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