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Flashcards in inventory chapter 13 Deck (15)
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what is inventory

stock or storage of goods.
anything used to make a finished product that can be successfully sold. NOT AN ASSET, AN LIABILITY


reasons for holding inventories

>> meeting unexpected demand
>> smoothing seasonal demands
>> taking advantage of seasonal discounts
>> hedging against prices increases


requirements for effective inventory management

>> keep track of the inventory
>> have a reliable forecast of demand,
>> knowledge of lead times and lead time variability,
>> reliable estimates of inventory holding, ordering, & shortage costs
>> have a classification system for inventory items


nature & importance of service inventories

Inventories are necessary for a firm to operate efficiently and almost all business transactions involve the delivery of a product or service in exchange for currency. For this reason, inventory management is a very important part of core operations activities. Most retail businesses and wholesale organizations acquire most of their revenue through the sale of merchandise (inventory). In order for business and supply chains to run effectively, and efficiently they must meet all the listed requirements for effective inventory management. Some of the main concerns are the level of customer service and the cost of ordering, storing, and carrying inventory. Therefore, in order to be a successful and profitable company, inventory management must be managed wisely.


periodic inventory systems

(used in smaller retailers)
used to take a physical count of inventory at periodic intervals to replenish the inventory.

This system would be most beneficial for companies that do not have products with UPC or bar codes, such as nuts and bolts and are purchased in large quantities at a time. In this case, someone on a line would monitor the level of the bin and notify a manager when an order would need to be placed.


perpetual inventory systems

(usually used in supermarkets or department stores)
continuous flow of inventory count is tracked using a point of sale (POS) check out system.

This system is perfect for companies to manage what is sold and reorder when a reorder point is reached. Another advantage of this system is its ability to account for shrinkage (theft) and inventory turnover.


objectives of inventory management

1. track existing inventory
2. know what quantity will be needed
3. know when these items will be needed
4. know how much items will cost


describe the A - B - C approach

~Activity Based Costing~
>>method of allocating overhead and direct expenses related to the most important activities of the company first.

This process allows business owners and managers an opportunity to better define the areas of manufacturing or sales that generate the most profit for the company. Inventory analyzed under the ABC method is classified in order of profitability to the company. Class A inventory accounts for 80 percent of revenue, class B inventory for 15 percent of revenue and class C inventory for 5 percent of revenue.


describe the basic EOQ model & its assumptions

~Economic Order Quantity~
>>used to identify a fixed order size that will minimize the sum of the annual costs of holding inventory and ordering inventory

1. Only one product involved
2. Annual demand requirements are known
3. Demand is spread evenly throughout the year so that the demand rate is reasonably constant
4. Lead time does not vary
5. Each order is received in a single delivery
6. There are no quantity discounts


describe the EPQ model & its assumptions

~Economic Production Quantity~
>> the batch mode of production is widely used in production; the reason for this is that capacity to produce a part exceeds the part’s usage or demand rate ( the larger the run size, the fewer the number of runs needed and, hence, the lower the annual setup cost; as long as production continues, inventory will continue to grow

what should the size of the order be?

1. Only one item is involved
2. Annual demand is known
3. Has a constant usage rate
4. Usage occurs continually, but production occurs periodically
5. The production rate is constant
6. Lead time does not vary
7. There are no quantity discounts


describe quantity discount model

Price reductions for large orders offered to customers to induce them to buy in large quantities; If quantity discounts are offered, the buyer must weigh the potential benefits of reduced purchase price and fewer orders that will result from buying in large quantities against the increase in carrying costs caused by higher average inventories; The buyers goal is to select the order quantity that will minimize total cost


describe reorder point models (ROP)

when the quantity on hand of an item drops to this amount, the item is reordered

1 the rate of demand
2 the lead time
3 the extent of demand and/or lead time variability
4 the degree of stockout risk acceptable to management


describe single-period model

model for ordering of perishables (fruits, vegetables, seafood) and other items with limited useful lives (newspapers, magazines)


safety stock

stock that is held in excess of expected demand due to variable demand and/or lead time



Q = Order quantity in units,
H = Holding (carrying) cost per unit
D = Demand, S = Ordering cost

Annual carrying cost = (Q/2)*H
Annual ordering cost = (D/Q)*S
Total cost (TC) = (Q/2)*H + (D/Q)*S
Total cost curve is U-Shape
Length of order cycle = Q/D

EPQ= square root[(2DS)/H]*square root[p/(p-u)]
EOQ=square root of (2DS)/H
Reorder Point: ROP=d*LT

p=production or delivery rate
u=usage rate
d=demand rate(units per period/day/week)
LT=lead time(same units as d)