CH 9 Managing Inventory in the Supply Chain
Explain the differences between inventory carrying cost and ordering costs.
- ordering cost is the cost incurred every time an order is placed by a company. Contrary to this, inventory carrying cost includes the cost of un-utilized inventory which is stored doe future use. it is also known as the opportunity cost since a company might have utilizes this cost by investing in some other operations. - ordering cost includes the cost of ordering and inbound logistics. whereas, inventory carrying cost includes the capital cost, storage space cost, inventory service cost, and inventory risk cost.
Why is it usually more difficult to determine the cost of lost sales for finished goods than it is for raw materials inventories?
Cost if kiss sales for finished goods is relatively difficult to determine as compared to the cost of lost sales for raw materials. Cost of lost sales for raw material inventories can be calculated by determining the safety stock levels and inventory carrying cost. Contrary to this, cost of lost sales for finished goods includes the unmet demand that the company could not fulfill due to stock outs. A company cannot calculate this cost with accuracy. The take the subjective estimates to predict this value.
What is the underlying principle of the square-root rule? How do inventories change as the number of warehouses in a logistics network changes?
Square root rule works on the following principle: "For higher numbers of stocking locations, greater amount of inventory would be required to satisfy the customers. Contrary to this, lower amount of stocking locations would require lower level of aggregate inventories." In a logistic network, the inventories level would change with the change in the number of warehouses as pre the given expression: - Future inventory = present inventory X square root(no future facilities / no of present facilities) - This it is concluded that inventory level of existing facilities would increase with the increase in total number of facilities. conversely, inventory level of existing facilities would decrease with the decease in total number of facilities.
How does inventory carrying cost for inventory in transit differ from the cost of inventory at rest?
- Capital cost of inventory at rest and cost of inventory-in-transit would be same, only if they inventory in transit is owned by the same company. - cost of inventory at rest includes the storage space cost for the inventory. Carrying cost of inventory-in-transit does not include such cost. - Service cost for inventory at rest included the tax on inventory level. Contrary to this, service cost for inventory-in-transit included the insurance cost of inventory. - Deterioration cost of inventory-in-transit is negligible in comparison to the cost of inventory at rest. Since, in-transit inventory does not undergo much depreciation.
Compare and contrast the fixed quantity version of EOQ with the fixed internal version. In which situations would each be used?
- In fixed order quantity approach, a fixed amount of inventory is ordered each time a reordering takes place. This fixed amount of inventory is calculated on the basis of demand, product's cost, carrying and reorder cost. Contrary to this, in fixed internal version approach different amounts of inventory is ordered after a particular time period. - In fixed order quantity approach, when the inventory level reaches opt the reorder point next lot of inventory is ordered. Contrary to this, in fixed order internal approach, order size of inventories varies according to the availability of inventories present in the stock.
What is the difference between independent and dependent demand items? Why is this distinction important to inventory managers?
- When demand of a product depends on the demand of some other products, it is known as dependent demand. For example, demand of petrol would depend on the demand of cars. Contrary to this, when demand of a product does not depend on the demand of other products, it is known as the independent demand. For example, demand of a television would be independent. - In a manufacturing company the demand of raw material, semi-finished goods and other components depend upon the demand of finished product. it shows a dependent demand. Contrary to this, demand of finished products showing independent demand is complex as compared to the demand forecasting dependent products. - Demand formatting of products showing independent demand is complex as compared to the demand forecasting of dependent products. - Products showing dependent demand use just-in-time (JIT), Material resource planning (MRP) and manufacturing resource planning techniques. Contrary to this, products showing independent demand utilize DRP technique.
What are the benefits of classifying inventory using ABC analysis? What are the different types of criteria that could be used to classify inventory?
Benefits of classifying the inventories according to ABC analysis are listed below: - it helps a company to determine the crucial competes and raw materials required for its production process - a company used this analysis to monitor the demand of its crucial inventories and ensure their availability at the manufacturing facility. - It also helps a company to prioritize the tips involved in it production panning process. - Helps to increase the efficiency of an organization by maximum utilization of its resources. Under ABC analysis, inventory of an organization is classified on the basis of following criteria: - sales volume - cash flow - lead time - stock out costs
Explain the essential characteristics of MRP, DRP, and VMI. How do they operate with each other to provide a systematic approach to managing supply chain inventories?
Characteristics of MRP approach are given below: - Determines the demand of components, raw materials and subassemblies required for production. - Offsets the replenishment orders according to the rdiqiements of an organization. Characteristics of DRP approach is listed below: - It utilized a DRP table that contains various elements inducing SKU<BOH, scheduled recipes and planned orders. - Determines the replenishment schedules between an organization's manufacturing facilities and distribution centers. Characteristics of VMI approach is given below: - Manages the inventories present in various distribution centers of a company. All these techniques are related with each other. MRP helps to manage the inbound raw material and components of a manufacturing company. DRP helps to manage the finished goods between the facility and distribution centre. VMI helps to manage the inventories present in various distribution centers of a company. Hence, all these techniques work in coordination with each other to increase the efficiency of a supply chain.
Explain why inventory costs and inventory levels have declined relative to GDP over the last 20 years. is these beneficial to the economy? Why or why not?
Costs have declined as compared to GDP because of the continuous growth and advancement of information technology. Information technology advances have help organizations implement programs that take inventories out of the supply chain. Information technology has helped keep optimal levels of inventory and maximize productivity, sales, and market share. (good bc...) If inventory increases at a slower rate than GDP the economy will be generating more revenue with fewer assets and working capital investment.
How can inventory carrying cost be calculated for a specific product? What suggestions would you offer for determining the measure of product value to be used in this calculation?
Inventory carrying the cost for a specific product is calculated with the help of a given step: - determine the value of inventory - determine the costs involved in carrying individual components. add these costs to determine the total direct cost consumed by the product. This cost would include variable- based cost and value-based cost. - Divide the total cost involved in carrying inventory by the value of inventory. Doing this, would give the annual inventory cost for that product. Product value can be calculated by adding the cost of goods sold including the cost if direct labor, materials and overhead with the direct cost involved in moving that product from the manufacturing location to the distribution centre.
Why has the JIT approach to inventory control become popular in some industries? How does the JIT approach compare to the EOQ approach to inventory management? Should JIT be adopted by all inventory managers? Why or why not?
Just-in-time (JIT): inventory planning allows 'on time' delivery of parts and supplies to a company, at the time of requirement. JIT approach to inventory control is utilized by various inductors due to the following reasons: - it helps to reduce the overstocking or shortage of inventory. Thus it is helpful to minimize the lost opportunity cost as well as the inventory wastage within an organization. - JIT helps minimum utilization of resources. Thus it would increase the efficiency and effectiveness of an organization. - it helps in establishing partnerships with suppliers which often leads to better quality and more reliable delivery of raw materials and supplies. - it also helps to reduce the lead times and set up times in the manufacturing process that increases the productivity of an organization. Difference between JIT and EOQ approach are listed below: - In EOQ approach, inventory is considered as an asset. Contrary to this, JIT approach considers inventory as the liability of an organization. - organizations using EOQ approach, maintains a fixed amount of safety stock. Contrary to this, organizations using JIT approach do not maintain any safety stock. They procure the inventory at the time of manufacturing. - Production and lead time in EOQ approach is linger as compared to the JIT approach. - EOQ approach utilizes multiple sourcing. Contrary to this, JTI utilized single sourcing. JIT Cannot be utilized by all managers across different organizations due to the following reasons: - Procurement of small lots of materials sometimes becomes economically prohibitive. - Significant changes in inventory requirement without adequate lead time. - JIT manufacturing involves erratic schedules. - Besides this, JIT approach might create huge losses for a company in case of mishaps, accidents, or natural disaster.
What are the major components of inventory carrying costs?
capital cost storage space cost inventory service cost inventory risk cost in other words: - captial cost - the cost involved in storing the inventories - service cost associated with the inventory - risk cost associated with the inventory
How would you measure the capital cost for making inventory policy decisions?
capital cost: includes the cost incurred in purchasing inventory that remands un-utilized for a given period. a company could gain additional revenue by investing this amount on some other operations Capital cost is helpful to make inventory policy decisions. Capital can be measured with the help of the following: - by calculating the hurtle rate of an organization. Hurtle rate includes the minimum rate of return on new investments done by a company. - Weighted average costs of capital may be utilized to measure the capital cost. Weighted average costs of capital includes the average percent of debt incurred on various sources of funding.