Chapter 4

indirect

COST RELATED TO INVENTORY cannot be traced directly to the unit produced (e.g., overhead; MRO items, buildings, equipment, etc.)

carrying

COST RELATED TO INVENTORY costs for physically having inventory on-site and for maintaining the infrastructure needed to store the inventory and to secure and insure it over time.

variable

COST RELATED TO INVENTORY dependent on the unit volume produced vary with output level (e.g., materials, labor, utility power, etc.)

Individual Item Purchase Price Discounts

Discounts for ordering larger quantities. If the volume discount is sufficient to offset the added cost from carrying additional inventory, then ordering a larger volume may be desirable.

cycle stock

Inventory that a company builds to satisfy its' immediate demand_. depletes gradually as customer orders are received, and is replenished cyclically when supply orders are received amount is dependent on actual demand

maintenance, repair, and operating (MRO) products

Items used in support of _general operations and maintenance such as maintenance supplies, spare parts, and consumables used in the manufacturing process and supporting operations.

transportation freight rate discounts

Ordering a larger quantity may mean that you can take advantage of Transportation Freight-Rate Discounts which will lower the per unit costs.

trasnportation

The item being ordered and transported may require specialized or dedicated transportation, impacting the quantity per order

reorder point (ROP)

The lowest inventory level at which a new order must be placed to avoid a stockout is known as the

limited capital

The model may generate an order quantity which the company does not have sufficient available funds to purchase at one time.

obsolescence

The model may generate an order quantity which would create spoilage or obsolescence.

fixed time period system

The order quantity is the difference between the on-hand stock on the review day, and the pre-determined target inventory level. Q = R - IP where: Q = order quantity R = target inventory level IP = inventory position

unitization

The supplier may require the company to order an item in full pack, case, or pallet configurations.

fixed order fixed time period

The two common inventory ordering system categories

Maintenance, Repair & Operating (MRO) supplies

These are materials that you need to run the manufacturing operation and the business, but do not end up as part of the finished product

E

Which of the following cannot be considered as independent demand items? a. wholesale and retail merchandise items b. maintenance, repair, and operating supplies at a manufacturing company c. maintenance, repair, and operating supplies at a service firm d. raw material items that become part of the final product at a manufacturing firm e. service industry items such as hospital supplies or office supplies for law firms

E

Which of the following is NOT an assumption of the classic Economic Order Quantity (EOQ)? a. Lead time is known and constant. b. Demand is known and constant. c. Instantaneous replenishment. d. There is no quantity discount. e. The production rate must be greater than the consumption rate.

2D Bar Codes

are a graphical image that stores information both horizontally and vertically.

order costs

are costs that are incurred each time an order is placed. incurred each time an order in placed

carrying costs

are costs that are incurred for holding inventory in storage incurred for holding inventory

ABC system

classifies inventory based the degree of importance: Steps: Determine annual usage or sales for each item. Determine % of total usage or sales that each item represents. Rank items from highest to lowest %. Classify items into groups: A: Highest Value B: Moderate Value C: Least Valuable

strategic stock

stock generally used for a very specific purpose or future event, and for a defined period of time.

To Meet Customer Demand To Buffer Against Uncertainty in Demand and/or Supply To Decouple Supply from Demand To Decouple Dependencies in the Supply Chain

why hold inventory? (4 reasons)

single period inventory model

- a type of inventory system in which inventory is only ordered for a one-time stocking.

strategic stock, safety stock, and cycle stock

3 levels of internal inventory

Raw Materials Work-in-Process (WIP) sometimes called Work-in-Progress Finished Goods Maintenance, Repair and Operating (MRO) supplies

4 main categories of inventory

work in progress

A good or goods in various stages if completion throughout the plant, spanning from raw material that has been released for initial processing up to fully processed material awaiting final inspection and acceptance as finished goods.

Economic Order Quantity (EOQ)

A quantitative decision model based on the trade-off between annual inventory carrying costs and annual order costs. EOQ is a fixed-order quantity model

service inventory

Activities carried out in advance of the customer's arrival do NOT maintain inventory of services, but of facilitated goods

fixed

COST RELATED TO INVENTORY (aka Sunk Costs) - independent of the unit volume produced (e.g., buildings, equipment, rent, allocated overhead costs, etc.)

direct

COST RELATED TO INVENTORY directly traceable to unit produced

order

COST RELATED TO INVENTORY labor costs associated with placing an order for inventory and the cost of receiving the order.

B

Companies hold a supply of inventory for all of the following reasons EXCEPT: a. meet variation in product demand b. increase production change/setup costs c. allow production scheduling flexibility d. purchase in bulk to take advantage of quantity discounts e. maintain independence of operations (Decoupling)

two models determining when to review inventory levels

Continuous Review System Periodic Review System

fixed order quantity

If the review determines that an order should be placed, then the order for a pre-defined quantity for that item is placed. Two main variables to calculate: Reorder Point (ROP) Order Quantity (Q)

Multiple-Item Purchase Price Discounts

If you purchase a combination of items from a supplier you may be able to take advantage of a volume discount based on the total volume across all the items purchased rather than just an individual item's volume.

E

In the ABC Inventory Matrix, inventory in area Y suggests a. under-stocked A and B items. b. under-stocked B and C items. c. overstocked A and B items. d. over-stocked B and C items. e. inventory matches sales.

D

In the ABC Inventory Matrix, inventory in area Z suggests a. under-stocked A and B items. b. under-stocked B and C items. c. overstocked A and B items. d. over-stocked B and C items. e. inventory matches sales.

pipeline stock

Inventory in the transportation network and the distribution system. Inventory that is already out in the market being held by wholesalers, distributors, retailers, and even consumers. The ownership of this inventory has been transferred to the trading partners, but may still influence decisions the company makes regarding how they manage and control their internal inventory, and how much safety stock and/or strategic stock to hold.

Obsolete Inventory

Inventory items that have met the observation criteria established by the company. never used or sold at full value

bin system

Inventory system that uses either one or two bins to hold a quantity of the item being inventoried. It is mainly used for small or low value items. When the inventory in the first bin has been depleted, an order is placed to refill or replace the inventory. The second bin is set up to hold enough inventory to cover demand during the replenishment lead time so as to last until the replacement order arrives.

materials inventory

Maintaining adequate ____________- inventory allows a company to support manufacturing operations and the production plan while avoiding delays.

finished product inventory

Maintaining adequate ___________________ inventory allows a company to fill customer orders immediately

raw materials

Purchases items or extracted materials that are converted via the manufacturing process into components and products.

Demand during Lead Time

ROP is equal to

Radio Frequency Identification (RFID)

Successor to the barcode for tracking individual unit of goods.

t

T/F Relaxing the instantaneous replenishment assumption of the EOQ model results in the Economic Manufacturing Quantity model.

T

T/F The EOQ, also known as the economic order quantity, is the optimal order size in terms of cost because it minimizes the annual total inventory cost. The EOQ is the lot size where inventory holding costs equal annual ordering costs.

Individual Item Purchase Price Discounts Multiple-Item Purchase Price Discounts Transportation Freight-Rate Discounts

The EOQ calculation will be impacted by volume economies of scale such as the following: (3)

storage capacity

The model may generate an order quantity which the company does not have sufficient storage capacity to handle at one time.

inventory turnover

The number of times that an inventory cycles, or "turns over," during the year.

D

The primary purpose of the basic economic order quantity model is a. to calculate the reorder point, so that replenishments take place at the proper time b. to minimize the sum of carrying cost and holding cost c. to maximize the customer service level d. to minimize the sum of setup cost and holding cost e. to calculate the optimum safety stock

production lot size

The supplier may require the company to order an item in full production lot sizes.

absolute inventory value

The value of the inventory at either its cost or its market value. Generally found on the balance sheet.

finished goods

Those items on which all manufacturing operations, including final testing, have been completed. These products are available for sale and/or shipment to the customer.

base level stock system

a type of inventory system that issues an order whenever a withdrawal is made from inventory.

safety stock

also known as "buffer stock," is inventory that is above and beyond what is actually needed to meet anticipated demand A quantity of stock planned to be in inventory to protect against fluctuations in demand or supp

barcode reader

an electronic device that can read barcodes and transmit the data to a computer. These might be handheld cordless devices, corded devices that attach directly to a PC's USB port, or computers with integrated laser scanners

Linear (1D) Bar Codes

are "a series of alternating bars and spaces printed or stamped on parts, containers, labels, or other media, representing encoded information that can be read by electronic readers.

hidden costs

having too much inventory on hand can lead to ________________

cogs/average inventory at cost

inventory turnover ratio

pipeline

level of external inventory

inventory

the quantities of goods and mateiels that are held in stock

Purchase Cost + Order Cost + Carrying Cost

total cost =

inventory

what is typically a company's largest asset?