Chapter 7

Understand the various types and principles of statistical Reorder Point models

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Given a simple example, be able to calculate the Inventory Turnover Ratio

COST OF REVENUE/AVERAGE INVENTORY

Distinguish dependent from independent demand inventories

Dependent demand is the internal demand for parts based on the demand of the final product in which the parts are used. Subassemblies, components and raw materials are examples of dependent demand items. Dependent demand may have a pattern of abrupt and dramatic changes because of its dependency on the demand of the final product Independent demand is the demand for a firm's end products and has a demand pattern affected by trends, seasonal patterns and general market conditions. For example, the demand for an all-terrain vehicle is independent demand. Batteries, headlights, seals and gaskets originally used in assembling the all-terrain vehicles are dependent demands; however, the replacement batteries, headlights, seals and gaskets sold as service parts to the repair shops or end users are independent demand items

Understand the costs of inventory and inventory turnovers

Direct costs are those that are directly traceable to the unit produced, such as the amount of materials and labor used to produce a unit of the finished good Indirect costs are those that cannot be traced directly to the unit produced and they are synonymous with manufacturing overhead. (Maintenance, repair and operating supplies; heating; lighting; buildings; equipment; and plant security are examples of indirect costs.) Fixed costs are independent of the output quantity, but variable costs change as a function of the output level. Buildings, equipment, plant security, heating and lighting are examples of fixed costs, whereas direct materials and labor costs are variable costs Order costs are the direct variable costs associated with placing an order with the supplier, whereas holding or carrying costs are the costs incurred for holding inventory in storage. Order costs include managerial and clerical costs for preparing the purchase, as well as other incidental expenses that can be traced directly to the purchase. Examples of holding costs include handling charges, warehousing expenses, insurance, pilferage, shrinkage, taxes and the cost of capital. setup costs are used in place of order costs to describe the costs associated with setting up machines and equipment to produce a batch of product. A widely used measure to determine how efficiently a firm is using its inventory to generate revenue is the inventory turnover ratio or inventory turnovers . This ratio shows how many times a company turns over its inventory in an accounting period.

Understand the goals and variables utilized in the EOQ and EMQ models and their underlying assumptions

E.O.Q = The basic order decision is to determine the optimal order size that minimizes total annual inventory costs. Its assumptions are demand is known and constant delivery time is known and constant replenishment is instantaneous price is constant holding cost is known and constant order cost is known and constant stockouts are not allowed E.O.Q VARIABLES ARE. Annual demand Purchase price Ordering sots Holding costs Order quantity EMQ= Used to determine the most economical number of units to produce.

Know RFID and how it can be used in inventory management

Radio frequency identification (RFID) has been used as an eventual successor to the barcode for tracking an individual unit of goods. RFID does not require direct line of sight to read a tag, and information on the tag is updatable. RFID is a valuable technology for tracking inventory in the supply chain. It can synchronize information and physical flow of goods across the supply chain from manufacturers to retail outlets and to the consumers at the right place at the right time. Likewise, RFID can track returned goods through the supply chain and prevent counterfeit. It also helps to reduce out-of-stock items. There is no doubt that RFID is an invaluable tool for improving inventory management and supply chain efficiencies

Describe the four basic types of inventories and their functions

Raw materials are unprocessed purchased inputs or materials for manufacturing the finished goods. Raw materials become part of finished goods after the manufacturing process is completed. There are many reasons for keeping raw material inventories, including volume purchases to create transportation economies or take advantage of quantity discounts; stockpiling in anticipation of future price increases or to avoid a potential short supply; or keeping safety stock to guard against supplier delivery or quality problems. Work-in-process (WIP) describes materials that are partially processed but not yet ready for sales. One reason to keep WIP inventories is to decouple processing stages or to break the dependencies between work centers. Finished goods are completed products ready for shipment. Finished goods inventories are often kept to buffer against unexpected demand changes and in anticipation of production process downtime; to ensure production economies when the setup cost is very high; or to stabilize production rates, especially for seasonal products. Maintenance, repair and operating (MRO) supplies are materials and supplies used when producing the products but are not parts of the products. Solvents, cutting tools and lubricants for machines are examples of MRO supplies. The two main reasons for storing MRO supplies are to gain purchase economies and to avoid material shortages that may shut down production.

Understand the effect of Quantity Discounts

The quantity discount model or price-break model is one variation of the classic EOQ model. It relaxes the constant price assumption by allowing purchase quantity discounts. The quantity discount model must consider the trade-off between purchasing in larger quantities to take advantage of the price discount. It basically creates an incentives to buy more cause u get a higher discount.

Describe the continuous review and periodic review systems

continuous review of the physical inventory is required to make sure that orders are initiated when physical inventories reach their reorder points. In practice, a continuous review system can be difficult to achieve and very expensive to implement. Inventory review costs can be lowered by using a periodic review system instead, where physical inventory is reviewed at regular intervals, such as weekly or monthly. continuous review system difficult to achieve for all inventory items requires less safety stock periodic review system physical inventory is reviewed at regular intervals (ABC) weekly monthly quarterly annually requires safety stock to protect against inventory system errors.

Understand ABC classification, ABC inventory matrix & cycle counting

the ABC system suggests that approximately 20 percent of the items make up about 80 percent of the total annual dollar usage, and these items are classified as the A items. The B items make up roughly 40 percent of the items and account for about 15 percent of the total annual dollar usage, while the C items are the remaining 40 percent of the items, making up about 5 percent Finally, the two ABC analyses are combined to form an ABC inventory matrix as shown in Figure 7.1. The A items based on current inventory value should match the A items based on annual inventory dollar usage, falling within the unshaded diagonal region of the figure. Similarly, the B and C items should match when comparing the two ABC analyses. Otherwise, the company is stocking the wrong items. The ABC inventory matrix also suggests that some overlaps are expected between two cycle counting to reconcile discrepancies between their physical inventory and inventory record on a monthly or quarterly basis. Cycle counting, or physically counting inventory on a periodic basis, also helps to identify obsolete stocks and inventory problems so that remedial action can be taken in a reasonable amount of time. However, cycle counting can be costly and time-consuming and can disrupt operations.