krm8_ism_ch12 - 12 Chapter Inventory Management DISCUSSION...

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Chapter 12 Inventory Management DISCUSSION QUESTIONS 1. The short answer is that higher inventories do not provide an advantage in any of the nine competitive priority categories. The important point is that firms must have the “right amount” of inventory to meet their competitive priorities. The only relevant costs considered in this chapter are ordering costs, holding costs, and stockout costs. In the economic order quantity (EOQ) model, costs of placing replenishment orders tradeoff against the costs of holding inventory. Under the assumptions of the EOQ, average inventory is one-half of the order quantity. The number of orders placed per year varies inversely with order quantity. When we consider stockout costs, an additional inventory (safety stock), is held to trade-off costs of poor customer service or costs for expediting shipments from unreliable suppliers. In the lean systems chapter, we see order quantities (lot sizes) that are much smaller than the “ideal” suggested by the EOQ model. As a result, lean systems average inventory is also much lower. Are there some other relevant costs of holding inventory that we have not considered in the EOQ model? If there are, a firm that ignores these costs will make the wrong inventory decisions. These wrong decisions will make the firm less competitive. Let’s examine the relationships between inventory and the nine competitive priorities discussed in the operations strategy chapter. We compare competitors H and L. They are similar in all respects except H maintains much higher inventory than does L. 1) Low-cost operations. Costs include materials, scrap, labor, and equipment capacity that are wasted when products are defective. When a process drifts out of control, competitor H’s large lot sizes tend to result in large quantities of defectives. The EOQ does not consider the cost of defectives, and erroneously assumes that setup costs are constant. Small lots cause frequent setups, but the cost per setup decreases due to the learning curve. Competitor L will enjoy competitive advantages with lower setup, materials, labor, equipment, and inventory holding costs. 2) Top quality. Superior features, durability, safety, and convenience result from improved designs. High inventories force competitor H to choose between scrapping obsolete designs or delaying introduction of product improvements until the old inventory is consumed. In either case, L gains a competitive advantage. 3) Consistent quality. Consistency in conforming to design specifications requires consistency in supplied materials, setups, and processes. Small lots made frequently tend to increase consistency. Again, advantage goes to L. 4)
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This note was uploaded on 12/19/2009 for the course MANAGEMENT 00123 taught by Professor Ahmed during the Spring '09 term at Albany College of Pharmacy and Health Sciences.

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krm8_ism_ch12 - 12 Chapter Inventory Management DISCUSSION...

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