Ch 21 Summary - CHAPTER 21 INVENTORY MANAGEMENT ECONOMIC...

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CHAPTER 21 INVENTORY MANAGEMENT: ECONOMIC ORDER QUANTITY, JIT, AND THE THEORY OF CONSTRAINTS Inventory represents a significant investment of capital for most companies. Inventory management is fundamental to establishing a long-term competitive advantage. The focus of this chapter is how inventory policy can be used to aid in establishing a competitive advantage. Three approaches to managing inventory are addressed: just-in-case, JIT, and theory of constraints. LEARNING OBJECTIVES After studying Chapter 21, you should be able to: 1. Describe the just-in-case inventory management model. 2. Discuss just-in-time (JIT) inventory management. 3. Explain the basic concepts of constrained optimization. 4. Define the theory of constraints, and tell how it can be used to manage inventory. KEY TOPICS The following major topics are covered in this chapter (related learning objectives are listed for each topic). 1. Just-In-Case Inventory Management (LO 1) 2. JIT Inventory Management (LO 2) 3. Basic Concepts of Constrained Optimization (LO 3) 4. Theory of Constraints (LO 4) I. JUST-IN-CASE INVENTORY MANAGEMENT Inventory management is concerned with managing inventory costs. There are three basic costs associated with inventory when it is purchased from an outside supplier. These are: 1. Ordering costs – the costs of placing and receiving an order. Examples include: clerical costs, documents, insurance for shipment, and unloading. 2. Carrying costs – the costs of carrying inventory. Examples include: insurance, inventory taxes, obsolescence, the opportunity cost of capital tied up in inventory, and storage. 3. Stockout costs – the costs of not having sufficient inventory. Examples include: lost sales, costs of expediting (i.e., extra setup, transportation) and the costs of interrupted production. Ordering costs are replaced by setup costs when the goods are produced internally. Setup costs are the costs of preparing equipment and facilities so they can be used to produce a particular product or component. Examples include setup labor, lost income (from idled facilities), and test runs. A. Justifying Inventory Traditional reasons for carrying inventory include: 1. To balance ordering or setup costs and carrying costs 2. To satisfy customer demand (e.g., meet delivery dates) 3. To avoid shutting down manufacturing facilities because of: a. machine failure.
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