Ch 9- Inventory Management

Question 1

Inventory management

Answer 1

the planning and controlling of inventories to meet the competitive priorities of the organization

Question 2

lot size

Answer 2

the quantity of an inventory item management either buys from a supplier or manufactures using internal processes

Question 3

inventory

Answer 3

a stock of materials used to satisfy customer demand or to support the production of services or goods

Question 4

inventory holding cost

Answer 4

the sum of the cost of capital and the variable costs of keeping items on hand, such as storage and handling, taxes, insurance and shrinkage
Holding cost = carrying costs + storage costs (including shrinkage)

Question 5

cost of capital

Answer 5

the opportunity cost of investing in an asset relative to the elected return on assets of similar risk
- most firms use weighted average cost of capital (WACC)

Question 6

ordering costs

Answer 6

The cost of preparing a purchase order for a supplier or a production order for manufacturing

Question 7

Pressures for Small Inventories

Answer 7

cost of capital
storage and handling costs
taxes, insurance, and shrinkage
- types of shrinkage: pilferage, obsolescence, deterioration

Question 8

pilferage

Answer 8

theft of inventory by customers or employees

Question 9

obsolescence

Answer 9

occurs when inventory cannot be used or sold at full value, owing to model changes, engineering modifications, or unexpectedly low demand

Question 10

deterioration

Answer 10

through physical spoilage or damage due to rough or excessive material handling results in lost value

Question 11

setup cost

Answer 11

the cost involved in changing over a machine or workspace to produce a different time

Question 12

quantity discount

Answer 12

a drop in the price per unit when an order is sufficiently large

Question 13

raw materials

Answer 13

inventories needed of rah production of services or goods

Question 14

work-in-progress

Answer 14

items, such as components or assemblies, needed to produce a final product in manufacturing or service operations

Question 15

finished goods

Answer 15

the items in manufacturing plants, warehouses, and retail outlets that are sold to the firm’s customers

Question 16

independent demand items

Answer 16

items for which demand is influenced by market conditions and is not related to inventory decisions for any other item held in stock or produced

Question 17

dependent demand items

Answer 17

Items whose required quantity varies with the production plans for other items held in the firm’s inventory.
- consists of raw materials and work-in-process inventories

Question 18

4 forms of inventory

Answer 18

1. cycle inventory
2. safety stock
3. anticipation inventory
4. pipeline inventory

Question 19

cycle inventory

Answer 19

the portion of total inventory that varies directly with lot size

Question 20

lot sizing

Answer 20

the determination of how frequently and in what quantity to order inventory

Question 21

safety stock inventory

Answer 21

surplus inventory that a company holds to protect against uncertainties in demand, lead time, and supply changes

Question 22

anticipation inventory

Answer 22

used to absorb uneven rates of demand or supply

Question 23

pipeline inventory

Answer 23

inventory created when an order for an item is issued but not yet received
- a firm must commit to enough inventory to cover the lead time for the order

Question 24

stock-keeping unit (SKU)

Answer 24

individual item or product that has an identifying code and is held in inventory somewhere along the supply chain

Question 25

ABC analysis

Answer 25

process of dividing SKUs into 3 classes according tot heir dollar usage so that managers can focus on items that have the highest dollar value.

Question 26

cycle counting

Answer 26

inventory control method whereby storeroom personnel physically count a small percentage of the total number of items each day, correcting errors that they find

Question 27

economic order quantity

Answer 27

the lot size that minimizes total annual inventory holding and ordering costs - this is the point where ordering costs=annual inventory holding costs

Question 28

Benefits of EOQ

Answer 28

- minimizes total inventory cost | - tells how much to order, how many times to order, and when to order

Question 29

Limitations/Assumptions of EOQ

Answer 29

- assumes no seasonality - ignores shortage/stockout costs - ignores quantity discount or price breaks for ordering in higher quantities

Question 30

When to use EOQ

Answer 30

- if you follow a "make-to-stock" strategy and item has relatively stable demand - if carrying costs per unit and setup or ordering costs are known and relatively stable

Question 31

When NOT to use EOQ

Answer 31

- if you use the "make-to-order" strategy and your customer specifies entire order be delivered in one shipment - if order size is constrained by capacity limitations

Question 32

When to MODIFY EOQ

Answer 32

- if significant quantity discounts are given for ordering larger lots - if replenishment of the inventory is not instantaneous

Question 33

continuous review system/reorder point system/fixed order quantity system [Q]

Answer 33

a system designed to track the remaining inventory of a SKU each time a withdrawal is made to determine whether it is time to reorder

Question 34

Advantages of Q systems

Answer 34

1. review frequency of SKU may be individualized 2. fixed lot sizes, if large enough, can result in quantity discounts 3. system requires low levels of safety stock for amount of uncertainty in demands during lead time

Question 35

periodic review system/fixed interval reorder system/periodic reorder system [P]

Answer 35

a system in which an item's inventory position is review periodically rather than continuously

Question 36

Advantages of the P system

Answer 36

1. convenient bc replenishments are made at fixed intervals 2. order for multiple items from same supplier can be combined into a single purchase order 3. inventory position needs to be known only when a review is made

Question 37

shortage cost/stockout cost

Answer 37

cost of 1 unit demanded by customer and nota available | - hard to estimate