ch12_ISM[1] - CHAPTER Inventory Management 12 DISCUSSION...

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184 12 CHAPTER Inventory Management D ISCUSSION Q UESTIONS 1. The four types of inventory are: ¡# Raw material—those items that are to be converted into product ¡# Work-in-process (WIP)—those items that are in the pro- cess of being converted ¡# Finished goods—those completed items for which title has not been transferred ¡# MRO—(maintenance, repair, and operating supplies)— those items that are necessary to keep the transformation process going 2. The advent of low-cost computing should not be seen as obviating the need for the ABC inventory classification scheme. Although the cost of computing has decreased considerably, the cost of data acquisition has not decreased in a similar fashion. Business organizations still have many items for which the cost of data acquisition for a “perpetual” inventory system is still consid- erably higher than the cost of the item. 3. The purpose of the ABC system is to identify those items that require more attention due to cost or volume. 4. Types of costs— holding cost : cost of capital invested and space required; shortage cost : the cost of lost sales or customers who never return; the cost of lost good will; order cost : the costs associated with ordering, transporting, and receiving the items; unit cost : the actual cost of the item. 5. Assumptions of EOQ model: demand is known and constant over time; lead time is known and constant; receipt of inventory is instantaneous; quantity discounts are not possible; the only vari- able costs are the costs of placing an order or setting up produc- tion and the cost of holding or storing inventory over time and if orders are placed at the right time, stockouts or shortages can be completely avoided. 6. The EOQ increases as demand increases or as the setup cost increases; it decreases as the holding cost increases. The changes in the EOQ are proportional to the square root of the changes in the parameters. 7. Price times quantity is not variable in the EOQ model, but is in the discount model. When quality discounts are available, the unit purchase price of the item depends on the order quantity. 8. Advantages of cycle counting: 1. eliminating the shutdown and interruption of production necessary for annual physical inventories 2. eliminating annual inventory adjustments 3. providing trained personnel to audit the accuracy of inventory 4. allowing the cause of errors to be identified and remedial action to be taken 5. maintaining accurate inventory records 9. A decrease in setup time decreases the cost per order, en- courages more and smaller orders, and thus decreases the EOQ. 10. Discount points below the EOQ have higher inventory costs, and the prices are no lower than at the EOQ. Points above the EOQ have higher inventory costs than the corresponding price break point or EOQ at prices that are no lower than either of the price beaks or the EOQ. (It depends on whether or not there exists a discount point above the EOQ.) 11. Service level refers to the fraction of customers to whom the product or service is delivered when and as promised.
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ch12_ISM[1] - CHAPTER Inventory Management 12 DISCUSSION...

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