Operations Management Test #3

What are the primary reasons for holding inventory?

(1) to take advantage of price discounts, (2) to take advantage of economic lot sizes, (3) to provide a certain level of customer service, and (4) because production requires some in-process inventory.

Total Cost

(Q/2)(H) + (D/Q)(S)

What are the trade-offs for buying additional amounts to take advantage of quantity discounts.

Buying additional units to take advantage of quantity discounts will save money on a per unit purchasing cost of the item. We will also save on ordering cost because since we bought a larger quantity, we will not have to order this item as frequently. However, as a result of ordering larger quantity, we will have to carry larger inventory in stock, which in turn will result in an increase in inventory holding cost.

Briefly describe each of the costs associated with inventory.

Carrying or holding costs include interest, security, warehousing, obsolescence, and so on. Procurement costs relate to determining how much is needed, vendor analysis, inspection of receipts and movement to temporary storage, and typing up invoices. Shortage costs refer to opportunity costs incurred through failure to make a sale due to lack of inventory. Excess costs refer to having too much inventory on hand.

What are the trade-offs for treating holding costs as a percentage of unit price instead of a constant amount?

If we treat holding cost as a percentage of the unit price, as the unit price increases, so will the holding cost, and as a result, if we are using the EOQ approach, we will have to place a smaller order, resulting in a lesser inventory. On the other hand, if we use a constant amount of a holding cost, the inventory decisions will not be affected by the changes in unit cost (price) of the item.

D

annual demand

H

annual holding

LT

lead time

S

setup cost per order

Describe the A-B-C approach to inventory control.

A-B-C approach refers to the classification of items stocked according to some measure of importance (e.g., cost, cost-volume, criticalness, cost of stockout) and allocating control efforts on that basis.

Explain how a carrying cost can result in a decrease in inventory.

As the carrying cost increases, holding inventory becomes more expensive. Therefore, in order to avoid higher inventory carrying costs, the company will order more frequently in smaller quantities because ordering smaller quantities will lead to carrying less inventory.

What are the requirements for effect inventory management?

Effective inventory management requires cost information, information on demand and lead time (amounts and variabilities), an accounting system, and a priority system (e.g., A-B-C).

Who needs to be involved in making inventory decisions involving holding costs? Setting inventory levels? Quantity discount purchasing?

In making inventory decisions involving holding costs, setting inventory levels and deciding on quantity discount purchases, the materials manager, plant manager, production planning and control manager, the purchasing manager, and in some cases the planners who work in production planning and control or purchasing departments should be involved. The level and the nature of involvement will depend on the organizational structure of the company and the type of product being manufactured or purchased.

What is safety stock and what is its purpose?

Safety stock is inventory held in excess of expected demand to reduce the risk of stockout presented by variability in either lead time or demand rates.

Under what circumstances would the amount of safety stock be held large, small, and zero?

Safety stock is large when large variations in lead time and/or usage are present. Conversely, small variations in usage or lead time require small safety stock. Safety stock is zero when usage and lead time are constant, or when the service level is 50 percent (and hence, z = 0).

What potential benefits do RFID tags have for inventory management?

Scanners will automatically read the information on an RFID chip into a database, so the companies can keep track of sales and inventory. Keeping track of inventory will enable suppliers to keep track of trends and react to market changes. In addition, RFID chips will assist in increasing the speed of communication on a supply chain. The information between parties will travel faster, which will improve the responsiveness of buyers and ordering information on the supply chain.

What potential risks do RDIF tags have for inventory management?

The risk of using RFID chip tags stems from privacy concerns. It is feared that computer pirates will figure out security controls and be able to scan shoppers' merchandise and determine what they have bought. In order to avoid this risk, companies are considering turning of RFID tags once the items are purchased.

How has technology aided inventory management? How have technological improvements such as automobiles and computers impacted inventory management?

The technology has had a tremendous impact on inventory management. The utilization of bar coding has not only reduced the cost of taking physical inventory but also enabled real time updating of inventory records. The satellite control systems available in trucks and automobiles has enabled companies to determine and track the location of in-transit inventory.

How would you respond to the criticism that EOQ models tend to provide misleading results because values of D, S, and H are, at best, educated guesses?

The total cost curve is relatively flat in the vicinity of the EOQ, so that there is a "zone" of values of order quantity for which the total cost is close to its minimum. The fact that the EOQ calculation involves taking a square root lessens the impact of estimation errors. Also, errors may cancel each other out.

What are some ways a company can reduce the need for inventories?

Whusing standardized parts, improved forecasting of demand, using preventive maintenance on equipment and machines, reducing supplier delivery lead times and delivery reliability, utilizing reliable suppliers and improving the relationships in the supply chain, restructuring the supply chain so that the supplier holds the inventory, reducing production lead time by using more efficient manufacturing methods, developing simpler product designs with fewer parts.

What are the trade-offs for conducting cycle counts once a quarter instead of once a year?

will result in more frequent counting, which will result in an increase in labor and overhead costs. However, the more frequent counting would also lead to less errors in inventory accuracy and more timely detection of errors, which in turn would lead to timely deliveries to customers, less work in process inventory, more efficient operations, improved customer service, and assurance of material availability.

ROP

d*LT

d

demand rate