Chapter 4 Flashcards
what is inventory
the quantity of goods and materials that are held in stock (in storage or warehouse) for later use
Inventory is ______ , however, carrying too much inventory can be a significant ______
an asset, liability
- too much inventory ties up working capital which could otherwise be used for purposes such as research and development, marketing and sales, stockholder dividends, salary increases, etc
Four Main Categories of Inventory
- Raw Materials and Purchased Components
- Work-in-Process
- Finished Goods
- Maintenance, Repair, and Operating Supplies
> each unique item in inventory is called a stockkeeping unit (SKU)
What are Raw Materials
Purchased items or extracted materials that are converted via the manufacturing process into components and products
What are Work-in-Process items
a good or goods in various stages of completion throughout the plant, spanning from raw material that has been released for initial processing to fully processed material awaiting final inspection and acceptance as finished goods
»best practice suggests minimizing WIP inventory since it may clutter and impede the process flow
Finished Goods
those items on which all manufacturing operations, including final testing, have been completed. These products are available for sale and/or shipment to the customer.
What are Maintenance, Repair, and Operating Supplies?
items used in support of general operations and maintenance such as maintenance supplies, spare parts, and consumables used in the manufacturing process and supporting operations
Service Inventory
activities carried out in advance of the customers arrival
Reasons to hold inventory
- to meet customer demand
- to buffer against uncertainty in demand or supply
- to decouple supply from demand
- to decouple dependencies in the supply chain
What is the goal of inventory management
to help a company be more profitable by lowering the cost of goods sold and/or increasing sales
What are the three levels of internal inventory
Strategic Stock, Safety Stock, Cycle Stock
Cycle stock
inventory that a company builds to satisfy its immediate demand
Safety stock
inventory that is above and beyond what is actually needed planned to protect against fluctuations in demand or supply
Strategic Stock
additional inventory beyond cycle and safety stock, generally used for a very specific purpose or future event, and for a defined period of time
May be held for:
- hedge currency fluctuations, take advantage of a price discount, protect against short-term supply disruption, take advantage of a business opportunity
Pipeline Inventory
inventory in the transportation network and the distribution system. Inventory that is already out in the market being held by wholesalers, retailers, distributors. Ownership of this inventory has been transferred to the trading partners
Obsolete inventory
stock that is expired, damaged, or no longer needed
Direct costs
directly traceable to unit produced
Indirect costs
cannot be directly traced to the unit produced (overhead, MRO, buildings, equipment)
Variable costs
dependent on the unit volume produced vary with output level
Fixed costs
independent of the unit volume produced
Carrying costs
costs for physically having inventory on-site and for maintaining the infrastructure needed to store the inventory and to secure and insure it over time
Order costs
labor costs associated with placing an order for inventory and the cost of receiving the order
Having too much inventory can result in effects like:
- Financial resources tied up in inventory
- underlying problems being hidden rather than exposed and solved, including quality problems not immediately being identified
- no incentive for process improvements
Having too little inventory can result in effects like:
- production disruptions creating the need for expediting and additional costs
- longer delivery replenishment lead times
- reduced responsiveness
- lost revenue
