MGT 301 Chapter 6

Inventory Equilibrium

Determining the proper amount of inventory. Similar to balancing a scale.

Bullwhip Effect

The ripple effect of small changes in customer demand are magnified upstream through a supply chain, all the way from the customers to the retailer to the distributer to the manufacturer. as the variability of demand increases sharply when you progress up the supply chain.

Enterprise Resource Planning (ERP)

a large, integrated information system that supports most enterprise processes and data storage needs across the entire organization

Cycle inventory

a quantity of inventory that varies in proportion to order quantity; the order quantity Q is proportional to the time between orders (cycle). The longer the time between orders, the higher the order quantity.

Cycle counting

a system in which employees physically count a percentage of the total number of items stocked in inventory and correct any errors that are found. It is often combined with ABC inventory analysis, with the A items being counted most often, followed by B, and then C.

Newsvendor problem

a technique that determines how much inventory to order when handling perishable products or items that have a limited life span

Electronic data interchange (EDI)

a technology that allows companies or units within a company to exchange orders, forecasts, and invoices electronically without human intervention to enter data into the receiving system

Base stock system

a type of inventory system that issues an order whenever a withdrawal is made from inventory.Items are replaced on a one-for-one basis.This system is often used for very expensive items, such as spare motors for manufacturing equipment or spare parts.

Can order system

a type of inventory system that reviews the inventory position at fixed time intervals and places orders to bring the inventory up to an expected target level, but only if the inventory position is below a minimum quantity, similar to the reorder point in a continuous review system.

Bin system

a type of inventory system that uses either one or two bins to hold a quantity of the item being inventoried; an order is placed when one of two bins is empty or a line on a single bin is reached.

Radio Frequency Identification (RFID)

an automatic identification method that relies on storing and remotely retrieving data using devices . an object that can be attached to or incorporated into a product, animal, or person for the purpose of identification using radio waves.

Continuous review system (crs)

an inventory system that always orders the same quantity of items but has differing periods of time between orders. it monitor inventory levels regularly and place an order as soon as a certain inventory level or reorder point is reached.

Periodic review system (prs)

an inventory system that has a fixed time between orders but has different order quantities from order to order. it monitor inventory at the end of the prescribed time period (week, month etc.), the order quantity is based on the difference between a target inventory level and the existing inventory level at the end of the time period.

Independent demand

demand for items that are considered end items that go directly to a customer, and for which demand is influenced by market conditions and not related to inventory decisions for any other item. demand for a finished product.

Dependent demand

demand for items that are used to make another item or are considered to be component parts. is demand for component parts or sub-assemblies.

Safety stock inventory

excess Inventory that a company holds to guard against uncertainty in demand, lead time, and supply.is created when a company either orders before an order is needed, or orders more than the expected demand.

ABC Systems

inventory systems that utilize some measure of importance to classify inventory items and allocate control efforts accordingly

Anticipation inventory

inventory that is held for future use at a time when demand will exceed available capacity

Work-in-process inventory

inventory that is in the process of being transformed from one state to another. It cannot be sold to a customer because it is not yet finished.

Pipeline inventory

inventory that is in the process of moving from one location in the supply chain to another. consists of orders that have been placed but not yet received.

Lead time

is the time between when an order is placed and when it is expected to arrive or be finished

Protection interval

is the time during which safety stock must protect against running out of stock.

Level C in ABC System

items account for 50 to 70 percent of the total number of items, yet account for only 10 to 20 percent of annual dollar value.items may well be of high importance, but because they account for relatively little annual inventory cost, it may be preferable to order them in large quantities and carry excess safety stock.

Level A in ABC System

items make up only 10 to 20 percent of the total number of items, yet account for 60 to 80 percent of annual dollar value.

Inventory position

on-hand inventory plus outstanding orders, minus any back order quantities (items promised to a customer but not yet delivered)

Remanufactured/reconditioned inventory

products that have been used by a customer and then reacquired by a company and either re-manufactured or reconditioned for resale

Inventory Systems

provides the structure and operating policies for maintaining and controlling goods to be stocked in inventory. responsible for ordering, tracking, and receiving goods.

Processing cost

the cost in time and/or money to machine, assemble, or transform an item.

Target inventory

the desired quantity of inventory that will cover expected demand during the protection interval plus enough safety stock to provide the desired cycle-service level

Excess cost

the difference between the purchase cost of an item and its salvage or discounted value

Shortage cost

the lost profit from not being able to make a sale, plus any loss of customer goodwill

Economic order quantity

the order quantity that minimizes the total annual cost of ordering and holding inventory for a particular item. Answers the question of how much to order.

Inventory

the physical stock of any items or resources used in an organization.

Reorder point

the predetermined level that an inventory position must reach for an order to be placed

Set-up cost

used in manufacturing situations where physical steps need to be taken to prepare for an order.

Ordering Cost

used when purchasing items from a supplier or retailer because of the time or cost necessary to initiate the order and process it when it is received.

Vendor-managed inventory (VMI)

vendors monitor sales at the retailer and replenish inventories when supplies are low