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Supply Chain Ch. 11

Inventory Management

QuestionAnswer
Single period model Use when you're making a one-time purchase of an item (e.g. shirts to sell at a sporting event)
Fixed order quantity model Use when you want to keep an item in stock--the same number of units ordered each time, and orders are placed when inventory reaches a certain level
Fixed time period model Items are ordered at fixed time intervals
Inventory system Set of policies and controls that monitor inventory levels and determine when stock should be replenished/how large orders should be
Manufacturing inventory Items that contribute to/become part of a firm's production output--raw materials, finished products, component parts, supplies, WIP
Reasons for inventory To maintain independence of operations, to meet variations in product demand, to allow flexibility in production scheduling, to provide a safeguard for raw material delivery time, to take advantage of economic purchase size, etc.
Inventory costs Holding/carrying costs, setup/production change costs, ordering costs, shortage costs
Holding/carrying costs Includes the costs for storage facilities, handling, insurance, pilferage, breakage, obsolescence, depreciation, taxes, and the opportunity cost of capital
Setup/production change costs Setting up for different production projects--these costs are a deterrent to small lot sizes
Ordering costs Managerial and clerical costs of completing the order
Shortage costs Costs associated with backorders, lost profit, loss of customer goodwill, lateness penalties, etc.
Independent demand Determined by market demand
Dependent demand Refers to demand for component parts used in finished products
ABC inventory classification Groups inventory into high dollar volume (A, 15%), moderate dollar volume (B, 35%), and low dollar volume (C, 50%).
Cycle counting Inventory-taking technique when inventory is counted frequently rather than once or twice per year
Created by: ejrasmus