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Chapter 12 – Inventory Management

Type of Inventories
1. Raw Materials (RM) and purchased parts
2. Partially completed goods (WIP)
3. Finished goods inventory (FG)
4. Replacement parts, tools, supplies
5. Goods in transit to warehouse or customer(FedEx)
What happens to production AND sales if you don’t have the inventory you need?
can’t produce product, stop production, and stops products from entering the market, and stops revenue.
Dependent demand
inventory items that are components of FG. Demand is derived from # of desired Fgs.
What is Safety Stock?
Extra inventory
take advantage of order cycles
This is when we buy quantities of inventory that exceed our need to minimize purchasing costs and inventory costs. Example: shopping at Sams
hedge against price increases
betting the price now is cheaper than the future
Inadequate control of inventory results in:
(1) understocked items, and/or
(2) overstocked items
Problems with understocking. Understocking inventory results in :
opportunity cost lost of money
Problems with overstocking. Overstocking inventory causes problems with:
wasting money and can’t use it anywhere else.
Inventory Management
attempts to balance the issues…..to have enough inventory on hand to satisfy the customer, while minimizing inventory so as not to unnecessarily use $ or space.
periodic systems
physical count
perpetual systems
continual system, usually on-line. E.g. scanning UPC codes
1. Advantages: real time totals of inventory
2. Disadvantages: expensive and you still need a periodic system.
forecast of demand
must have reliable estimates of amount and time of demand.
knowledge of lead times
time interval between ordering and receiving the order.
Holding costs
cost to store inventory
how much does it cost to store inventory?
interest, insurance, taxes, obsolescence, deterioration, spoilage, heat, light, security, and opportunity costs for not being able to spend $ elsewhere.
ordering costs
cost of ordering and receiving inventory. Includes preparing invoices, shipping costs, inspection costs.plus the salaries of people involved
shortage costs
costs that result when we fail to meet demand, including the cost of NOT making a sale, loss of customer good will, etc.
classification systems
classify inventory on the basis of relative importance
What do EOQ Models identify ?
optimal order quantity by minimizing the sum of certain annual costs that vary with order size.
What is The Basic EOQ model is used to identify ?
the order size that will minimize the sum of the annual costs of holding inventory and ordering inventory.
WHY does Large Order – lower ordering cost, but higher carrying cost?
not ordering as much
WHY does Small Order – higher ordering cost, but lower carrying cost?
constantly ordering
Quantity discounts
are price reductions for large orders offered to customers to induce them to buy in large quantities (like shopping at SAM=s).
Reorder Point
when inventory on hand drops to a predetermined amount

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