Chapter 12 Production and Operations

Probabilistic model

a statistical model applicable when product demand or any other variable is not known but can be specified by means of a probability distribution

Single Period Model

a system for ordering items that have little or no value at the end of a sales period (perishables)

Fixed period system

a system in which inventory orders are made at regular time intervals

Perpetual inventory system

a system that keeps track of each withdrawal or addition to inventory continuously so records are always current

What are the advantages of cycle counting?

What are the advantages of cycle counting? 1. eliminates the shutdown and interruption of production necessary for annual physical inventories 2. eliminates annual inventory adjustments 3. trained personnel audit the accuracy of inventory 4. allows the cause of the errors to be identified and remedial action to be taken 5. maintains accurate inventory records

Cycle Counting

a continuing reconciliation of inventory with inventory records

Quantity discount model

a reduced price for items purchased in large quantities

Pilferage

a small amount of theft

Describe the four types of Inventory

1. Describe the four types of Inventory a. Raw material - materials that are usually purchased but have yet to enter the manufacturing process b. Work-in-process (WIP) inventory - products of components that are no longer raw materials but have yet to become finished products c. Maintenance/repair/operating (MRO) inventory - maintenance, repair, and operating materials d. Finished-goods inventory - an end item ready to be sold, but still an asset on the company's books

Class A

Annual dollar volume is high (15% of inventory, 70-80% of total dollar usage)

How are inventory levels monitored in retail stores?

Inventory in retail stores is monitored using a sing-period model, which is a system for ordering items that have little or no value at the end of a sales period.

Two systems for record accuracy

Periodic systems or perpetual systems

Production order quantity model

an economic order quantity technique applied to production orders

Finished-goods inventory

an end item ready to be sold, but still an asset on the company's books

Economic order quantity model

an inventory-control technique that minimizes the total of ordering and holding costs

Fixed-quantity system

an ordering system with the same order amount each time

ABC Analysis

divided inventory on-hand into three classifications based on annual dollar volume

Safety stock (ss)

extra stock to allow for uneven demand; a buffer

What is "safety stock"? What does safety stock provide safety against?

extra stock to allow for uneven demand; a buffer. Provides a defense against demand that is not constant as well as variability in the supply chain. Extra units in inventory that are kept to reduce the risk of a stock out. If there is a delay in delivery or unusually high demand, there is a cost to being out of stock. Protects against the extra cost of a stockout

Robust

giving satisfactory answers even with substantial variation in the parameters

Class C

low annual dollar volume (5% of annual dollar volume but about 55% of total inventory items)

Maintenance/repair/operating (MRO) inventory

maintenance, repair, and operating materials

Raw material inventory

materials that are usually purchased but have yet to enter the manufacturing process

Class B

medium annual dollar volume (30% of inventory items, 15-25% of total value)

Assumptions of Economic Order Quantity (6)

o Demand for an item is known, reasonably constant, and independent of decisions for other items o Lead time is known and consistent o Receipt of inventory is instantaneous and complete (one batch at one time) o Quantity discounts are not possible o The only variable costs are the cost of setting up or placing an order and the cost of holding or storing inventory over time o Stockouts can be completely avoided if orders are placed at the right time

4 Functions of Inventory

o Provide a selection of goods for anticipated customer demand and to separate the firm from fluctuations in that demand o Decouple various parts of the production process o Take advantage of quantity discounts o Hedge against inflation

4 Types of Inventory

o Raw material inventory o Work-in-process inventory (WIP) o Maintenance/repair/operation (MRO) inventory o Finished-goods inventory

Work-in-process inventory (WIP)

products or components that are no longer raw materials but have yet to become finished products

Periodic System

require regular (periodic) checks of inventory to determine quantity on hand

Shrinkage

retail inventory that is unaccounted fro between receipt and sale

Ordering Costs

the cost of the ordering process

Holding Costs

the cost to keep or carry inventory in stock

Setup Cost

the cost to prepare a machine or process for production

Reorder point

the inventory level (point) at which action is taken to replenish the stocked item

Service level

the probability that demand will not be greater than supply during lead time. It is the complement of the probability of a stockout

Lead Time

the time between placing an order and receiving it; in production systems, the wait, move, queue, setup, and run times for each component produced

Setup Time

the time required to prepare a machine or process for production

Objective of Inventory Management

to strike a balance between inventory investment and customer service

Perpetual Inventory System

tracks both receipts and subtractions from inventory on a continuing basis (ex. Barcode scan at POS)

Inventory Models for Independent Demand (3)

• Basic economic order quantity (EOQ) model • Production order quantity model • Quantity discount model

Control of Service Inventories Techniques

• Good personnel selection, training, and discipline • Tight control of incoming shipments • Effective control of all goods leaving the facility

Advantages of Cycle Counting

• eliminates the shutdown and interruption of production necessary for annual physical inventories • eliminates annual inventory adjustments • trained personnel audit the accuracy of inventory • allows the value of the errors to be identified and remedial action to be taken • maintains accurate inventory records