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Operations Mgmnt.

Prof. Fandel: Chapter 12 Managing Inventories

Inventory Any asset held for future use of sale.
Inventory Objectives: 1) Maintain sufficient inventory 2) Incur lowest possible cost
Inventory Management Involves planning, coordinating, and controlling the acquisition, handling, movement, distribution, and possible sale of raw materials, component parts and subassemblies, supplies and tools, replacement parts to meet customer wants and needs.
Raw Materials, component parts, subassemblies, and supplies Inputs to manufacturing and service delivery processes.
Work-In-Process (WIP) Inventory Consists of partially finished products in various stages of completion that are awaiting further processing.
Finished Goods Inventory Completed products ready for distribution or sale to customers.
Safety Stock Inventory An additional amount of inventory that is kept over and above the average amount required to meet demand.
Environmentally Preferable Purchasing (EPP), or Green Purchasing The affirmative selection and acquisition of products and services that most effectively minimize negative environmental impacts over their life cycle of manufacturing, transportation, use, and recycling or disposal.
Inventory Managers deal with two fundamental decisions: 1) When to order items from a supplier or when to initiate production runs if the firm makes their own items. 2) How much to order or produce each time a supplier or production order is placed.
Four categories of inventory costs: 1) Ordering or setup costs 2) Inventory-holding costs 3) Shortage Costs 4) Unit cost of the stock-keeping Units (SKUs)
Ordering Costs (Setup Costs) Incurred as a result of the work involved in placing purchase orders with suppliers or configuring tools, equipment, and machines within a factory to produce an item.
Inventory-holding Costs (Inventory-carrying Costs) The expenses associated with carrying inventory.
Shortage Costs (Stockout Costs) The costs associated with a SKU being unavailable when needed to meet demand.
Unit Cost The price paid for purchased goods or internal cost of producing them.
Stock-Keeping Unit (SKU) A single item or asset stored at a particular location.
Stockout The inability to satisfy demand for an item.
Backorder Occurs when a customer is willing to wait for an item.
Lost Sale Occurs when the customer is unwilling to wait and purchases the item elsewhere.
ABC Inventory Analysis Categorizes SKUs into 3 groups according to their annual dollar usage. A) Items account for a large $ value but a relatively small % of total items. C) Items account for a small $ value but a large % of total items B) between A and C
Fixed Quantity System (FQS) The order quantity or lot size is fixed; the same amount, Q, is ordered every time.
Inventory Position (IP) The on-hand quantity (OH) plus any orders placed but which hae not arrived (scheduled receipts, or SR), minus Backorders (BO) Ex) IP = OH + SR - BO
Reorder Point The value of the inventory position that triggers a new order.
Economic Order Quantity (EOQ) Model is a classic economic model developed in the early 1900s that minimizes total cost, which is the sum of the inventory-holding cost and the ordering cost.
EOQ Model: Inventory Holding Cost equation The cost of storing one unit in inventory for the year, Ch, is Ch = (I)(C) Where I = Annual inventory-holding charge expressed as a percent of unit cost C = Unit cost of inventory item or SKU.
EOQ Model: Ordering Cost equation If D = annual demand and we order Q units each time, then we place D/Q ORDERS/YEAR. Annual ordering Cost = (# of orders per year)(Cost per Order) = (D/Q)Co Where (Co) is the cost of placing one order.
EOQ Model: Total Annual Cost equation Total annual cost is the sum of the inventoy holding cost plus the order or setup cost: TC = (1/2)(Q)(Ch) + (D/Q)Co
EOQ Model: Economic Order Quantity equation The EOQ is the order quantity that minimizes the total annual cost Q = Square Root[(2D x Co)/Ch]
Fixed Period System (FPS) An alternative to fixed order quantity system, sometimes called periodic review system, in which the inventory position is checked only at fixed intervals of time, T, rather than on a continuous basis.
Two Principle Decisions in FPS: 1) The time between reviews (T) 2) The replenishment level (M)
Created by: KAzetapi
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