Management Final Chapter 11

Which class requires close control by operations manager

A

C items

Account for a small dollar value but a large percentage of total items

Somewhere in the middle of A and C

B

Which items need not be as closely controlled and can be managed using automated computer systems

C

What is one of the first steps in analyzing an inventory problem?

Describe the essential characteristics of the environment and inventory system

In airlines and hotels what are inventories

Inventories are not physical goods that customers take with them, but provide a capacity available for serving customers

What are essential characteristics of the environment and inventory system?

Number or items, nature of demand, number and size of time periods, lead time, stockouts

Inventory costs can be classified into what four major categories?

Ordering or setup costs, inventory holding costs, shortage costs, and unit cost of the SKUs

What is the order quantity that minimizes total cost?

Q*= square root of (2DC0/Ch)

What happens when the inventory position falls at or below a certain level?

Reorder point

Total annual cost for the EOQ model

TC = 1/2QCh + (D/Q)C0

What is the process of triggering an order based on?

The inventory position

How can the news vendor problem be solved?

Using a technique called marginal economic analysis which compares the cost or loss of ordering one additional item with the costs

Stock keeping unit

a single item or asset stored at a particular location

A items

account for large dollar value but a relatively small percentage of total items

Safety stock

additional planned on-hand inventory that acts as a buffer to reduce the risk of a stockout

Environmentally preferable purchasing EPP or green purchasing

affirmative selection and acquisition of products and services that most effectively minimize negative environmental impacts over their life cycle of manufacturing, transportation, use, and recycling or disposal

What is an example of a service organization?

airline and hotel

Safety stock inventory

an additional amount that is kept over and above the average amount required to meet demand

inventory

any asset held for future use or sale

shortage or stockout costs

are costs associated with inventory being unavailable when needed to meet demand

Inventory holding/ inventory carrying costs

are the expenses associated with carrying inventory

Stockouts

back orders result in additional costs for transportation, expediting, or perhaps buying from another supplier at a higher price. A lost sale has an associated opportunity cost, which may include loss of goodwill and potential future revenue

What is an ABC inventory analysis

consists of categorizing inventory items or SKUs into three groups according to their total annual dollar usage

finished goods inventory

consists of completed products ready for distribution or sale to customers

Work in process WIP inventory

consists of partially finished products in various stages of completion that are awaiting further processing

Explain how a fixed order quantity inventory system operates and how to use the EOQ and safety stock

continuously monitor the inventory level and place orders when the level reaches some "critical values"

Explain how a fixed order quantity inventory system operates and how to use the EOQ and safety stock models

continuously monitor the inventory level and place orders when the level reaches some critical value

Inventory Position (IP)

defined as the on hand quantity (OH) plus any ordered placed at which have not arrived (called scheduled receipts, SR,) minus any back orders (BO)

nature of demand

demand can be classified as independent or dependent, deterministic or stochastic, and dynamic or static

Independent Demand

demand for a SKU that is unrelated to the demand for other SKUs and needs to be forecasted

dynamic demand

demand that varies over time

reorder point

depends on the lead time and demand rate

Stockout

inability to satisfy demand for an item

Ordering Costs/ set up costs

incurred as a result of the work involved in placing orders with suppliers or configuring tools, equipment, and machines within a factory to produce an item.

what does the single period inventory model apply to?

inventory situations in which one order is placed for a good in anticipation of a future selling season where demand is uncertain

Inventory Management

involves planning, coordinating, and controlling the acquisition, storage, handling, movement, distribution, and possible sale of raw materials, component parts and sub assemblies, supplies and tools, replacement parts, and other assets that are needed to meet customer wants and needs

B items

items that are between A and C

Lead time

lead time is affected by transportation carriers, buyer order frequency and size and supplier production schedules and may be deterministic or stochastic in which case it may be described by some probability

Economic Order Quantity (EOQ)

model is a classic economic model developed in the early 1900s that minimizes the total cost, which is the sum of the inventory-holding cost and the ordering cost

Backorder

occurs when a customer is willing to wait for the item

What may inventories be?

physical goods used in operations, and include raw materials, parts, sub assemblies, supplies, tools, equipment or maintenance, and repair items.

Inputs to manufacturing and service delivery processes

raw materials, component parts, sub assemblies, and supplies

Fixed period system (FPS)

sometimes called a periodic review system- is one in which the inventory position is checked only at fixed intervals of time, T, rather than on a continuous basis

Stable demand is usually called

static demand

Cs=

the cost per item of overestimating demand (salvage cost) this cost represents the loss of ordering one additional item and finding that it can not be sold

Cu

the cost per item of underestimating demand (shortage cost); this cost represents the opportunity loss of not ordering one additional item and finding that it could have been sold

Service level

the desired probability of not having a stock-out during a lead-time period

What is the process of triggering an order based on?

the inventory position when the inventory position falls at or below a certain value, r, called the reorder point a new order is placed

Fixed Quantity system (FQS)

the order quantity or lot size is fixed; that is, the same amount, Q, is ordered every time

Unit cost

the price paid for purchased goods or the internal cost of producing them

What happens after a single period ends

the product has wither sold out or there is a surplus of unsold items to sell for salvage value

lead time

the time between placement of an order and its receipt

Number and size of time periods

the type of approach used to analyze single period inventory problems is different from the approach needed for the multiple period inventory situation

Reorder Point

the value of the inventory position that triggers a new order

SKU's are said to have dependent demand if

their demand is directly related to the demand of other SKUs and can be calculated without needing to be forecasted

number of items

to manage and control these inventories each item is often assigned a unique identifier called a stock keeping unit SKU

Lost Sale

when a customer is unwilling to wait and purchases the item elsewhere

Inventory managers deal with two fundamental decisions

when to order items from a supplier or when to initiate production runs if the firm makes its own items How much to order or produce each time a supplier or production order is placed. Inventory management is all about making trade off among the costs associated with these decisions

cycle inventory

(also called order or lot size inventory ) is inventory that results from purchasing or producing in larger lots than are needed for immediate consumption or sale