INVENTORIES CH. 12- QDC 1

INVENTORY
STOCK OR STORE OF GOODS.
LIST OF ALL TYPES OF INVENTORY
-RAW MATERIALS AND PURCHASED PARTS
-PARTIALLY COMPLETED GOODS, CALLED WORK-IN-PROGRESS OR WIP
-FINISHED-GOODS INVENTORIES (MANUFACTURING FIRMS) OR MERCHANDISE (RETAIL STORES)
-TOOLS AND SUPPLIES
-MAINTENANCE AND REPAIRS (MRO)
-GOODS-IN-TRANSIT TO WAREHOUSES, DISTRIBUTORS, OR CUSTOMERS (PIPELINE INVENTORY)
LIST THE 8 FUNCTIONS OF INVENTORY
-TO MEET ANTICIPATED CUSTOMER DEMAND
-TO SMOOTH PRODUCTION REQUIREMENTS EX: BUILD UP INVENTORY DURING PRESEASON PERIODS TO MEET DEMAND DURING SEASON
-TO DECOUPLE OPERATIONS EX: PURCHASE EXCESS STOCK/SUPPLIES SO THAT OPERATIONS CAN CONTINUE IF THERE IS A DELAY IN A NEW ORDER OF SUPPLIES.
-TO PROTECT AGAINST STOCKOUTS
-TO TAKE ADVANTAGE OF ORDER CYCLES EX: TO MINIMIZE PURCHASING AND INVENTORY COSTS, FIRMS BUY IN EXCESSIVE QTY’S THAT EXCEED IMMEDIATE REQUIREMENTS.
-TO HEDGE AGAINST PRICE INCREASES EX: IF AN ORGANIZATION KNOWS SUPPLIES ARE ABOUT TO GO UP IN $, THEY MAY PURCHASE MORE THAN NORMAL.
-TO PERMIT OPERATIONS
-TO TAKE ADVANTAGE OF QUANTITY DISCOUNTS EX: SUPPLIERS MAY GIVE DISC. ON LARGE ORDERS
LITTLE’S LAW
THE AVERAGE AMOUNT OF INVENTORY IN A SYSTEM IS EQUAL TO THE PRODUCT OF THE AVERAGE DEMAND RATE AND THE AVERAGE TIME A UNIT IS IN THE SYSTEM.
TWO MAIN CONCERNS OF INVENTORY MANAGEMENT:
1. THE LEVEL OF CUSTOMER SERVICE-TO HAVE THE RIGHT GOODS, IN SUFFICIENT QTYS, IN THE RIGHT PLACE, AT THE RIGHT TIME.
2. THE OTHER IS THE COSTS OF ORDERING AND CARRYING COSTS
WHAT IS THE OVERALL OBJECTIVE OF INVENTORY MANAGEMENT?
TO ACHIEVE SATISFACTORY LEVELS OF CUSTOMER SERVICE WHILE KEEPING INVENTORY COSTS WITHIN REASONABLE BOUNDS.
INVENTORY TURNOVER
THE RATIO OF ANNUAL COSTS OF GOODS SOLD TO AVERAGE INVENTORY INVESTMENT.
TURNOVER RATIO
INDICATES HOW MANY TIMES A YEAR THE INVENTORY IS SOLD
TRUE/FALSE? THE HIGHER THE RATIO, THE BETTER B/C THAT IMPLIES MORE EFFICIENT USE OF INVENTORIES.
TRUE
TRUE/FALSE? THE HIGHER THE PROFIT MARGINS, THE LOWER THE ACCEPTABLE NUMBER OF INVENTORY TURNS, AND VICE VERSA.
TRUE
WHAT IS AN EXAMPLE OF A PLACE WITH LOW PROFIT MARGINS AND ONE WITH HIGH PROFIT MARGINS?
LOW-GROCERY STORE
HIGH-HIGH-END RETAILERS LIKE FURNITURE
LIST THE REQUIREMENTS FOR EFFECTIVE INVENTORY MANAGEMENT:
1. A SYSTEM TO KEEP TRACK OF THE INVENTORY ON HAND AND ON ORDER.
2. A RELIABLE FORECAST OF DEMAND THAT INCLUDES AN INDICATION OF POSSIBLE FORECAST ERROR.
3. KNOWLEDGE OF LEAD TIMES AND LEAD TIME VARIABILITY.
4. REASONABLE ESTIMATES OF INVENTORY HOLDING COSTS, ORDERING COSTS, AND SHORTAGE COSTS.
5. CLASSIFICATION SYSTEM FOR INVENTORY ITEMS.
WHAT ARE THE TWO TYPES OF INVENTORY COUNTING SYSTEMS?
PERIODIC AND PERPETUAL
PERIODIC COUNTING SYSTEM
PHYSICAL COUNT OF ITEMS IN INVENTORY MADE AT PERIODIC INTERVALS (WEEKLY, MONTHLY)
PERPETUAL INVENTORY SYSTEM (AKA CONTINUAL SYSTEM)
KEEPS TRACK OF REMOVALS FROM INVENTORY ON A CONTINUOUS BASIS, SO THE SYSTEM CAN PROVIDE INFORMATION ON THE CURRENT LEVEL OF INVENTORY FOR EACH ITEM. IN OTHER WORDS, WHEN INVENTORY REACHES A PRE-DETERMINED MINIMUM, A FIXED QTY IS ORDERED.
TWO-BIN SYSTEM
SIMPLE SYSTEM THAT USES TWO CONTAINERS FOR INVENTORY AND A REORDER IS DONE WHEN THE FIRST IS EMPTY.
UPC OR UNIVERSAL PRODUCT CODE SYSTEM
BAR CODE PRINTED ON A LABEL THAT HAS INFORMATION ABOUT THE ITEM IT LABELS.
BAR CODE BREAK DOWN
-A ZERO ON THE LEFT OF BAR CODE-INDICATES GROC. ITEM
-FIRST 5 NUMBERS INDICATE MANUFACTURER SUCH AS KELLOGG’S
-LAST 5 NUMBERS INDICATE SPECIFIC ITEM
-SMALL PACK ITEMS SUCH AS CANDY AND GUM USES A SIX-DIGIT NUMBER
LEAD-TIME
THE TIME BETWEEN SUBMITTING AN ORDER AND RECEIVING IT.
POS OR POINT-OF-SALE SYSTEMS
ELECTRONICALLY RECORD ACTUAL SALES.
LIST THE THREE BASIC INVENTORY COSTS:
HOLDING OR CARRYING, ORDERING, AND SHORTAGE COSTS.
HOLDING/CARRYING COST
THE COST TO CARRY OR HOLD AN ITEM IN INVENTORY FOR A LENGTH OF TIME WHICH IS USUALLY 1 YEAR
ORDERING COSTS
THE COST OF ORDERING AND RECEIVING INVENTORY
SHORTAGE COSTS
COSTS THAT RESULT WHEN DEMAND EXCEEDS SUPPLY OF INVENTORY ON HAND. THESE CAN INCLUDE OPPORTUNITY COST OF NOT MAKING THE SALE, LOSS OF CUSTOMER GOODWILL, LATE CHARGES, AND SIMILAR COSTS.
ABC APPROACH
CLASSIFIES INVENTORY ITEMS ACCORDING TO SOME MEASURE OF IMPORTANCE, USUALLY ANNUAL DOLLAR VALUE AND THEN ALLOCATES CONTROL EFFORTS ACCORDINGLY.
ECONOMIC ORDER QUANTITY MODEL (EOQ)
IDENTIFIES OPTIMAL ORDER QTY BY MINIMIZING THE SUM OF CERTAIN ANNUAL COSTS THAT VARY WITH ORDER SIZE: 1. BASIC EOQ MODEL 2. ECONOMIC PRODUCTION QTY MODEL 3. QTY DISCOUNT MODEL
QUANTITY DISCOUNTS
PRICE REDUCTIONS FOR LARGE ORDERS OFFERED TO CUSTOMERS TO INDUCE THEM TO BUY LARGE QTYS
REORDER POINT (ROP)
IN TERMS OF QTY, THE REORDER POINT OCCURS WHEN THE QTY ON HAND DROPS TO A PRE-DETERMINED AMT.
WHAT ARE THE 4 DETERMINANTS OF THE REORDER POINT QTY?
1. THE RATE OF DEMAND (USUALLY BASED ON FORECAST
2. LEAD TIME
3. EXTENT OF DEMAND AND/OR LEAD TIME VARIABILITY.
4. THE DEGREE OF STOCKOUT RISK ACCEPTABLE TO MGT
SAFETY STOCK
STOCK HELD IN EXCESS OF EXPECTED DEMAND DUE TO VARIABLE DEMAND AND/OR LEAD TIME
SERVICE LEVEL
PROBABILITY THAT DEMAND WILL NOT EXCEED SUPPLY DURING LEAD TIME
DETERMINANTS OF SAFETY STOCK LEVELS
1. THE AVERAGE DEMAND RATE AND AVERAGE LEAD TIME
2. DEMAND AND LEAD TIME VARIABILITY
3. DESIRED SERVICE LEVEL
FILL RATE
% OF DEMAND FILLED BY STOCK ON HAND.
FIXED-ORDER-INTERVAL (FOI) MODEL
ORDERS ARE PLACED AT FIXED TIME INTERVALS.
ADVANTAGES OF A FIXED-INTERVAL SYSTEM:
1. RESULTS IN TIGHT CONTROL
2. GROUPING ORDERS FROM THE SAME SUPPLIER SAVES ON ORDERING PACKAGING AND SHIPPING COSTS
3. MAY BE ONLY PRACTICAL WAY IF INVENTORY WITHDRAWALS CANNOT BE CLOSELY MONITORED.
DISADVANTAGES OF A FIXED-INTERVAL SYSTEM:
1. IT NECESSITATES A LARGER AMOUNT OF SAFETY STOCK FOR A GIVEN RISK OF STOCKOUT BC OF THE NEED TO PROTECT AGAINST SHORTAGES DURING AN ENTIRE ORDER INTERVAL PLUS LEAD TIME (INSTEAD OF LEAD TIME ONLY), AND THIS INCREASES THE CARRYING COST.
2. PLUS, COSTS OF PERIODIC REVIEWS.
SINGLE-PERIOD MODEL
MODEL FOR ORDERING OF PERISHABLES AND OTHER ITEMS WITH LIMITED USEFUL LIVES.
SHORTAGE COSTS
GENERALLY, THE UNREALIZED PROFIT PER UNIT.
EXCESS COSTS
DIFFERENCE BETWEEN PURCHASE COST AND SALVAGE VALUE OF ITEMS LEFT OVER AT THE END OF A PERIOD.
LIST THE INVENTORY PROCESSES THAT OFFER THE POTENTIAL FOR COST REDUCTION AND CUSTOMER SATISFACTION:
1. RECORD KEEPING- ACCURATE INVENTORY SO THAT INVENTORY DECISIONS ARE MADE BASED ON CORRECT INFORMATION.
2. VARIATION REDUCTION- LEAD TIME VARIATIONS AND FORECAST ERRORS IMPACT INV. MGT.
3. LEAN OPERATION- LEAN SYSTEMS ARE DEMAND DRIVEN MEANING GOOD ARE PULLED THROUGH SYSTEM TO MATCH DEMAND INSTEAD OF PUSHED WITHOUT AT DIRECT LINK TO DEMAND.
4. SUPPLY CHAIN MANAGEMENT- WORKING MORE CLOSELY WITH SUPPLIERS TO COORDINATE SHIPMENTS, REDUCE LEAD TIMES, AND REDUCE SUPPLY CHAIN INVENTORIES CAN REDUCE THE SIZE AND FREQUENCY OF STOCKOUTS WHILE LOWERING CARRYING COSTS.