Chapter 9 Inventory Management

Material requirements planning (MRP)

An inventory control system used to compute order quantities for dependent demand inventory items. which considers not only the quantities of each of the component parts needed, but also the lead times needed to produce and receive the items.

Dollar value

H is the dollar value to hold one unit in inventory over some period of time. H = I C H is Holding Cost I is Holding Cost percentage C is Item Cost

Percentage of item cost

Holding Cost percentage

Holding cost

Holding cost—sometimes called carrying cost—includes all the costs that vary with the amount of inventory held in stock. This includes storage facilities, handling, insurance, pilferage, breakage, obsolescence, depreciation, taxes, and the opportunity cost of capital.

Transportation inventory

Pipeline inventory Also called transportation inventory, this is inventory that is in transit. It exists because the points of demand and supply are not the same.

Buffer stock

Safety Stock Also called buffer stock, is extra inventory carried to serve as a cushion for uncertainties in supply and demand.

Carrying cost

Same thing as holding cost

Bill of materials (BOM)

The relationship between independent and dependent demand is shown in a bill of materials (BOM) A list that shows all the raw materials, components, and subassemblies that go into a product. It also shows the quantities and relationships of items needed to make a final product.

Hedge inventory

inventories that are carried in anticipation of a price increase or a shortage of products

CHAPTER HIGHLIGHTS

-- There are many reasons for carrying inventory. They include protecting against lead time demand, maintaining independence of operations, balancing supply and demand, buffering against uncertainty, and achieving economic purchase orders. -- There are different types of inventory intended for different purposes. Inventory types are: cycle stock, safety stock, anticipation inventory, pipeline inventory, and MRO. -- The three inventory costs are: holding cost, ordering cost, and shortage cost. Inventory holding cost includes all the costs involved with holding inventory in stock. Ordering cost is the cost of placing an order. Shortage cost is the cost associated with being out of stock, such as loss of customer goodwill and possible lost sales. -- Inventory systems answer two basic questions: when to order and how much to order. Two of the most common types of inventory systems are: fixed-order quantity system and fixed-time period system. -- In a fixed-order quantity system the order placed is constant or fixed. An order is placed when the inventory position drops to the reorder point, noted as ROP. In the basic fixed-order quantity system the order quantity is computed as an economic order quantity or EOQ. When production directly feeds demand, then it is computed as an economic production quantity or EPQ. -- In a fixed-time period system orders are placed in regular time intervals denoted by T. The order that is placed varies and is the quantity that will return the IP to a target inventory level, denoted as R. -- Independent demand is demand for a finished product, such as a computer, a bicycle, or a pizza. Dependent demand is demand for component parts or subassemblies that are a result of the independent demand item. -- To manage inventory properly it must be classified based on its degree of importance. The tool for this is ABC classification. This allows us to give priority to important inventory items and manage those with care, while not wasting resources on items that are of less importance. A inventory items are of highest importance and must be monitored carefully. B items are classified as moderate importance, and C items are of least importance. -- Inventory must be measured and evaluated on a regular basis given its impact on cost and customer service. The most common ways to measure inventory are in units, dollars, weeks of supply, and inventory turns. -- Vendor managed inventory (VMI) is an arrangement where the vendor is responsible for managing the inventory located at a customer's facility. The vendor stocks the inventory, places replenishment orders, and arranges its display. The vendor typically own the inventory until it is purchased by the customer.

Ordering cost

Costs involved in placing an order and procuring the item.

Shortage cost

Costs that occur when a company runs out of stock.

Setup cost

Ordering cost is sometimes called setup cost as it also includes the costs involved in preparing the production run, when the items are made in-house.

Inventory policy

Inventory decisions that answer the questions of when and how much to order.

Seasonal inventory

Inventory where companies carry extra inventory during a low season in anticipation of higher demands during the high season.

Enterprise resource planning (ERP)

Large software programs used for planning and coordinating all resources throughout the entire enterprise.

Fixed-order quantity system

The first inventory system As the name suggests, the quantity that is ordered with this system is constant or fixed, and is denoted by Q. An order is placed when the inventory position drops to a predetermined level, noted as the reorder point or ROP. Therefore, there are two variables that define this system and answer the two basic questions of when to order and how much: Q and ROP. They specify when to place an order: when inventory reaches the reorder point ROP. They also specify how much to order: the quantity Q.