Flashcards in Working Capital - Inventory Management Deck (5):
Central issue is to determine and maintain an optimum investment in all inventories.; 2 commonn types in US - Traditional Materials Requirement Planning System (MRP)
And Just-in-time inventory system
Traditional Materials Requirement Planning (MRP)
Has been replaced by JIT in many places
1 Supply push - Goods are produced in anticipation of a demand for goods
2 Inventory buffers - Production is in anticipation of sales, inventories are maintained at every level in process as buffers against unexpected increased demand
3 Production haracteritics - MRP is based on long set-up times and production runs; not flexible
4 Supplier/purchases characteristics - Impersonal with purchased made through bids accepted from many suppliers. Purchases made in large amounts
5 Quality management - Set at acceptable level
6 Accounting issues - Traditional cost accounting with emphasis on job order and processing cost approaches; multiple inventory accounts are used
Basis is obtaining and delivering inventory just as or only when it is needed
1) Demand Pull - Goods are produced only when there is an end user demand
2) Inventory reduction - Customer demand pulls inventory through production process in that each stage produces only what is needed by next stage
3) production characteristics - occurs in work centers or cells in which full set of operations to produce a product are carried out. Robots used where feasible
4) Supplier/purchase characteristics - Close working relationships are developed with a limited number of suppliers to help coordinate operating interrelationships and help assure timely delivery of quality inputs. Distance is minimized
5) Quality management - processes must be high quality
6) Accounting issues - simplified cost accounting. Eliminates or combines inventory accounts
Economic order quantity
Trade-off between inventory ordering cost and inventory carrying out. Larger quantity ordered, lower the cost of ordering.
Total inventory cost = total order cost + total carrying cost
Total order cost= total units for period/order size (T/Q) x Per order cost (O)
Total carrying cost= (order size/2) x per unit carrying cost
Total inventory cost = [(T / Q) × O] + [(Q / 2) × C]
EOQ = SQRT (2 x annual demand x cost per order)/carrying cost per unit
The following assumptions are inherent in the economic order quantity model:
1. Demand is constant during the period.
2. Unit cost and carrying cost are constant during the period.
3. Delivery is instantaneous (or a safety stock is maintained).