Inventory Management Exam 3

materials managememt
the process of identifying the material needs for business operations
independent requirements
demand of goods that are demanded directly by customers
Independent customer demand is
stochastic, that is…
it contains a random component and it is, therefore, non-deterministic (must be forecasted)
Demand from customers is translated into independent requirements because
it is determined externally and is independent of any internal operation.
Material demand from production processes becomes dependent requirements because
it is dependent on specic production plans internal to the organization
dependent requirements
a function of a process controlled by the organization, such as production
Dependent demand is deterministic, and can be precise calculated in a process called
material requirements planning (MRP)
make-to-order (MTO) production mode
When a product is tailored to a specific customer or the customer has the opportunity of selecting among multiples options, configurations, or variants such as sizes, colors and so on), the production takes place after the order is received,
Materials that are highly standardized offer more _____ in demand management.
make-to-stock (MTS) production mode
materials that are highly standardized and can be served directly from stock
a production order can be generated by
independent requirements or from stock control
stock control can generate…
production orders for internal procurement, or purchase orders for external procurement.
goal of inventory management
optimizing the inventories, in order to achieve the goals of customer service at minimum cost.
inventory management is based
on matching availability with ______
stock keeping unit (SKU)
any item designed with a unique identifier, such as a material number, for which the
firm desires to keep individualized control of inventory.
inventory management system
necessary to provide with specific guidelines as to when to order, when to produce, and how much inventory to keep of each SKU and each location, with the ultimate goal of minimization of inventory costs.
example of main material types
finished products
raw materials
trading goods
packing materials
own containers
external containers
Finished products are sold to customers, and their optimal inventories depend on…
customer demand
Semi-finished products and raw materials depend on…
the anticipated production schedule
Packing materials are used as a function of ______
containers are used for internal and external ______
Inventories are ___ resources, and keeping inventories always costs money.
the levels of inventory should be _____ while providing the desired level of supply chain performance.
pipeline stock
inventory that is in process or in transit through the distribution system
how to reduce pipeline stock
create faster and leaner production and transportation systems
types of inventory
pipeline stock
cycle stock
anticipation stock
safety stock
consignment stock
cycle stock
inventory that remains from larger economic order quantities, quantity discounts, or large batches of production due to economies of scale.
Cycle stock can be optimized by….
using inventory models with quantity discounts and optimizing production lots
anticipation stock
an accumulation of stock for anticipated fluctuations in demand, such as seasonality, and therefore it is also called seasonal stock.
Anticipation stock can be optimized with…
accurate demand forecasting and production scheduling
safety stock
additional stock that is kept for unanticipated fluctuations in demand, supply, or lead time.
safety stock is optimized using
stochastic models
Consignment stock
inventory that its owner (the consignor) places at a customer’s location (the consignee), where the consignor keeps title of the goods until the consignee sells them.
three inventory costs
cost of ordering, cost of holding inventory,
and cost of stock outs
Cost of ordering inventory
a cost that is undertaken in the process of
placing and delivering an individual order, regardless of its size.

generally denoted by the letter S (setup cost)

the cost of ordering includes
administrative work of placing and receiving the order, inspection costs, and other per-order charges such
as shipping and handling
Cost of holding inventory
the cost of carrying inventory in stock per
unit of time such as day, month, or year, usually denoted with the letter H
cost of holding inventory includes
the interest cost of capital plus the cost of the warehouse facility, personnel,
insurance, obsolescence, spoilage, and pilferage
The financial cost of capital can
be estimated with
the firm’s average cost of capital
Cost of stock outs
the cost associated with a stock out, or the inability to respond to the demand from inventory.
cost of stock outs include
loss of sales and profits, customer goodwill, liability costs, and the possible cost of disrupting operations
The cost of stock outs should be balanced with the cost of holding ____ _____
safety stock
Critical materials
those with highest cost of stock-outs, and their stock out risk should be minimal.
Inventories are accounted for as an _____, and they appear in the ____ sheet
asset; balance
Assigning a value to inventories is important because it allows for
the calculation of cost of goods sold (COGS) and profitability analysis.
physical inventory
stopping the flow if inventory, counting the physical quantities, and entering the differences in the computer system.
statuses of inventory
unrestricted inventory
quality inspection inventory
blocked inventory
in-transit inventory
Unrestricted inventory
The stock is available for any use, internal or external, without restrictions.
Quality inspection inventory
Stock that must undergo quality control inspection. Once it has been cleared for quality control, it becomes unrestricted and can be committed to any use
Blocked inventory
If stock is found defective, damaged, obsolete, expired, or otherwise unfit for use, stock is marked as blocked and is unavailable for use.
In-transit inventory
Stock that is owned by the company but is being transported, such as in an internal stock transfer, is marked as in transit and unavailable to use until arrival in the storage location of destination.
Economic Order Quantity
the order quantity that minimizes
the sum of inventory holding costs and order setup costs.
The EOQ model minimizes the total inventory cost by balancing the cost of _____ with the cost of _____ inventory
ordering; holding
assumptions of the EOQ model
1. Constant rate of demand (D)
2. Constant order lead time (L) between order issue and delivery
3. Constant and defined order setup cost independent of order size (S)
4. Constant inventory holding cost per unit and per period (H)
5. Delivery in one single batch
6. No quantity discounts
7. Only one product per order setup
the total inventory cost includes
holding costs and order setup cost
inventory holding cost
includes all costs related to holding inventory per unit of time, including financial cost of capital, warehousing, insurance, obsolescence, pilferage,
and so on
holding cost for inventory (equation)
order setup cost
the one-time cost to place and deliver a single order of any size
EOQ variables
D = Demand in units per period
S = Cost of processing and serving an order, or Setup cost
H = Cost of holding an unit of inventory per period.
Q = Order quantity.
order cost (equation)
EOQ (equation)
Q=√ (2DS/H)
constant order quantity model
also known as the Q-model
assumes that the order quantity and order time can be freely determined when placing an order.
Q-model answers what questions
What is the optimal order quantity?
When is the best time to order?
lead time equation
order processing time + planned delivery time + goods receipt processing time
(Q-model) the time of the order is determined by calculating a…
reorder point (ROP)
reorder point (ROP)
the inventory
level that is exactly enough to cover the expected demand (d) during the lead time (L)
ROP for Q-model (equation)
(d bar)L
given what two things can a firm use historical data to automatically calculate safety stock for each material?
service level and variability of demand during the lead time
service level (SL)
the probability of completing an an ordering cycle without running out of stock
stock out risk (SR)
the probability of running out of stock
during an order cycle
Service level and stockout risk are probabilities of mutually exclusive events, and therefore
the key to selecting a good service level is to determine…
the consequences of a stock out at the end of an inventory cycle
Once the service level has been selected, and assuming a normally distributed demand,
its associated ____ zSL can be determined.
safety stock equation (SS)
reorder point (equation)
d bar * L + zSL * √(L) * σ
The constant order period model (P-model) is used in situations when…
the firm faces a fixed order and delivery interval
p-model order quantity (equation)
R + SS – I
P-model required inventory equation
d bar(T+L)
P-model SS equation
zSL * √(T+L) * σ
single period model
deals with inventory in which goods not sold lose value immediately
The single period model allows us to
optimize the inventories by…
balancing the risk of overestimating
the demand with the risk of underestimating it
single period model risk of overestimating is…
the cost of overestimating multiplied by the probability of overestimating
single period p (probability of overestimating) equation)
p ≤ (Cu)/(Co+Cu)
single period – the probability of overestimating is the desired ____ level
single period model quantity equation
d bar + Zsl *σ
warehouse management systems (WMS)
control the storage, retrieval, and movements of materials within and across warehouses in the organization.
four types of material movements
goods receipt
goods issue
stock transfer
transfer posting
goods receipt
A movement of a material into inventory, causing inventory to increase
goods issue
A movement of a material out of inventory is a goods issue, the exact opposite of a goods receipt.
stock transfer
When goods are physically transported from a location to another
within the organization
3 basic forms of stock transfer
between storage locations in the same warehouse
warehouses in the same company
between subsidiaries of the same enterprise
Stock transfers basically consist of a goods ___ and a goods ___
issue; receipt
transfer posting
does not
involve a physical movement of the material, but only a change of its status
possible statuses of a good
in transit
quality control
blocked or locked
in consignment (vendor owned inventory)