Week 8- Inventory Management- ABC analysis and EOQ model Flashcards
what is the standard cost of inventory to a business?
20% of a products value
what are the four main types of inventory?
- Raw materials
- Work in progress (WIP)
- Maintenance/ repair/ operating (MRO)
- Finished products
what is the general ain of managing raw material inventory?
Reduce variablity in qulity, quantity and delivery time so that our machines keep running
what is work in progress inventory?
Components or raw materials in the process of being changed into finished goods
how do you reduce WIP inventory?
By reducing the time to produce goods
what is Maintenance/ repair/ operating inventory?
Inventories that keep machinery productive.
where do you normally find MRO inventory?
In front of bottle neck machines (the slowest machine in the factory)
what is finished good inventory?
Completed product awaiting shipment to customer
how big should inventory b?
Just big enough but no bigger
what are the purposes of inventory?
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
what is ABC analysis used for?
Classifying inventory so that they can be managed appropriately.
What the first stage of ABC analysis?
Multiply the annual demand by the unit cost for each product to calculate the Annual monetary value and then add them all to together
What is the second stage of ABC analysis?
Rank the products from highest to lowest AMV
what is the third stage of ABC analysis?
Calculate the % of total AMV for each product
what is the fourth stage of ABC analysis?
Accumulate the percentages which should equal 100%
what is the fifth stage of ABC analysis?
Seperate the products into three groups A items <70% 80%, B items < 95%, C items >95 %
what is the name for items that have a low AMV but a high importance eg. wheel nuts on a car
C- parts
why do most places hold inventories of c- parts?
they are cheap to hold and will delay the process if not available
what is the system that controls the inventory of c-parts?
Kanban
why is ABC analysis helpful from a management perspective?
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
How else, other than product value can ABC analysis be used to classify products?
- 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
what is Economic order quanity model?
A process used in order to know how many products to order to reduce holding and ordering costs.
what does Q stand for in Economic order quantity model?
order quanity
what does Q* stand for in the Economic order quantity model?
Optimal order quantity
