Chapter 12: Inventory Management

Which of the following allow you to calculate the average amount of inventory in transit?

ATI = (tD)/365

If the EOQ is ordered, which of the following is true?

Annual ordering cost is equal to annual holding cost.

How can both the JIT and EOQ inventory theories effectively be reconciled?

By considering the setup cost as a variable instead of a parameter

How Companies Use Their Inventory

1.Anticipation or seasonal inventory (for future demand) 2.Fluctuation Inventory or Safety (or Reserve) Stock: buffer demand fluctuations. 3.Lot-size or cycle stock: take advantage of quantity discounts or purchasing efficiencies. 4.Transportation or Pipeline inventory. 5.Speculative or hedge inventory protects against some future event, e.g. labor strike, price increase. 6.Maintenance, repair, and operating (MRO) inventories, e.g. hand tools, lubricants, supplies.

If annual demand is 6,000, ordering cost is $45, and holding cost is $20, what is EOQ?

164.3 2(6000)(45) / 20 = 540,000/20= 27,000; sq rt of 27,000 = 164.3

What level of average inventory must be maintained on hand to provide 4 hours of production supply if the average material consumption rate is $12 per hour?

48 units

Determine the standard deviation of demand during review period and lead time if the review period is 10 days, lead time is 15 days and the standard deviation of demand during interval is 125 units.

625

ABC Inventory classification uses the Pareto analysis to segment items into value categories based on annual dollar volume. Which of the following represents the percentage for each?

A = 20%/80%; B = 30%/15%; C = 50%/5%

How can the EPQ model be economically reconciled with just-in-time (JIT) production?

Decrease ordering cost (S).

Cycle counting is a method for maintaining accurate inventory records.

Determining what and when to count are the major decisions.

Inventory Record Accuracy

Inaccurate inventory records can cause: Lost sales. Disrupted operations. Poor customer service. Lower productivity. Planning errors and expediting.

Cost-efficient operations

Inventories help achieve cost-effective operations by •Using buffer stock to assure smooth production flow • Maintaining a level workforce • Allowing longer production runs, which spreads the cost of setups • Taking advantage of quantity discounts

Inventory Investment Measures Example: The Coach Motor Home Company has annual cost of goods sold of $10,000,000. The average inventory value at any point in time is $384,615. Calculate inventory turnover and weeks/days of supply.

Inventory Turnover:

Types of Inventory

Inventory comes in many shapes/sizes: Raw materials - purchased items or extracted materials transformed into components or products Components - parts or subassemblies used in final product. Work-in-process - items in process throughout the plant. Finished goods - products sold to customers. Distribution inventory - finished goods in the distribution system.

Which of the following is not one of the six ways to use inventory?

JIT inventory

Hand tools, lubricants, and cleaning supplies are usually examples of what?

MRO inventory

Which of the following inventory functions does not involve end products sold to customers?

MRO inventory

Customer service

Measured by any of the following: • Percentage of orders shipped on schedule • Percentage of line items shipped on schedule • Percentage of dollar volume shipped on schedule • Idle time due to component and material shortages

Minimum inventory investment

Measured by any of the following: •Inventory turnover • Weeks of supply • Days of supply

_____________________ is the probability that demand during lead time will not exceed on-hand inventory.

Order-cycle service level

Which of the following is an assumption of the basic EOQ model?

Orders arrive at once (in one lot).

Which basic EOQ assumption does the EPQ model relax?

Orders arrive at once.

Customer Service Level Measurements

Percentage of Orders Shipped on Schedule. Good measure if orders have similar value (Doesn't capture) . If one company represents 50% of your business but.only 5% of your orders, 95% on schedule could represent only 50% of value. Percentage of Line Items Shipped on Schedule. Recognizes not all orders are equal, but doesn't capture $ value of orders. More expensive to measure. Ok for finished goods. A 90% service level might mean shipping 225 items out of the total 250 line items totaled from 20 orders scheduled. Percentage Of $ Volume Shipped on Schedule. Recognizes the differences in orders in terms of both line items and $ value.

Which of the following statements is true?

Periodic counting generally counts every item in stock, whereas annually cycle counting generally does not daily.

Objectives of Inventory Management

Provide desired customer service level, to allow cost-efficient operations, and to minimize inventory investment. Three objectives: Customer service. Provide for cost-efficient operations. Minimum inventory investments.

Inventory comes in many shapes and sizes, as shown in Figure 12.1. Most manufacturing firms have the following types of inventory.

Raw materials are the purchased items or extracted materials that are transformed into components or products. For example, gold is a raw material that is transformed into jewelry. Components are parts or subassemblies used in building the final product. For example, a transformer is a component in an electronic product

In a periodic review inventory system, how many units are ordered?

Target inventory level - on hand balance

Inventory Record Accuracy

Two methods for checking record accuracy: Periodic counting - physical inventory is taken periodically, usually annually. Steps: Count, Verify, Collect tickets, Reconcile. Cycle counting - daily counting of pre-specified items provides the following advantages: Timely detection and correction of inaccurate records. Elimination of lost production time due to unexpected stock outs. Structured approach using employees trained in cycle counting.

Chapter 12 Highlights

Types of inventory: Raw materials, purchased components, work-in-process, finished goods, distribution inventory and maintenance, repair and operating supplies types of inventory. Objectives of inventory management are to provide the desired level of customer service, to allow cost-efficient operations, and to minimize inventory investment. Inventory investment is measured in inventory turnover and/or level of supply. Inventory performance is calculated as inventory turnover or weeks, days, or hours of supply. Cycle counting is a method for maintaining accurate inventory records. Determining what and when to count are the major decisions.

Which of the following is not a type of manufacturing inventory?

accounting inventory

Percentage of orders shipped on schedule is a good measure of finished goods customer service if:

all orders and customers have similar value.

What is the formula for inventory turnover?

annual cost of goods sold / average inventory in dollars

What costs are considered in the quantity discount model?

annual purchasing costs + annual holding costs + annual ordering costs

Which inventory function specifically is designed to allow the company to maintain a level production strategy?

anticipation inventory

Which is the primary inventory function that is activated after coupons are distributed to customers?

anticipation inventory

Distribution inventory

consists of finished goods and spare parts at various points in the distribution system—for example, stored in warehouses or in transit between warehouses and consumers. Maintenance, repair, and operational (MRO) inventory are supplies that are used in manufacturing but do not become part of the finished product. Examples of MRO are hand tools, lubricants, and cleaning supplies.

If inventory records fail to accurately reflect the quantity of materials available, all except which of the following may occur?

continuous operations

What are the three areas for Inventory objectives?

customer service, cost-efficient operations, minimum inventory investment

Finished goods in transit to the customer are called what?

distribution inventory

Maintenance, Repair, and Operating (MRO) Inventory

includes maintenance supplies, spare parts, lubricants, cleaning compounds, and daily operating supplies such as pens, pencils, and note pads. MRO items support general operations and maintenance but are not part of the product the company builds. Inventory plays multiple roles in a company's operations. For this reason, companies develop inventory management objectives and performance measures to evaluate how well they are handling their inventory investment. The six functions of inventory are summarized in Table 12.1

Companies can achieve cost-efficient operations by using which of the following inventory approaches?

inventory building to leverage reduced setup costs

Speculative or Hedge Inventory

is a buildup to protect against some future event such as a strike at your supplier, a price increase, or the scarcity of a product that may or may not happen. A company typically builds speculative inventory to ensure a continuous supply of necessary items. Think about booking an airline flight three months in advance so you can take advantage of a reduced fare. You assume that the airfare will not be reduced further and that you will still need the ticket three months from now. It is a gamble.

Cycle counting

is a method of counting inventory throughout the year. This is a series of mini-physical inventories done daily of some pre-specified items. The frequency of counting a particular item depends on the importance and value of the item. Typically, A items are counted most frequently. The advantages of cycle counting are • Timely detection and correction of inventory record problems. • Elimination of lost production time since the company does not need to shut down operations. • The use of employees dedicated to cycle counting.

Anticipation Inventory or Seasonal Inventory

is built in anticipation of future demand, planned promotional programs, seasonal fluctuations, plant shutdowns, and vacations. Companies build anticipation inventory to maintain level production throughout the year. For example, the toy industry builds toys throughout the year in anticipation of high seasonal sales in December.

Fluctuation Inventory or Safety Stock

is carried as a cushion to protect against possible demand variation, "just in case" of unexpected demand. For example, you might keep extra food in the freezer just in case unexpected company drops in. Fluctuation inventory or safety stock is also called buffer stock or reserve stock.

Transportation or Pipeline Inventory

is in transit between the manufacturing plant and the distribution warehouse. Transportation inventory are items that are not available for satisfying customer demand until they reach the distribution warehouse, so the company needs to decide between using slower, inexpensive transportation or faster, more expensive transportation. To calculate the average amount of inventory in transit, we use the formula

Percentage of Line Items Shipped on Schedule recognizes that:

not all orders are equal but fails to take into account the dollar value of orders.

Inventory investment is measured in inventory turnover and

or level of supply. Inventory performance is calculated as inventory turnover or weeks, days, or hours of supply.

A(n) _________________ inventory record provides an up-to-date inventory balance by recording all inventory transactions as they happen.

perpetual

What are purchased items or extracted materials that will be transformed into components or products called?

raw materials inventory

In some cases, companies have shifted the burden of inventory accuracy and replenishment decisions to their vendor. Vendor-managed inventory (VMI)

requires the vendor to maintain an inventory of certain items at the customer's facility. The supplier still owns the inventory until the customer actually withdraws it for use. At that time, the customer pays for the items. The customer does not have to order any of the inventory, as the supplier is responsible for maintaining an adequate supply. Companies use this approach most frequently with lower-level C items that have a relatively standard design.

Lot-size Inventory or Cycle Stock

results when a company buys or produces more than is immediately needed. The extra units of lot-size inventory are carried in inventory and depleted as customers place orders. Consider what happens when you buy a 24-can case of soda. You do not normally drink all 24 cans at once. Instead, what you do not need right away, you store for future consumption. You may buy more of an item than you need to take advantage of lower unit costs or quantity discounts. Cycle stock also occurs when making products and the process has a minimum greater than is needed.

Periodic counting

satisfies auditors that the inventory records accurately reflect the value of the inventory on hand. For material planners, the physical inventory is an opportunity to correct errors. The four steps in taking a physical inventory are 1.Count the quantity of the item and record the count on a ticket attached to the item. 2. Verify by recounting. 3. After verification, collect the tickets. 4. Reconcile inventory records with actual counts. For major discrepancies, investigate further. For minor discrepancies, adjust the inventory records.

Which inventory function provides a cushion against unexpected supply shortage?

speculative inventory

Which inventory function provides a hedge against inflation?

speculative inventory

Which of the following is used in determining the order quantity in the periodic review system?

target inventory level

After the product is completed, it becomes finished goods

the bicycles, stereos, CDs, and automobiles that the company sells to its customers.

Work-in-process (WIP) refers

to all items in process throughout the plant. Since products are not manufactured instantaneously, there is -always some WIP inventory flowing through the plant

The objectives of inventory management are to provide the desired level of customer service

to allow cost-efficient operations, and to minimize inventory investment. Customer service can be measured in several ways, including as a percentage of orders shipped on schedule, a percentage of line items shipped on schedule, a percentage of dollar volume shipped on schedule, or idle time due to material and component shortages. Cost-efficient operations are achieved by using inventory as buffer stocks, allowing a stable year-round workforce, and spreading the setup cost over a larger number of units.

Which inventory function exists between the manufacturing plant and the distribution plant?

transportation inventory

In inventory management, when discussing customer service we mean:

whether the product is available when the customer wants it.

Raw materials, purchased components

work-in-process (WIP), finished goods, distribution inventory and maintenance, repair and operating supplies are all types of inventory. Inventories have several uses: anticipation inventory is built before it is needed; fluctuation stock provides a cushion against uncertain demand; cycle stock is a result of the company's ordering quantity; transportation inventory includes items in transit; speculative inventory is a buildup to protect against some future event; and MRO inventory supports daily operations.