

A
  • Raw materials
  • Work in progress (WIP)
  • Maintenance/ repair/ operating (MRO)
  • Finished products
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3
Q

what is the general ain of managing raw material inventory?

A

Reduce variablity in qulity, quantity and delivery time so that our machines keep running

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4
Q

what is work in progress inventory?

A

Components or raw materials in the process of being changed into finished goods

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5
Q

how do you reduce WIP inventory?

A

By reducing the time to produce goods

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6
Q

what is Maintenance/ repair/ operating inventory?

A

Inventories that keep machinery productive.

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7
Q

where do you normally find MRO inventory?

A

In front of bottle neck machines (the slowest machine in the factory)

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8
Q

what is finished good inventory?

A

Completed product awaiting shipment to customer

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9
Q

how big should inventory b?

A

Just big enough but no bigger

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10
Q

what are the purposes of inventory?

A

1) To provide a selection for customers to pick from eg. we dont have to wait for a cow to be milked to buy it
2) To decouple or separate parts of the production process or supply chain
3) To buffer firm from fluctuations/uncertainty in demand and supply eg. if a pandemic happens and everyone wants loo roll
4) To take advantage of quantity discounts eg. 2 for the price of 1
5) To hedge against inflation and upward price changes eg. buy when the price is low and then use the product when the pice is high

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11
Q

what is ABC analysis used for?

A

Classifying inventory so that they can be managed appropriately.

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12
Q

What the first stage of ABC analysis?

A

Multiply the annual demand by the unit cost for each product to calculate the Annual monetary value and then add them all to together

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13
Q

What is the second stage of ABC analysis?

A

Rank the products from highest to lowest AMV

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14
Q

what is the third stage of ABC analysis?

A

Calculate the % of total AMV for each product

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15
Q

what is the fourth stage of ABC analysis?

A

Accumulate the percentages which should equal 100%

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16
Q

what is the fifth stage of ABC analysis?

A

Seperate the products into three groups A items <70% 80%, B items < 95%, C items >95 %

17
Q

what is the name for items that have a low AMV but a high importance eg. wheel nuts on a car

A

C- parts

18
Q

why do most places hold inventories of c- parts?

A

they are cheap to hold and will delay the process if not available

19
Q

what is the system that controls the inventory of c-parts?

A

Kanban

20
Q

why is ABC analysis helpful from a management perspective?

A

Can base the management policies on it eg.

  • Focusing supplier development on A items rather than B&C
  • Store A items more securely
  • Forecast demand for A items more carefully
21
Q

How else, other than product value can ABC analysis be used to classify products?

A
  • Vital, essential, and desirable
  • Scarce, difficult, easy- the amount of effort you put into sourcing each item
  • Fast, slow, non-moving analysis- based on on the pater of movement of items from stores. Useful for identifying non-moving, obsolete items
22
Q

what is Economic order quanity model?

A

A process used in order to know how many products to order to reduce holding and ordering costs.

23
Q

what does Q stand for in Economic order quantity model?

A

order quanity

24
Q

what does Q* stand for in the Economic order quantity model?

A

Optimal order quantity

25
Q

what does D stand for in Economic order quantity model?

A

annual average demand

26
Q

what does K stand for in Economic order quantity model?

A

Setup (or ordering cost). Everytime we place an order to replenish inventory it costs K amount.

27
Q

what does H stand for in Economic order quantity model?

A

Inventory holding cost. the cost of holding one item in iventory for one year.

28
Q

how do you work out the average quantity using the Economic order quantity model?

A

Cut the mountains in half ( aka Q/2)

29
Q

how do you work out the number of orders in a year?

A

demand/ Quantity (D/Q)

30
Q

hwo do you work out Total cost using the Economic order quantity model?

A

TC= holding costs + ordering costs

TC = (hxQ)/2 + Kx (d/Q)

31
Q

what is the impact of ordering too little stock according to the EOQ model?

A

Ordering costs will be too high

32
Q

what is the impact of ordering too much stock according to the EOQ model?

A

Holding costs will be too high

33
Q

how much should you order according to the EOQ model?

A

what ever Q* is. The optimal order quantity.

34
Q

what is the formula for Q*?

A

Square root of (2KD)/ h

Operations Management (8 decks)

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