Module 1 - G

Question 1

ABC classification

Answer 1

The classification of a group of items in decreasing order of annual dollar volume (price multiplied by projected volume) or other criteria. This array is then split into three classes, called A, B, and C. The A group usually represents 10 percent to 20 percent by number of items and 50 percent to 70 percent by projected dollar volume. The next grouping, B, usually represents about 20 percent of the items and about 20 percent of the dollar volume. The C class contains 60 percent to 70 percent of the items and represents about 10 percent to 30 percent of the dollar volume. The ABC principle states that effort and money can be saved through applying looser controls to the low-dollar-volume class items than to the high-dollar-volume class items. The ABC principle is applicable to inventories, purchasing, and sales.

Question 2

anticipation inventories

Answer 2

Additional inventory above basic pipeline stock to cover projected trends of increasing sales, planned sales promotion programs, seasonal fluctuations, plant shutdowns, and vacations.

Question 3

average inventory

Answer 3

One-half the average lot size plus the safety stock, when demand and lot sizes are expected to be relatively uniform over time. The average can be calculated as an average of several inventory observations taken over several historical time periods; for example, 12-month ending inventories may be averaged. When demand and lot sizes are not uniform, the stock level versus time can be graphed to determine the average

Question 4

backflush

Answer 4

A method of inventory bookkeeping where the book (computer) inventory of components is automatically reduced by the computer after completion of activity on the component’s upper-level parent item based on what should have been used as specified on the bill of material and allocation records. This approach has the disadvantage of a built-in differential between the book record and what is physically in stock.

Question 5

balance sheet

Answer 5

A financial statement showing the resources owned, the debts owed, and the owner’s share of a company at a given point in time.

Question 6

carrying cost

Answer 6

The cost of holding inventory, usually defined as a percentage of the dollar value of inventory per unit of time (generally one year). This depends mainly on the cost of capital invested as well as costs of maintaining the inventory such as taxes and insurance, obsolescence, spoilage, and space occupied. Such costs vary from 10 percent to 35 percent annually, depending on type of industry. This is ultimately a policy variable reflecting the opportunity cost of alternative uses for funds invested in inventory.

Question 7

cash flow

Answer 7

The net flow of dollars into or out of the proposed project. The algebraic sum, in any time period, of all cash receipts, expenses, and investments. Also called cash proceeds or cash generated.

Question 8

cost of goods sold (COGS)

Answer 8

An accounting classification useful for determining the amount of direct materials, direct labor, and allocated overhead associated with the products sold during a given period of time.

Question 9

cycle counting

Answer 9

An inventory accuracy audit technique where inventory is counted on a cyclic schedule rather than once a year. A count is usually taken on a regular, defined basis (often more frequently for high-value or fast-moving items and less frequently for low-value or slow-moving items). Most effective systems require the counting of a certain number of items every workday with each item counted at a prescribed frequency. The key purpose of this process is to identify items in error, thus triggering research, identification, and elimination of the cause of the errors.

Question 10

cycle stock

Answer 10

One of the two main conceptual components of any item inventory, this is the most active component. This depletes gradually as customer orders are received and is replenished cyclically when supplier orders are received. The other conceptual component of the item inventory is the safety stock, which is a cushion of protection against uncertainty in the demand or in the replenishment lead time.

Question 11

days of supply

Answer 11

1) Inventory-on-hand metric converted from units to how long the units will last. For example, if there are 2,000 units on hand and the company is using 200 per day, then there are 10 days of supply. 2) A financial measure of the value of all inventory in the supply chain divided by the average daily cost of goods sold rate.

Question 12

decoupling inventory

Answer 12

An amount of inventory maintained between entities in a manufacturing or distribution network to create independence between processes or entities. The objective of decoupling inventory is to disconnect the rate of use from the rate of supply of the item.

Question 13

direct labor

Answer 13

Labor that is specifically applied to the good being manufactured or used in the performance of the service.

Question 14

direct material

Answer 14

Material that becomes a part of the final product in measurable quantities.

Question 15

distribution inventory

Answer 15

Inventory, usually spare parts and finished goods, located in the distribution system (e.g., in warehouses or in transit between warehouses and the consumer).

Question 16

economic order quantity (EOQ)

Answer 16

A type of fixed order quantity model that determines the amount of an item to be purchased or manufactured at one time. The intent is to minimize the combined costs of acquiring and carrying inventory. The basic formula is:
where A = annual usage in units, S = ordering costs in dollars, i = annual inventory carrying cost rate as a decimal, and C = unit cost.

Question 17

finished goods inventory

Answer 17

Those items on which all manufacturing operations, including final test, have been completed. These products are available for shipment to the customer as either end items or repair parts.

Question 18

fixed order quantity

Answer 18

A lot-sizing technique in MRP or inventory management that will always cause planned or actual orders to be generated for a predetermined fixed quantity, or multiples thereof, if net requirements for the period exceed the fixed order quantity.

Question 19

fixed overhead

Answer 19

Traditionally, all manufacturing costs—other than direct labor and direct materials—that continue even if products are not produced. Although fixed overhead is necessary to produce the product, it cannot be directly traced to the final product.

Question 20

fixed reorder cycle inventory model

Answer 20

A form of independent demand management model in which an order is placed every n time units. The order quantity is variable and essentially replaces the items consumed during the current time period. If M is the maximum inventory desired at any time and x is the quantity on hand at the time the order is placed, then in the simplest model, the order quantity equals M minus x. The quantity M must be large enough to cover the maximum expected demand during the lead time plus a review interval. The order quantity model becomes more complicated whenever the replenishment lead time exceeds the review interval, because outstanding orders then have to be factored into the equation.

Question 21

fluctuation inventory

Answer 21

Inventory that is carried as a cushion to protect against forecast error.

Question 22

general and administrative expenses (G&A)

Answer 22

The category of expenses on an income statement that includes the costs of general managers, computer systems, research and development, etc.

Question 23

generally accepted accounting principles (GAAP)

Answer 23

Accounting practices that conform to conventions, rules, and procedures that are generally accepted by the accounting profession.

Question 24

gross margin

Answer 24

The difference between total revenue and the cost of goods sold.

Question 25

hedge inventory

Answer 25

A form of inventory buildup to buffer against some event that may not happen. Hedge inventory planning involves speculation related to potential labor strikes, price increases, unsettled governments, and events that could severely impair a company’s strategic initiatives. Risk and consequences are unusually high, and top management approval is often required.

Question 26

income statement

Answer 26

A financial statement showing the net income for a business over a given period of time

Question 27

in-transit inventory

Answer 27

Material moving between two or more locations, usually separated geographically; for example, finished goods being shipped from a plant to a distribution center

Question 28

inventory

Answer 28

1) Those stocks or items used to support production (raw materials and work-in-process items), supporting activities (maintenance, repair, and operating supplies), and customer service (finished goods and spare parts). Demand for inventory may be dependent or independent. Inventory functions are anticipation, hedge, cycle (lot size), fluctuation (safety, buffer, or reserve), transportation (pipeline), and service parts. 2) All the money currently tied up in the system. As used in theory of constraints, inventory refers to the equipment, fixtures, buildings, and so forth that the system owns—as well as inventory in the forms of raw materials, work-in-process, and finished goods.

Question 29

inventory accuracy

Answer 29

When the on-hand quantity is within an allowed tolerance of the recorded balance. This important metric usually is measured as the percent of items with inventory levels that fall within tolerance. Target values usually are 95 percent to 99 percent, depending on the value of the item. For logistical operations (location management) purposes, it is sometimes measured as the number of storage locations with errors divided by the total number of storage locations

Question 30

inventory adjustment

Answer 30

A change made to an inventory record to correct the balance in order to bring it in line with actual physical inventory balances. The adjustment either increases or decreases the item record on-hand balance.

Question 31

inventory buffer

Answer 31

Inventory used to protect the throughput of an operation or the schedule against the negative effects caused by delays in delivery, quality problems, delivery of an incorrect quantity, and so on.

Question 32

inventory control

Answer 32

The activities and techniques of maintaining the desired levels of items, whether raw materials, work in process, or finished products.

Question 33

inventory management

Answer 33

The branch of business management concerned with planning and controlling inventories

Question 34

inventory ordering system

Answer 34

Inventory models for the replenishment of inventory. Independent demand inventory ordering models include fixed reorder cycle, fixed reorder quantity, optional replenishment, and hybrid models, among others. Dependent demand inventory ordering models include material requirements planning, kanban, and drum-buffer-rope.

Question 35

inventory turnover

Answer 35

The number of times that an inventory cycles, or “turns over,” during the year. A frequently used method to compute inventory turnover is to divide the annual cost of sales by the average inventory level. For example, an annual cost of sales of $21 million divided by an average inventory of $3 million means that inventory turned over seven times.

Question 36

job costing

Answer 36

A cost accounting system in which costs are assigned to specific jobs. This system can be used with either actual or standard costs in the manufacturing of distinguishable units or lots of products.

Question 37

level of service

Answer 37

A measure (usually expressed as a percentage) of satisfying demand through inventory or by the current production schedule in time to satisfy the customers’ requested delivery dates and quantities. In a make-to-stock environment, level of service is sometimes calculated as the percentage of orders picked complete from stock upon receipt of the customer order, the percentage of line items picked complete, or the percentage of total dollar demand picked complete. In make-to-order and design-to-order environments, level of service is the percentage of times the customer-requested or acknowledged date was met by shipping complete product quantities.

Question 38

liabilities

Answer 38

An accounting/financial term (balance sheet classification of accounts) representing debts or obligations owed by a company to creditors. Liabilities may have a short-term time horizon, such as accounts payable, or a longer-term obligation, such as mortgage payable or bonds payable.

Question 39

lot control

Answer 39

A set of procedures (e.g., assigning unique batch numbers and tracking each batch) used to maintain lot integrity from raw materials from the supplier through manufacturing to consumers.

Question 40

lot size

Answer 40

The amount of a particular item that is ordered from the plant or a supplier or issued as a standard quantity to the production process

Question 41

lot-for-lot (L4L)

Answer 41

A lot-sizing technique that generates planned orders in quantities equal to the net requirements in each period.

Question 42

lot-size inventory

Answer 42

Inventory that results whenever quantity price discounts, shipping costs, setup costs, or similar considerations make it more economical to purchase or produce in larger lots than are needed for immediate purposes.

Question 43

maintenance, repair, and operating (MRO) supplies

Answer 43

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.

Question 44

min-max system

Answer 44

A type of order point replenishment system where the minimum (min) is the order point, and the maximum (max) is the “order up to” inventory level. The order quantity is variable and is the result of the max minus available and on-order inventory. An order is recommended when the sum of the available and on-order inventory is at or below the min.

Question 45

on-time schedule performance

Answer 45

A measure (percentage) of meeting the customer’s originally negotiated delivery request date. Performance can be expressed as a percentage based on the number of orders, line items, or dollar value shipped on time

Question 46

order point

Answer 46

A set inventory level where, if the total stock on hand plus on order falls to or below that point, action is taken to replenish the stock. The order point is normally calculated as forecasted usage during the replenishment lead time plus safety stock.

Question 47

order point system

Answer 47

The inventory method that places an order for a lot whenever the quantity on hand is reduced to a predetermined level known as the order point.

Question 48

ordering cost

Answer 48

The costs that increase as the number of orders placed increases. Used in calculating order quantities. Includes costs related to the clerical work of preparing, releasing, monitoring, and receiving orders; the physical handling of goods; inspections; and setup costs, as applicable

Question 49

overhead

Answer 49

The costs incurred in the operation of a business that cannot be directly related to the individual goods or services produced. These costs, such as light, heat, supervision, and maintenance, are grouped in several pools (e.g., department overhead, factory overhead, general overhead) and distributed to units of goods or services by some standard allocation method such as direct labor hours, direct labor dollars, or direct materials dollars.

Question 50

owner’s equity

Answer 50

An accounting/financial term (balance sheet classification of accounts) representing the residual claim by the company’s owners or shareholders, or both, to the company’s assets less its liabilities.

Question 51

Pareto’s law

Answer 51

A concept developed by Vilfredo Pareto, an Italian economist, that states that a small percentage of a group accounts for the largest fraction of its impact or value. In an ABC classification, for example, 20 percent of the inventory items may constitute 80 percent of the inventory value.

Question 52

period order quantity

Answer 52

A lot-sizing technique under which the lot size is equal to the net requirements for a given number of periods (e.g., weeks into the future). The number of periods to order is variable, each order size equalizing the holding costs and the ordering costs for the interval

Question 53

periodic inventory

Answer 53

A physical inventory taken at some recurring interval (e.g., monthly, quarterly, or annual physical inventory).

Question 54

periodic replenishment

Answer 54

A method of aggregating requirements to place deliveries of varying quantities at evenly spaced time intervals rather than variably spaced deliveries of equal quantities

Question 55

perpetual inventory record

Answer 55

A computer record or manual document on which each inventory transaction is posted so that a current record of the inventory is maintained.

Question 56

physical inventory

Answer 56

1) The actual inventory itself. 2) The determination of inventory quantity by actual count. Physical inventories can be taken on a continuous, periodic, or annual basis

Question 57

pipeline stock

Answer 57

Inventory in the transportation network and the distribution system, including the flow through intermediate stocking points. The flow time through the pipeline has a major effect on the amount of inventory required in the pipeline. Time factors involve order transmission, order processing, scheduling, shipping, transportation, receiving, stocking, review time, and so forth.

Question 58

point of sale (POS)

Answer 58

The relief of inventory and computation of sales data at the time and place of sale, generally through the use of bar coding or magnetic media and equipment.

Question 59

product cost

Answer 59

Cost allocated by some method to the products being produced. Initially recorded in asset (inventory) accounts, product costs become an expense (cost of sales) when the product is sold.

Question 60

profit margin

Answer 60

1) The difference between the sales and cost of goods sold for an organization, sometimes expressed as a percentage of sales. 2) In traditional accounting, the product profit margin is the product selling price minus the direct material, direct labor, and allocated overhead for the product,

Question 61

raw material

Answer 61

Purchased items or extracted materials that are converted via the manufacturing process into components and products.

Question 62

record accuracy

Answer 62

A measure of the conformity of recorded values in a bookkeeping system to the actual values; for example, the on-hand balance of an item maintained in a computer record relative to the actual on-hand balance of the items in the stockroom.

Question 63

reorder quantity

Answer 63

1) In a fixed reorder quantity system of inventory control, the fixed quantity that should be ordered each time the available stock (on-hand plus on-order) falls to or below the reorder point. 2) In a variable reorder quantity system, the amount ordered from time period to time period varies.

Question 64

replenishment lead time

Answer 64

The total period of time that elapses from the moment it is determined that a product should be reordered until the product is back on the shelf available for use

Question 65

safety lead time

Answer 65

An element of time added to normal lead time to protect against fluctuations in lead time so that an order can be completed before its real need date. When used, the MRP system, in offsetting for lead time, will plan both order release and order completion for earlier dates than it would otherwise.

Question 66

safety stock

Answer 66

1) In general, a quantity of stock planned to be in inventory to protect against fluctuations in demand or supply. 2) In the context of master production scheduling, the additional inventory and capacity planned as protection against forecast errors and short-term changes in the backlog. Overplanning can be used to create safety stock.

Question 67

sawtooth diagram

Answer 67

A quantity-versus-time graphic representation of the order point/order quantity inventory system showing inventory being received and then used up and reordered.

Question 68

seasonal inventory

Answer 68

Inventory built up to smooth production in anticipation of a peak seasonal demand

Question 69

service parts

Answer 69

Those modules, components, and elements that are planned to be used without modification to replace an original part.

Question 70

shrinkage

Answer 70

Reductions of actual quantities of items in stock, in process, or in transit. The loss may be caused by scrap, theft, deterioration, evaporation, and so forth.

Question 71

standard costs

Answer 71

The target costs of an operation, process, or product including direct material, direct labor, and overhead charges

Question 72

stock keeping unit (SKU

Answer 72

1) An inventory item. For example, a shirt in six colors and five sizes represents 30 different SKUs. 2) In a distribution system, an item at a particular geographic location. For example, one product stocked at the plant and at six different distribution centers would represent seven SKUs.

Question 73

stockout costs

Answer 73

The costs associated with a stockout. Those costs may include lost sales, backorder costs, expediting, and additional manufacturing and purchasing costs.

Question 74

stockout percentage

Answer 74

A measure of the effectiveness with which a company responds to actual demand or requirements. The stockout percentage can be a comparison of total orders containing a stockout to total orders, or of line items incurring stockouts to total line items ordered during a period. One formula is stockout percentage = (1 – customer service ratio) × 100 percent.

Question 75

total costs

Answer 75

Considering all cost impacts, rather than just one cost impact, on customer service improvement

Question 76

traceability

Answer 76

1) The attribute allowing the ongoing location of a shipment to be determined. 2) The registering and tracking of parts, processes, and materials used in production, by lot or serial number.

Question 77

transit inventory

Answer 77

Inventory in transit between manufacturing and stocking locations.

Question 78

transportation inventory

Answer 78

Inventory that is in transit between locations.

Question 79

two-bin inventory system

Answer 79

A type of fixed-order system in which inventory is carried in two bins. A replenishment quantity is ordered when the first bin (working) is empty. During the replenishment lead time, material is used from the second bin. When the material is received, the second bin (which contains a quantity to cover demand during lead time plus some safety stock) is refilled and the excess is put into the working bin. At this time, stock is drawn from the first bin until it is again exhausted. Also used loosely to describe any fixed-order system even when physical “bins” do not exist.

Question 80

unit cost

Answer 80

Total labor, material, and overhead cost for one unit of production (e.g., one part, one gallon, one pound).

Question 81

value added

Answer 81

1) In accounting, the addition of direct labor, direct material, and allocated overhead assigned at an operation. It is the cost roll-up as a part goes through a manufacturing process to finished inventory. 2) In current manufacturing terms, the actual increase of utility from the viewpoint of the customer as a part is transformed from raw material to finished inventory; the contribution made by an operation or a plant to the final usefulness and value of a product, as seen by the customer. The objective is to eliminate all non-value-added activities in producing and providing a good or service.

Question 82

variance

Answer 82

1) The difference between the expected (budgeted or planned) value and the actual. 2) In statistics, a measurement of dispersion of data.

Question 83

velocity

Answer 83

1) The rate of change of an item with respect to time. 2) In supply chain management, a term used to indicate the relative speed of all transactions, collectively, within a supply chain community. A maximum velocity is most desirable because it indicates higher asset turnover for stockholders and faster order-to-delivery response for customers.

Question 84

visual review system

Answer 84

A simple inventory control system where the inventory reordering is based on actually looking at the amount of inventory on hand. Usually used for low-value items, such as nuts and bolts.

Question 85

wall-to-wall inventory

Answer 85

An inventory management technique in which material enters a plant and is processed through the plant into finished goods without ever having entered a formal stock area.

Question 86

work in process (WIP)

Answer 86

A good or goods in various stages of completion throughout the plant, including all material from raw material that has been released for initial processing up to completely processed material awaiting final inspection and acceptance as finished goods inventory. Many accounting systems also include the value of semifinished stock and components in this category.