CH_12_10th_Edition_key_ideas

CH_12_10th_Edition_key_ideas - Chapter 12 CHAPTER 12...

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Chapter 12 CHAPTER 12 INVENTORY MANAGEMENT KEY IDEAS 1. Purpose of Inventory. Inventories are held for a variety of reasons, such as meeting anticipated demand, smoothing production, decoupling internal operations, protecting against stockouts, taking advantage of quantity discounts, and hedging against price increases. 2. Requirements for Inventory Management. The requirements for effective inventory management are an accounting system to keep track of on-hand and on-order merchandise, reliable forecasting of demand, estimates of lead times between placing an order and receiving goods, and lead-time variability, estimates of inventory holding costs, ordering costs and shortage (backorder) costs, and a classification system. 3. A-B-C Classification. The A-B-C approach can be used to classify inventory items according to some measure of importance. Very often that measure is annual dollar volume, which is the product of unit cost for an item and its annual demand or usage. After determining each item’s annual dollar volume, the resulting values are arrayed from high to low. Generally there will be a small percentage of items (10% to 15%) with relatively high annual volumes. These should be classified as A items, and given disproportionately high attention by management. At the other end of the scale will be a large percentage of items (around 50% to 60%) that have relatively low annual volume. These should be classified as C items and given disproportionately low attention by management.
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CH_12_10th_Edition_key_ideas - Chapter 12 CHAPTER 12...

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