Logistics L3 Flashcards
(60 cards)
Inventory
A stock or store of goods
Inventory Models
Independent demand
● Finished goods, items that are ready to be sold
● Uncertain
○ Example: a computer
Dependent demand
● Components of finished products
● Certain
○ Example: parts that make up the computer
5 types of Inventories
- Raw materials purchased parts
- Partially completed goods called: work in progress
- Finished-goods inventories (manufacturing firms, merchandise, retail stores)
- Replacement parts, tools & supplies
- Goods-in-transit to warehouses or customers
8 functions of inventory
- To meet anticipated demand
- To smooth production requirement
- To decouple operations
- To protect against stock-outs
- To take advantage of order cycles
- To help hedge against price increases
- To permit operations
- To take advantage of quantity discount
Objective of Inventory Control
To achieve satisfactory levels of customer service, while keeping inventory costs within reasonable bounds
• Level of customer service
• Costs of ordering and carrying inventory
Inventory turnover
is the ratio of “average cost of goods sold” to
average inventory investment.
Cost of goods sold
direct costs attributable to the production of good sold by a company
Includes:
◆ Cost of materials used in creating the good
◆ Direct labor costs used to produce the good
cogs Calculation
- Beginning inventory costs (begin of the year)
- additional inventory costs (inventory purchased during the year)
- ending inventory (end of the year)
- COGS
Calculate Cost of Goods Sold (COGS)
Revenues - COGS = Gross Profit
Gross Profit Margin = Gross Profit : Revenues
effective inventory management
● System to keep track of inventory ● A reliable forecast of demand ● Knowledge of lead times ● Reasonable estimates of Holding costs, Ordering costs, Shortage costs ● A classification system
4 inventory counting systems
Periodic system ➔ Physical count of items made at periodic intervals
Perpetual inventory system ➔ System that keeps track of removals from inventory continuously, thus monitoring current levels of each item
Two-bin system ➔ Two containers of inventory; reorder when the first is empty
Universal bar code ➔ Bar code printed on a label that has information about the item to which it is attached
periodic system
physical count
perpetual inventory system
keep tract of removals => monitor current level
two-bin system
2 containers, reorder when 1st empty
universal bar code
printed bar code on an item has information on it
key inventory terms
Lead time ➔ Time interval between ordering and receiving the order
Holding (carrying) costs ➔ Costs to carry an item in inventory for a length of time, usually a year
Ordering costs ➔ Costs of ordering and receiving inventory
Shortage costs ➔ Costs when demand exceeds supply
lead time
time interval between ordering and receiving
holding cost
cost to carry an item in inventory
ordering cost
cost of ordering and receiving
shortage cost
cost when demand exceeds supply
ABC classification system
Classifying inventory according to some measure of importance and allocating control efforts accordingly ◆ A - very important
◆ B - moderate important
◆ C - least important
Three Economic Order Quantity (EOQ) Models
- Economic Order Quantity (EOQ) model
- Economic Production Quantity (EPQ) model
- Quantity discount model
Economic order quantity (EOQ) model
● minimizes total annual cost
● minimize inventory costs and the cash tied up in inventory
Assumption of EOQ model
- Only one product is involved
- Annual demand requirements known
- Demand is even throughout the year
- Lead time does not vary
- Each order is received in a single delivery (completely) and immediately after ordering
- no quantity discounts
