heizer10_ch12_sg - 12 Inventory Management Summary A...

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12 Inventory Management Summary A business student’s career will often come across issues that involve inventory. Inventory represents a valuable investment that enhances customer satisfaction, but if managed inefficiently, also becomes costly. Managing inventory requires balancing the costs with the desired level of customer service. Inventory adds flexibility to an organization’s operations. It decouples stages of a process to provide for fluctuations in supply or demand. The opportunities to take advantage of quantity discounts expand, and purchasing polices can hedge against inflation. These advantages occur for any type of inventory, which include raw materials, work-in-process, finished goods, and maintenance, repair, or operating (MRO) supplies. The management of inventory is important because once assembled or purchased, additional value does not occur until the sale (the student should think about this). ABC analysis and accurate record keeping assist operations managers. ABC analysis divides inventory into three classifications based on annual dollar volume. Multiplying cost per unit by annual demand equals annual dollar volume. Typically, a small percentage of items comprise a large part of the annual dollar volume. Managers will group items into Class “A,” “B,”, and “C.” In the text, dollar volume percentages are 15%, 30%, and 55%, respectively. The percentages will depend on goals and policies of the organization. Other criteria can determine item classification. Ultimately, ABC analysis points to where management attention should occur. If you remember your accounting courses, then you should recognize that inventory changes affect the cost of goods sold by an organization and thus profitability. Further, accurate inventory helps with planning and the placement of orders by customers. Accurate records are necessary and require sound management practices such as a well-organized stockroom and proper labeling. Still, continuing audits insure that records are precise and call for counting inventory regularly. Modern practice uses “cycle counting,” in which Class “A” items are counted more frequently. Services are not immune from the management of inventory. Retail inventory suffers from shrinkage, whereby damage and theft reduce total value between the receipt of goods and their sale. Personnel selection, training, and discipline will contribute to control, as will proper receiving procedures and security precautions. The remainder of the chapter focuses on mathematical models that assist with the ordering and holding of inventory. These models assume particular demand patterns. Independent demand models covered in this chapter assume no influence by the demand of other products. Dependent demand models, covered in chapter 14, assume that a parent product’s demand will influence the demand for its underlying components.
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This note was uploaded on 11/24/2010 for the course DSIC 3152 taught by Professor B during the Fall '10 term at Fairleigh Dickinson.

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heizer10_ch12_sg - 12 Inventory Management Summary A...

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