Chapter 12: Inventory Management

Fixed-quantity, or Q, systems

That is, the same fixed amount is added to inventory every time an order for an item is placed. We saw that orders are event triggered. When inventory decreases to the reorder point (ROP), a new order for Q units is placed.

Robost

We mean that it gives satisfactory answers even with substantial variation in its parameters.

Raw Materials Inventory

has been purchased but not processed. This inventory can be used to decouple (i.e., separate) suppliers from the production process. However, the preferred approach is to eliminate supplier variability in quality, quantity, or delivery time so that separation is not needed.

Ordering Cost

includes costs of supplies, forms, order processing, purchasing, clerical support, and so forth. When orders are being manufactured, ordering costs also exist, but they are a part of what is called setup costs.

Finished-goods Inventory

is completed product awaiting shipment. Finished goods may be inventoried because future customer demands are unknown.

Perpetual inventory system

Every time an item is added to or withdrawn from inventory, records must be updated to determine whether the ROP has been reached.

Shrinkage

In retailing, inventory that is unaccounted for between receipt and time of sale is known as? Occurs from damage and theft as well as from sloppy paperwork.

Pilferage

Inventory theft is also known as?

Work-in-process (WIP) inventory

Is components or raw material that have undergone some change but are not completed. WIP exists because of the time it takes for a product to be made (called flow time). Reducing flow time reduces inventory. Often this task is not difficult: during most of the time a product is "being made," it is in fact sitting idle.

Quantity Discount

Is simply a reduced price (P) for an item when it is purchased in larger quantities.

Production Order Quantity Model

It is useful when inventory continuously builds up over time, and traditional economic order quantity assumptions are valid. We derive this model by setting ordering or setup costs equal to holding costs and solving for optimal order size, Q*. Using the following symbols, we can determine the expression for annual inventory holding cost for the production order quantity model:

Fixed-period, or P, system

On the other hand, inventory is ordered at the end of a given period. Then, and only then, is on-hand inventory counted. Only the amount necessary to bring total inventory up to a prespecified target level (T) is ordered.

Safety Stock

This equation for ROP assumes that demand during lead time and lead time itself are constant. When this is not the case, extra stock, should be added. When demand is not constant or variability exists in the supply chain, safety stock can be critical.

Holding Cost

are the costs associated with holding or "carrying" inventory over time. Therefore, holding costs also include obsolescence and costs related to storage, such as insurance, extra staffing, and interest payments. Many firms fail to include all the inventory holding costs. Consequently, inventory holding costs are often understated.

Single-period Inventory Model

describes a situation in which one order is placed for a product. At the end of the sales period, any remaining product has little or no value. This is a typical problem for Christmas trees, seasonal goods, bakery goods, newspapers, and magazines

ABC Analysis

divides on-hand inventory into three classifications on the basis of annual dollar volume. Is an inventory application of what is known as the Pareto principle (named after Vilfredo Pareto, a 19th-century Italian economist). The Pareto principle states that there are a "critical few and trivial many." The idea is to establish inventory policies that focus resources on the few critical inventory parts and not the many trivial ones. It is not realistic to monitor inexpensive items with the same intensity as very expensive items.

Economic Order Quantity (EQD) model

is one of the most commonly used inventory-control techniques. This technique is relatively easy to use but is based on several assumptions: 1.Demand for an item is known, reasonably constant, and independent of decisions for other items. 2.Lead time—that is, the time between placement and receipt of the order—is known and consistent. 3.Receipt of inventory is instantaneous and complete. In other words, the inventory from an order arrives in one batch at one time. 4.Quantity discounts are not possible. The only variable costs are the cost of setting up or placing an order (setup or ordering cost) and the cost of holding or storing inventory over time (holding or carrying cost). 5.These costs were discussed in the previous section. 6.Stockouts (shortages) can be completely avoided if orders are placed at the right time.

Service Level

is the complement of the probability of a stockout. For instance, if the probability of a stockout is 0.05, then the service level is .95. Uncertain demand raises the possibility of a stockout. One method of reducing stockouts is to hold extra units in inventory. As we noted previously, such inventory is referred to as safety stock. Safety stock involves adding a number of units as a buffer to the reorder point.

Setup Cost

is the cost to prepare a machine or process for manufacturing an order. This includes time and labor to clean and change tools or holders. Operations managers can lower ordering costs by reducing setup costs and by using such efficient procedures as electronic ordering and payment.

Probabilistic Models

models are a real-world adjustment because demand and lead time won't always be known and constant.

Maintenance/Repair/Operating

supplies necessary to keep machinery and processes productive. They exist because the need and timing for maintenance and repair of some equipment are unknown. Although the demand for MRO inventory is often a function of maintenance schedules, other unscheduled MRO demands must be anticipated.

Reorder Point

the inventory level at which an order should be placed

Lead Time

the time between placement and receipt of an order, or delivery time, can be as short as a few hours or as long as months.

Cycle Counting

uses inventory classifications developed through ABC analysis. With procedures, items are counted, records are verified, and inaccuracies are periodically documented. The cause of inaccuracies is then traced and appropriate remedial action taken to ensure integrity of the inventory system. A items will be counted frequently, perhaps once a month; B items will be counted less frequently, perhaps once a quarter; and C items will be counted perhaps once every 6 months.

Setup Time

usually require a substantial amount of work even before a setup is actually performed at the work center. With proper planning, much of the preparation required by a setup can be done prior to shutting down the machine or process. Can thus be reduced substantially. Machines and processes that traditionally have taken hours to set up are now being set up in less than a minute by the more imaginative world-class manufacturers. Reducing setup times is an excellent way to reduce inventory investment and to improve productivity.