AMB303_Topic 8_Exam

What is ABC analysis?

ABC analysis divides an inventory into three categories- "A items" with very tight control and accurate records, "B items" with less tightly controlled and good records, and "C items" with the simplest controls possible and minimal records

What is the formula for EOQ in $?

EOQ = √(2AB/C) A = annual usage, in dollars B = administrative costs per order of placing the order C = carrying costs of the inventory (expressed as an annual percentage of the inventory dollar value)

What is the formula for EOQ in units?

EOQ = √(2DB/IC) D = annual demand, in units B = administrative costs of placing the order per order I = dollar value of the inventory, per unit C = carrying costs of the inventory (%)

What is EOQ?

Economic ordering quantity (EOQ) determines the point at which the sum of the carrying costs and ordering costs is minimised.

What is inventory?

Inventories are stocks of goods and materials that are maintained for many purposes, the most common being to satisfy normal demand patterns

What is speculative stock?

Inventory that is held for several reasons, including seasonal demand, projected price increases, and potential shortages or products

What is psychic stock?

Inventory that is held to stimulate demand

What is the main benefit and risk of low and high inventory turnover?

Low inventory turnover = high inventory carrying costs, little (or no) stock out costs. High inventory turnover = low inventory carrying costs, high risk of stock out costs

How are the classes determined?

Measures to determine status include: sales volume (in dollars and/or units); fastest selling items; item profitability; item importance.

Explain the relationship between ordering and carrying costs.

Opposites. An increase in the number of orders leads to higher order costs and lower carrying costs

Define what is meant by dead inventory. What are several ways to manage it? Provide examples.

Products for which there is no sales during a 12 month period. - throw away (Atari threw games into landfill) - market dead stock more aggressively - no-return policy - sell to companies that specialise in selling such items - donate to charity

What is vendor managed inventory (VMI)?

The size and timing of replenishment orders are the responsibility of the manufacturer

VMI allows manufacturers to have access to a distributor's or retailer's sales and inventory data. To achieve this, what is required?

electronic data interchange (EDI) or the internet

What is pipeline, or in-transit stock?

inventory that is en route between various fixed facilities in a logistics system

What is safety, or buffer, stock?

inventory that is held in addition to cycle stock to guard against uncertainty in demand or lead time

What is cycle, or base, stock?

inventory that is needed to satisfy normal demand during the course of an order cycle

How do you calculate ordering cost?

number of orders per year x ordering cost per order

What is inventory shrinkage?

oMarkdowns- stock marked down to clear - erodes profit oKnown loss- deterioration of product and damage, empty packaging oUnknown loss- difference between book stock and actual SOH

What are the primary components of inventory carrying costs?

obsolescence costs, inventory shrinkage, storage, handling, insurance, taxes and interest costs

What are inventory carrying (holding) costs?

refers to the total cost of holding inventory. This includes warehousing costs such as rent, utilities and salaries, financial costs such as opportunity cost, and inventory costs related to perishability, pilferage, shrinkage and insurance.

How do you measure inventory turnover?

sales revenue/average inventory

How is inventory carrying cost calculated?

value of business inventory x carrying cost

How do you calculate annual demand in units?

value of inventory/value per unit

How are SKUs defined?

• Retailer - SKU is number (Brands) of cans of tinned tomatoes (1 x Unit) • Warehouse - SKU is number represents a 24-tin case (1 x Box) • Distributor - SKU is number of 42 case pallets containing 24-tin cases of tinned tomatoes (1 x Pallet)

What are some limitations of the EOQ?

•EOQ may not mirror the batch sizes of stock available for order •If discount is offered on quantity, often better to take the discount than the EOQ •Assumes stable and consistent demand

What are some issues with ABC analysis?

•How do you determine what inventory is A, B or C •How do you use that information (May help with Warehouse Layouts)

What are some issues with the JIT approach?

•Need suppliers with high quality stock •No Safety Stock + Poor Quality Stock = OOS •Ordering costs - higher with more frequent orders •Need local suppliers - faster delivery •Suppliers with a fast reliable transport

What is the JIT approach?

•Objective: Minimise inventory by reducing (or eliminating) safety stock, and ensuring inventory is at required destination at correct time. •Safety stock sitting on a shelf is considered waste. Trucks waiting in receiving considered waste.

List some inventory related costs

1. Obsolescence - cost of markdown/discount to clear 2. Storage costs - refrigeration, consider pet shop? 3. Handling costs - staff to pick and pack and move 4. Insurance costs - relative to cost, location and type - diamonds vs food 5. Taxes - relative to cost and quantity of stock held 6. Opportunity cost - hold the wrong stock, no room for right stock 7. Inventory shrinkage - known and unknown

WHat are the five classifications of stock?

1. cycle or base 2. safety or buffer 3. pipeline or in transit 4. speculative stock 5. physic stock

What are some special concerns with inventory?

1. deals (package desired with undesired) 2. defining SKUs 3. informal arrangements (outside dis. channel) 4. repair and replacement parts 5. reverse logistics 6. substitute products

What two problems can safety stock prevent?

1.Increased rate of demand 2.Longer-than-normal replenishment