Chapter 7: Inventory Management

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B items

40% of the items, 15% of the inventory cost

Cycle Counting

A commonly used technique in which physical inventory is counted on a periodic basis to ensure that physical inventory matches current inventory records.

ABC Inventory Matrix

A diagram that illustrates whether a firm's physical inventory matches its inventory usage. It is derived by plotting an ABC analysis based on inventory usage classification on the vertical axis and an ABC analysis based on physical inventory classification on the horizontal axis.

Pareto Analysis

A graphic technique that prioritizes the most frequently occurring problems or issues. The analysis recommends that problems falling into the most frequently occurring category be assigned the highest priority and managed closely.

Near Field Communication (NFC)

A secure form of data exchange between an NFC tag or Android-powered device with another Android-powered device. A specialized subset of RFID technology.

Radio Frequency Identification (RFID)

A technology that enables huge amounts of information to be stored on chips (called tags) and read at a distance by readers, without requiring line-of-sight scanning

Economic manufacturing Quantity (EMQ)

A variation of the classic EOQ model, used to determine the most economical number of units to produce.

Quantity Discount Model

A variation of the classic EOQ model, wherein purchase price is allowed to vary with the quantity purchased

active RFID tags

An RFID tag that is equipped with an onboard power supply to power the integrated circuits and broadcast its signal to the tag reader.

finished goods

Completed products ready for shipment. Often kept to buffer against unexpected demand changes in anticipation of production process downtime.

Direct Costs

Cost 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.

Fixed Cost

Cost that are independent of the output quantity

Physically counting inventory on a periodic basis

Cycle counting can be described as... A.) the analysis performed by an ABC analysis B.) physically counting inventory on a periodic basis C.) inventory control in a Motorcycle shop D.) stock counts of MRO items

Variable Cost

Expenses that vary as a function of the output level.

A items

Given the highest priority. 20% of the items, 80% of the inventory cost

Equal to the annual ordering cost

If an item is ordered using its economic order quantity, the annual carrying cost should be... A.) equal to the the annual ordering cost B.) the square root of the annual ordering cost C.) twice the annual purchase price D.) slightly less than the annual ordering cost

Fixed Order Quantity Models

Independent demand inventory models that use fixed parameters to determine the optimal order quantity to minimize total inventory costs.

C items

Lowest priority and are typically the most numerous. 40% of the items, 5% of the inventory cost.

obsolenscence

Overstocking of B and C items will cause...

Big Data

Refers to collection and analysis of significant portions of data to make business decisions

Economic Order Quantity (EOQ) Model

The classic independent demand inventory system that computes the optimal order quantity to minimize total inventory cost

Holding (carrying) costs

The cost incurred for holding inventory in storage

Independent Demand

The demand for a firms end products and has a demand pattern affected by trends, seasonal patterns, and general market conditions.

service level

The in-stock probability

Reorder Point (ROP)

The lowest inventory level at which a new order must be placed to avoid a stock out during the order cycle time period

Price Break Point

The minimum quantity required to receive a quantity discount

Indirect Cost

Those cost that cannot be traced directly to the unit produced and are synonymous with manufacturing overhead.

Out of stocks

Understocking of A and B items will cause...

MRO (maintenance, repair, operating) supplies

Used when producing the products but are not parts of the products. (Ex. Solvents, cutting tools, and lubricants for machines)

Cost, radio frequencies differ, skeptical about sharing information

What are RFID challenges?

Unprocessed purchased inputs or materials for manufacturing the finished goods

What are raw materials?

Radio Frequency Identification (RFID)

What is an inventory tracking tool, like barcoding, that does not require direct line of site for scanning (tag, reader, communication network, and software)

EOQ= square root ((2*annual demand*cost of placing one order)/holding cost))

What is the economic order quantity equation?

Annual Purchase+Annual Order+Annual Holding

What is the equation for the total annual inventory cost?

To buffer against demand uncertainty and safety stock

What is the primary purpose of inventory?

Dependent Demand

When General Motors purchased tires for their automobiles, this can be classified as: A.) continuous demand B.) dependent demand C.) independent demand D.) customer demand

80% of the annual dollar usage

When using the ABC Inventory Classification, A items typically account for about...

Retail goods at a department store

Which of the following is not a dependent demand? A.) service parts at an auto repair shop B.) raw materials at a manufacturer C.) retail goods at a department store D.) hamburger buns at McDonald's

Periodic Review System

a review of physical inventory at specific points in time

Continuous Review System

an inventory management system where the physical inventory levels are counted on a continuous or daily basis

Work in Process (WIP)

describes materials that are partially processed but not yet ready for sales.

Inventory

one of the most expensive assets for a company. It needs to be reduced but levels maintained to avoid stock outs.

80/20 rule

A theory originating from Pareto analysis, which suggest that most of a firms problem "events" (80 percent) are accounted for by just a few (20 percent) of the problems; can also be applied to other areas, such as the ABC inventory control, which says 80 percent of inventory dollars come from 20 percent of the inventory items

ABC Inventory Control System

A useful technique for determining which inventories should be managed more closely and which others should not (A items are the most important)

electronic product code (EPC)

A widely used RFID standard managed by EPC global, Inc.

Inventory Turnover Ratio

A widely used measure to analyze how efficiently a firm uses its inventory to generate revenue.

The tag, reader, communication network, and software

An RFID system consist of... A.) the code, band, writer, and reader B.) the tag, reader, communication network, and software C.) the standards, the equipment, the software, and the printer D.) the header, the manager, object, and serial number

Inventory Turns Ratio= Cost of Revenue/Average Inventory

Inventory Investment is measured by...

Materials Management Manufacturing Distribution Center Retail Store

RFID is a tool which automated the supply chains...

passive RFID tags

RFID tags that are without an internal power source and require power from a tag reader

maintenance, repair, and operating supplies

The categories of inventory are raw materials, work-in-process, finished goods, and ______

Setup Cost

The cost associated with setting up machines and equipment to produce a batch of product.

Dependent Demand

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.

Excess carrying cost

Too much inventory creates...

Raw Materials Finished Goods Work in Process MRO (maintenance, repair, & operating

What are the 4 categories of inventory?

Cost, radio frequencies differ, skeptical about sharing information

What are the RFID challenges?

Independent (finished goods/final products requested by customer) & dependent demand (components to assemble/manufacture independent demand)

What are the two inventory types?

To decouple processing stages or to break the dependencies between work centers

What is a reason to keep WIP inventories?

Direct Cost

Each unit produced contains $1.25 in materials. This is an example of...

Order Cost

the direct variable cost associated with placing an order with a supplier


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