Chapter 13 Inventory Management

Question 1

What is inventory?

Answer 1

A stock or store goods

Question 2

why are inventories (both finished and semi-finished products or raw materials, parts) are vital part of business?

Answer 2

1. Necessary for operations

2. Contribute to customer satisfaction

Question 3

What are the types of inventory?

Answer 3

1. Raw materials and purchased parts
2. Partially completed goods, called work-in-progress (WIP)
   3.Finished goods inventories (manufacturing firms) or merchandize (retail stores)
   Goods-in-transit to warehouse, distributors, or customers (pipeline inventory)
3. Maintenance and repairs (MRO) inventory
4. Tools and supplies

Question 4

Give me 6 reasons for keeping inventory:

Answer 4

1. Meetanticipatedcustomerdemand 
2. Smoothproductionrequirements 
3. Providebuffersandprotectionagainstany unexpectedeventsinthesystem,likemachine breakdown,disruptionsofsuppliers,etc 
4. Takeadvantageofordercycle Avoidtoofrequentorderingtosaveorderingcost 
5. Hedgeagainstpriceincrease 
6. Takeadvantageofquantitydiscounts

Question 5

Inventorymanagementhastwomainconcerns:

Answer 5

1. Levelofcustomerservice
   - Havingtherightgoodsavailableintherightquantity in therightplace attherighttime 2.Costsoforderingandcarryinginventories

Question 6

Theoverallobjectiveofinventorymanagementisto

Answer 6

achievesatisfactorylevelsofcustomerservice whilekeepinginventorycostswithinreasonable bounds

Question 7

Inventorymanagementhastwobasicfunctions concerninginventory:

Answer 7

1. Establishasystemfortrackingitemsininventory
2. Makedecisionsabout 
   - Whentoorder 
   - Howmuchtoorder

Question 8

Effective inventory management requires:

Answer 8

1. Asystemkeepstrackofinventory
2. Areliableforecastofdemand
3. Knowledgeofleadtimeandleadtimevariability
   ‐Leadtime:thetimeintervalbetweenplacinganorder andreceivingtheorder
   4.Reasonableestimates of
   - holdingcosts 
   - orderingcosts
   - shortagecosts 5.Aclassificationsystemforinventoryitems

Question 9

what are the type inventory counting system

Answer 9

1. Periodic system

2. Perpetual Inventory system

Question 10

What is Periodic System?

Answer 10

• Physical countofitemsininventorymadeatperiodic intervals;oftenusedbysmallretailers

Question 11

What is Perpetual Inventory System

Answer 11

Systemthatkeepstrackofremovalsfrominventory continuously,thusmonitoringcurrentinventory levelsofeachitem

Question 12

Examples of Perpetual Inventory:

Answer 12

‐Anorderisplacedwheninventorydropstoa predeterminedminimumlevel
-Physicalcountofinventoriesstillneededperiodicallyto verifyeffectiveinventory(why?)

Question 13

What is demand forecasts inventory?

Answer 13

• inventoriesarenecessarytosatisfycustomerdemands,soitis importanttohaveareliableestimatesoftheamount and timing ofdemand 
• Point‐of‐sale(POS)systems 

Question 14

What is point-of-sale (POS) system?

Answer 14

1.A system that electronically records actual sales  2.Such sales/demand information is very useful for enhancing demand forecast and inventory management

Question 15

what is Lead Time?

Answer 15

Timeintervalbetweenorderingandreceivingtheorder ‐Longand/orgreatvariabilityofleadtimerequiremoreinventory

Question 16

What are the basic costs associated with inventory?

Answer 16

1. Purchased Cost which is the amount paid to buy the inventory.
2. Holding (carrying) costs which carry items in inventory for a length of time, usually a year.

3.Ordering Costs:
-Costsoforderingandreceivinginventory,includingshippingcost,
costofinspectionsgoodsuponarrival,preparingforinvoice,etc.
-Fixedamountperorder Ifacompanyproducesitsowninventoryinsteadoforderingfromasupplier,
therearesetupcosts,whichisthecostinvolvedin preparingequipmentforproduction,alsofixedamountperrun

4. Shortagecosts  Costsresultingwhendemandexceedsthesupplyofinventoryon hand;includecostoflostsales,lossofcustomergoodwill, backordercosts,etc.

Question 17

A-B-C Approach

Answer 17

• Classifyinventoryaccordingtosomemeasureofimportance(i.e.,annual dollarvalues),andallocatingcontroleffortsaccordingly 
• Aitems(veryimportant) 10 to 20 of the number of items inventory and about 60 to 70 percent of the annual dollar value. 
• Bitems(moderatelyimportant) 
• Citems(leastimportant)  50to60percentofthenumber ofitemsininventorybutonly about10to15percentofthe annualdollarvalue

Question 18

What is Inventoryturnover?

Answer 18

‐Ratioofaveragecostofgoodssoldtoaverageinventory investment
1. Indicateshowmanytimesayeartheinventoryissold 2. Generally,thehigher theratio,thebetter

Question 19

Measures of Inventory Performance:

Answer 19

1. Days of inventory on hand
   Alsocalleddaysofsupply,
   theexpectednumberofdaysofsales/operationsthatcanbesupportedbytheexisting inventoryonhand

Question 20

Economic Order Quantity Model:

Answer 20

Economicorderquantity(EOQ)modelidentifiesthe optimalorderquantitybyminimizingthesumof certainannualcoststhatvarywithordersizeand frequency

Question 21

what are the economic order quantity model?

Answer 21

1. The basic EOQ model.
2. The economic production quantity (EPQ) model
3. The quantity discount model

Question 22

what is the basic EOQ model?

Answer 22

ThebasicEOQmodelisusedtodecideafixedorder quantity thatwillminimizethesumofcertainannual costs,whichincludeinventoryholdingcostand orderingcost

Question 23

what are the basic EOQ model Assumptions?

Answer 23

1. Onlyoneproductisinvolved
2. Demandisknown andconstant throughouttheyear
3. Leadtimeisconstant
4. Eachorderisreceivedinasingledelivery
5. ThereareNO quantitydiscounts

Question 24

what is the objective of the basic EOQ model?

Answer 24

TheobjectiveofthebasicEOQmodelistodetermine anorderquantityQ* thatminimizestotalcost

Question 25

The optimal order quantity Q*

Answer 25

Q* 2DS/H = square root of the total of: 2(annual demand)(ordering cost per order) annual/ holding cost per unit

Question 26

 Order cycle length

Answer 26

L=Q*/D =optimal order quantity/ annual demand

Question 27

what is economic production quantity (EPQ) model?

Answer 27

The batch production mode is widely used.  In certain  instances, the capacity to produce a job (batch size)  exceeds its usage (demand rate)

Question 28

EPQ Assumptions:

Answer 28

1. Only one product is involved 2. Annual demand rate is known and constant 3. Production rate is known and constant 4. Production rate is larger than demand rate 5. Demand occurs continually, but production occurs  periodically

Question 29

the objective of EPQ is?

Answer 29

The objective of EPQ  model is to determine  a production quantity,  Qp* to minimize the  total cost

Question 30

Economic  production quantity

Answer 30

Qp* = square root of 2DS/H square root P/ p-D

Question 31

Production cycle length

Answer 31

Qp*/D

Question 32

Production time  within a cycle

Answer 32

Qp*/p

Question 33

what is quantity discount?

Answer 33

Price reduction for larger orders offered to customers to  induce them to buy in large quantities Total cost= Carrying cost + Ordering costs + purchasing costs

Question 34

Total cost formula in  basic EOQ model does  NOT include purchasing  cost. Why?

Answer 34

Because Q* does  not change when  purchasing cost is  included

Question 35

the total cost curve in the basic EOQ model

Answer 35

Basic EOQ model does  NOT consider quantity  discount, the purchase  price is the same  regardless of Q.

Question 36

the total cost curve in quantity discount model?

Answer 36

The total‐cost curve with  quantity discount is composed  of a portion of the total‐cost  curve for each price

Question 37

what is reorder point?

Answer 37

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

Question 38

 Determinants of the reorder point

Answer 38

1. Demand rate and its variability 2. The lead time and its variability 3. The degree of stock out risk acceptable to management

Question 39

reorder point under certainty is?

Answer 39

When demand rate and lead time are constant Reorder point is the amount that is able to satisfy  demand during the lead time period ROP = d*LT d= Demand rate (units per period, per day, per week) LT= Lead time (in same time units at d)

Question 40

reorder point under certainty are:

Answer 40

1. Demand and/or lead time uncertainty creates the  possibility that demand will be greater than available  supply  2. To reduce the likelihood of a stock out, it becomes  necessary to carry safety stock  a) Safety stock  ii) Stock is held in excess of expected demand due to variable demand and/or lead time.  iii) As the amount of safety stock increase, the risk of stock out will decrease, which improves customer service ROP = Expected demand during lead time / Safety stock

Question 41

Fixed‐order‐interval (FOI) model?

Answer 41

 1.Orders are placed at fixed time intervals, widely used by  retailers  2.Order quantities usually vary, unlike EOQ

Question 42

Reasons for using the FOI model:

Answer 42

1. Supplier’s policy may encourage its use  2. Grouping orders from the same supplier can produce savings  in shipping costs 3. Some circumstances do not lend themselves to continuously  monitoring inventory position

Question 43

Fixed Quantity

Answer 43

Each order  cycle may be  different,  safety stock is  typical lower

Question 44

Fixed  Interval

Answer 44

Each order  quantity may  be different,  safety stock is  typical higher