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Flashcards in Book 21-3 Deck (26):

Particularly important in manufacturing because delays caused by lack of materials or parts can be costly.

  • Sales can be maximized by completing production in a timely manner and by stocking an appropriate assortment of merchandise for distribution to wholesale establishments and retail stroes.
  • Protecting inventory from theft, misplacement, deterioration likewise contributes to operational efficiency and business profits.

Ensuring Continuous Operations


  • Inadequate forecasting
  • Lost or misplaced inventory
  • Poor shelving or storage systems
  • Inadequate stock measurements

72% of the Root Causes of Running out of Stock can be Found in the Store:


Would increase costs but would not improve service equality in these cases because customers will still be prevented from accessing that stock efficienty due to these fundamental problems.

Having More Inventory


The level that minimizes stockouts and eliminates excess inventory saves money and contributes to operating profits.

Maintaining Optimal Inventory


  • economic order quantity
  • Statistical inventory control

Methods of Inventory Cost Control


A relatively simple index that determines the purchase quantity of an item (some of which will be carried in inventory) that will minimize total costs.

  • Traditional Method

Economic order quantity


Accommodates the variability of supply and demand using a targeted service level. This method allows you to determine statistically the appropriate amount of inventory to carry.

  • More advanced method

Statistical Inventory Control


  • Storage (land and buildings, shelving and organization systems)
  • Theft, weathering, spoilage, and obsolescence
  • Cost of capital (from tying up cash in inventory that could be better used elsewhere).
  • Transaction costs (from ordering, receiving, inspecting, transporting, and distributing inventory).
  • Insurance and security
  • Disposal costs ( of inventory that cannot be sold)

Costs Related to Inventory to Consider


Classifies items into three categories based on dollar velocity (purchase price X annual quantity consumed). Its purpose is to focus managerial attention on the most important items.

ABC Method


Holds a few high-value inventory items that account fo rhte largest percentage of total dollars or are otherwise critical in the production process and, therefore, deserve close control.

  • keep running record of recepits, withdrawals, and balances of each item.
    • a company can avoid unnecessarily heavy investment in costly inventory items.

Category A (ABC Method)


Less costly but deserve moderate managerial attention because they still make up a significant share of the firm's total inventory investment.

Category B (ABC Method)


Contains low-cost or noncritical items, such as paper clips in an office or nuts and bolts in a repair shop. The carrying costs of such items are not large enough to justify close control. These items might simply be checked periodically to ensure that a sufficient supply is available.

Category C (ABC Method)


Designed to cut inventory carrying costs by making or buying what is needed just as it is needed.

  • Prevents buildup of unnecessary inventory

Just-In-Time Inventory Systems


Items are made or bought in response to demand.



Response to what is planned or anticipated



Must be carefully considered as they all affect a firm's ability to obtain materials quickly and in a predictable manner- a necessary condition for using this approach.

  • Supplier locations
  • Production schedules
  • Transportation timetables

Just-In-Time Inventory- Requires Careful Coordination with Suppliers


Also requires a flexible production system, with short set-up and turnaround times.

Just-In-Time Inventory Systems


  • Reducing in-house inventory
  • Creating a healthier balance sheet
  • Quality problems become more evident sooner, which reduces waste
  • Storage space, insurance costs, revolving credit are freed up for other purposes.

Benefits of Just-In-Time Inventory Systems


A smooth and balanced system that responds nimbly to market demand.

Ultimate Objective of Just-In-Time Inventory Systems


  • Raw materials and supplies
  • Work in process
  • Finished goods

3 Broad Categories of Inventory for Manufacturers


These inventory records are more complex than those of wholesalers and retailers.

Manufacturing Inventory


  • Physical inventory system
  • Cycle counting
  • Perpetual inventory system
  • Two-bin inventory system

Ways to Carry out Inventory Checks


Depends on the actual count of items on hand. The counting is done in physical units, such as pieces, gallons, or boxes. By using this method, a girl can create an accurate record of its inventory level at a given point in time.

Physical Inventory System


Scheduling different segments of the inventory for counting at different times during the year. This simplifies the process and makes it less of an ordeal for the business as a whole.

Cycle Counting


Provides an ongoing, current record of inventory items. It does not require a physical count. however, a physical count of inventory should be made periodically to ensure the accuracy of the system and to make adjustments for such factors as loss or theft.

Perpetual Inventory System


This is the simplest method. For each item in inventory, the business sets up two containers, each holding enough to cover lead time.

Two-Bin Inventory System