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Chapter 20. INVENTORY MANAGEMENT - Coggle Diagram
Chapter 20. INVENTORY MANAGEMENT
Understanding inventory management
Inventory Models
Single-period model
Used when we are making a one-time purchase of an item
Fixed-order quantity model
Used when we want to maintain an item “in-stock,” and when we restock, a certain number of units must be ordered
Fixed–time period model
Item is ordered at certain intervals of time
Inventory
the stock of any item or resource used in an organization
Includes raw materials, finished products, component parts, supplies, and work-in-process
Manufacturing inventory: refers to items that contribute to or become part of a firm’s product
Inventory system
the set of policies and controls that monitor levels of inventory
Determines what levels should be maintained, when stock should be replenished, and how large orders should be
Purposes of Inventory
To maintain independence of operations
To meet variation in product demand
To allow flexibility in production scheduling
To provide a safeguard for variation in raw material delivery time
To take advantage of economic purchase order size
Inventory Costs
Holding (or carrying) costs
Costs for storage, handling, insurance, and so on
Setup (or production change) costs
Costs for arranging specific equipment setups, and so on
Ordering costs
Costs of placing an order
Shortage costs
Costs of running out
Demand Types
Independent demand – the demands for various items are unrelated to each other
For example, a workstation may produce many parts that are unrelated but meet some external demand requirement
Dependent demand – the need for any one item is a direct result of the need for some other item
Usually a higher-level item of which it is part
INVENTORY CONTROL SYSTEMS
Single-period inventory model
One-time purchasing decision (e.g., vendor selling T-shirts at a football game)
Seeks to balance the costs of inventory overstock and under stock
Single Period Model Applications
Overbooking of airline flights
Ordering of clothing and other fashion items
One-time order for events – e.g., t-shirts for a concert
Multi-Period Models
Fixed-order quantity models
Also called the economic
order quantity, EOQ, and Q-
model
Event triggered
Inventory remaining must be continually monitored
Has a smaller average inventory
Favors more expensive items
Is more appropriate for important items
Requires more time to maintain – but is usually more automated
Is more expensive to implement
Inventory position
the on-hand plus on-order minus
backordered quantities. In the case where inventory has been allocated for special purposes, the inventory position is reduced by these allocated amounts
Economic Order Quantity (EOQ)
Establishing Safety Stock Levels
Fixed–time period models
Also called the periodic system,
periodic review system, fixed-
order interval system, and P-mode
Time triggered
Counting takes place only at the end of the review period
Has a larger average inventory
Favors less expensive items
Is sufficient for less-important items
Requires less time to maintain
Is less expensive to implement
Fixed-time period model with safety stock
Process
Inventory turn calculation
A measure of the expected number of times inventory is replaced over a year.
Price-break model
This model is useful for finding the order quantity of an item when the price of the item varies with the order size.
Price varies with the order size.
To find the lowest-cost, calculate the order quantity for each price and see if the quantity is feasible.
Sort prices from lowest to highest and calculate the order quantity for each price until a feasible order quantity is found.
If the first feasible order quantity is the lowest price, this is best; otherwise, calculate the total cost for the first feasible quantity and calculate total cost at each price lower than the first feasible order quantity.
Sort prices from lowest to highest and calculate the order quantity for each price until a feasible order quantity is found.
Inventory planning and accuracy
ABC Classification
Divides inventory into dollar volume categories that map into strategies appropriate for the category
Inventory Management
Inventory accuracy – refers to how well the inventory records agree with physical count
Cycle counting – a physical inventory-taking technique in which inventory is counted on a frequent basis rather than once or twice a year
