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1 Ch 12 Inventory Management Lecture Notes 2009

1 Ch 12 Inventory Management Lecture Notes 2009 - 1 Chapter...

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Chapter 12 Inventory Management A. Inventory 1. What is inventory? Goods/materials waiting to be used/sold 2. What are the two major questions inventory managers try to answer? 3. What are the four types of inventory? - items that are to be converted into product - items that are in the process of being converted - items for which titles has not been transferred - items that are necessary to keep the transformation process going 4. Reasons To Hold Inventory various parts of the production process Provide a selection for customers Take advantage of Hedge against 5. What are the two forms of demand? -items demanded by external customers, e.g. air ticket, cars, Skateboard -items used to produce final products. e.g. meals in flight, parts of cars, axles, boards 1 1
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6. Inventory Costs - associated with holding or “carrying” inventory over time ( warehouse, obsolescence, insurance, staff, interest, damage, pilferage ) - associated with costs of placing order and receiving goods (supplies, forms, order processing, clerical support, shiiping & handling) - cost to prepare a machine or process for manufacturing an order (clean-up, retooling, adjustment) 7. Cycle Counting Items are counted and records updated on a periodic basis Often used with ABC analysis to determine cycle Has several advantages . Eliminates shutdowns and interruptions . Eliminates annual inventory adjustment . Trained personnel audit inventory accuracy . Allows causes of errors to be identified and corrected . Maintains accurate inventory records 8. Cycle Counting Example 5,000 items in inventory, 500 A items, 1,750 B items, 2,750 C items Policy is to count A items every month (20 working days), B items every quarter (60 days), and C items every six months (120 days) Item Class Quantity Cycle Counting Policy Number of Items Counted per Day A 500 Each month 500/20 = 25/ day B 1,750 Each quarter 1,750/60 = 29/ day C 2,750 Every 6 months 2,750/120 = 23/ day Items Counted / Day = 2 2
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B. ABC Classification System Demand volume & cost of items vary Classify inventory into 3 categories Class % of volume % of value A 5 - 15 70 - 80 B 30 15 C 50 - 60 5 – 10 ABC exercise.doc 1. ABC Classification Example. 3 3 (Cost * Volume) Part Cost Demand Value 1 $60 90 2 $350 40 3 $30 130 3900 4 $80 60 4800 5 $30 100 3000 6 $20 180 3600 7 $10 170 1700 8 $320 50 16000 9 $510 60 30600 10 $20 120 2400 Cumulative Cumulative % of % of % of total % of Part Cost Usage Value total value total value quantity total quantity 9 $510 60 $30,600 6% 8 $320 50 $16,000 2 $350 40 $14,000 16.4% 70.9% 1 $60 90 $5,400 6.3% 77.2% 9% 24% 4 $80 60 $4,800 5.6% 82.8% 6% 30% 3 $30 130 $3,900 4.6% 87.4% 13% 43% 6 $20 180 $3,600 4.2% 91.6% 18% 61% 5 $30 100 $3,000 3.5% 95.1% 10% 71% 10 $20 120 $2,400 2.8% 97.9% 12% 83% 7 $10 170 $1,700 2.0% 100.0% 17% 100% Sum= 1000 $85,400
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2. Additional ABC Classification Example. McKenzie Services is considering using ABC analysis to focus attention on its most critical inventory items. A random sample of twenty items has been taken and the dollar usages have been calculated as shown below. Rank the items and assign them to an A, B, or C class.
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