CGFM Exam 3: Section 1, Chapter 6 - Inventory and Supply Management

two broad functions of an inventory management system?

(1) supply control and (2) inventory control.

objectives of inventory management system

(1) to have the "right" amount of inventory on hand to meet customer needs (2) to ensure that inventories are safeguarded against loss caused by pilferage, spoilage, breakage, and obsolescence.

Internal Controls for inventory

1) Procedures manuals 2) Separation of duties 3) Ensuring inspection accuracy 4) Storage 5) Safe-guarding 6) Physical verification

Elements of an internal control system include

1) policy and procedures manuals, 2) separation of duties, 3) ensuring inspection accuracy, 4) appropriate storage practices and physical safeguards, 5) and periodic physical verification

major inventory control activities

1) receiving and inspecting 2) Placing in inventory 3) tracking 4) accounting for inventory movements 5) valuing inventory

risks of inventory and supply chain management

1. Insufficient quantities of materials 2. Excess quantities of materials 3. Losses due to pilferage, spoilages, deterioration, or obsolescence Having the RIGHT amount

"reorder points" - when to order

Means when to order new stock. The reorder point takes account of: (1) customer usage, (2) the amount of time it takes to (a) place an order AND (b) receive delivery, and (3) usually a "safety level" to meet unforeseen problems. formula is time (time to order(15)+time to receive (30) + safety level time (15) multiplied by daily consumption. = (LEAD TIME + SAFETY LEVEL AMT) X daily consumption rate

Copy of purchase order should go to the receiving department to alert it to incoming supplies.

Not showing quantities ordered on the receiving department's copy of the purchase order requires the inspector to physically count the items received.

administrative costs

administrative costs-the cost of ordering and the cost of carrying supplies in inventory.

carrying costs

costs of investing in inventory, warehousing, and loss due to pilferage and other factors

Supply control

determines (1) what should be in inventory, (2) what the inventory levels should be, and (3) when and how much to order.

administrative lead time

one of the factors considered in determining when to replenish inventory levels. Administrative lead time includes the time needed to order and receive delivery of stock.

Which pairs of factors are "traded off' against each other in determining the Economic Order Quantity?

ordering costs and carrying costs

Inventory

refers to operating materials, supplies and items of equipment consumed in the normal course of operations; repair and replacement parts; inventory held for sale in internal service and revolving funds; and other items of supply held for various reasons

Inventory control

relates to the processes of receiving, issuing, and keeping track of inventory, as well as safeguarding the inventory.

Economic Order Quantity (EOQ) formula

square root of 2DS/CI, where a) D is the annual demand for the item; b) S is the cost of each order processing, expressed in dollars; c) C is the unit cost d) I is the cost of carrying the item in inventory, expressed as a percent of the unit cost of the item ordered.

how is the inventory turnover calculated?

supplies issued divided by average inventory

Inventory information system

system for determining when and how much to buy.

Economic Order Quantity

takes into account the administrative costs-the cost of ordering and the cost of carrying supplies in inventory. These costs flow inversely-·if more orders are placed, ordering costs increase, but carrying costs decrease. These costs need to be considered in figuring how much to order.