Chapter 5 - Inventory Management

Chapter 5 - Inventory Management - Chapter 5 Inventory...

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Chapter 5 – Inventory Management I. Introduction a. Inventory: i. Stock or store of goods 1. Independent-Demand Items: a. Items that are ready to be sold or used 2. Dependent-Demand Items: a. Items whose demand depends on how many of each item is needed for the assembly of an independent-demand item II. The Nature and Importance of Inventories a. Return on Investment (ROI): i. Profit after taxes divided by total assets 1. Used to measure managerial performance a. Reduction in inventory can greatly increase ROI b. Types of Inventories: i. Raw materials and Purchased Parts ii. WIP iii. Finished-Goods or Merchandise iv. Tools and Supplies v. Maintenance and Repairs (MRO) Inventory vi. Goods-in-Transit c. Functions of Inventory: i. To meet anticipated customer demand 1. Anticipation stocks a. Inventory held to satisfy expected (average) demand
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ii. To smooth production requirements 1. Firms that experience seasonal patterns in demand build up inventory during preseason periods iii. To decouple operations 1. Manufacturing firms use inventory as buffers between successive operations to maintain continuity of production that would otherwise be disrupted in the event of a machine breakdown iv. To protect against stock outs 1. Safety stocks a. Stocks in excess of average demand to compensate for variabilities in demand and lead time v. To take advantage of order cycles vi. To hedge against price increases vii.To permit operations 1. Little’s Law can quantify pipeline inventory a. Pipeline inventories are created through the intermediate stocking of goods—raw materials, semi-finished items, finished good in production sites, and items in the warehouse i. Little’s law states that the average amount of inventory in a system is equal to the product of the average rate at which inventory units leave the system (average demand rate) and the average time a unit is in the system 1. Thus, if a unit is in the system for an average of 10 days, and the demand rate is 5 units per day, the average inventory is 50 units viii. To take advantage of quantity discounts d. Objectives of Inventory Control: i. Inadequate control of inventories can result in both under- and overstocking of items
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1. Under-Stocking results in missed deliveries, lost sales, dissatisfied customers, and production bottlenecks 2. Overstocking unnecessarily ties up funds that might be more productive elsewhere ii. Inventory management has two main concerns: 1. Level of customer service a. Having the right goods, in sufficient quantities, in the right place, at the right time 2. Costs of ordering and carrying inventories iii. Inventory Turnover: 1. Ratio of annual costs of goods sold to average inventory investment a. Indicates how many times a year the inventory is sold III. Requirements For Effective Inventory Management a. Management must have the following: i. A system to keep track of the inventory on hand and on order ii. A reliable forecast of demand that includes an indication of possible
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This note was uploaded on 04/24/2011 for the course MGMT 361 taught by Professor Panwalker during the Spring '10 term at Purdue.

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Chapter 5 - Inventory Management - Chapter 5 Inventory...

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