ABC Analysis for Inventory Management

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Questions and Answers

What is the purpose of ABC Analysis in inventory management?

To analyze inventory levels based on alphabetical order

To prioritize low unit cost items over high unit cost items

To manage delivery and quality problems effectively

To establish policies focusing on critical parts over trivial ones (correct)

Which of the following is NOT a criterion that may be used in ABC Analysis other than annual dollar volume?

Supplier credit terms (correct)

Quality problems

Anticipated engineering changes

Delivery problems

Why are accurate records essential in production and inventory systems?

To make precise decisions about ordering and shipping (correct)

To determine the number of items in each class

To focus on critical parts in inventory

To plan for anticipated engineering changes

What is the purpose of cycle counting in inventory management?

To ensure accurate records through periodic counting Signup and view all the answers

Why is it important to count A items every month in the example provided?

Because A items are critical and need frequent monitoring Signup and view all the answers

In the context of cycle counting policies, why are stockrooms required to be secure?

To avoid interruptions and shutdowns Signup and view all the answers

What are holding costs in inventory management?

Costs of carrying or holding inventory over time Signup and view all the answers

In inventory management, what does the EOQ model assume about demand?

Demand is known, constant, and independent Signup and view all the answers

What are setup costs in the context of inventory management?

Costs of preparing a machine or process for manufacturing an order Signup and view all the answers

Which of the following is NOT an assumption of the Basic EOQ Model?

Receipt of inventory is instantaneous and complete Signup and view all the answers

What influences Holding Costs in inventory management?

Business location and interest rates Signup and view all the answers

How do Dependent Demand and Independent Demand differ in inventory management?

Independent demand varies depending on other items Signup and view all the answers

What is the purpose of lead time offset in MRP systems?

To schedule the release of orders based on lead times Signup and view all the answers

In MRP systems, what does the term 'explosion' refer to?

The detailed breakdown of component requirements at each level of the BOM Signup and view all the answers

Why do subassemblies in MRP systems exist only temporarily?

To reduce inventory holding costs Signup and view all the answers

What is the significance of low-level coding in MRP systems?

It ensures accurate identification of items at their lowest occurrence level Signup and view all the answers

How are gross requirements determined in MRP systems?

By starting with a production schedule for the end item and considering lead times Signup and view all the answers

What does 99% accuracy in outstanding purchase orders mean for MRP systems?

99% of purchase orders must have accurate quantities and schedules Signup and view all the answers

What is the order amount of jackets needed if the target value is 50, there is no on-hand inventory, no earlier orders not yet received, and 3 jackets are back ordered?

53 jackets Signup and view all the answers

In the context provided, what is the annual holding cost rate for the ergonomically correct office chair at Paper Clips, Etc.?

40% Signup and view all the answers

For Hucbaby Motor Services, Inc., if the average weekly demand for copper wire is 20 spools with a standard deviation of 6 spools, what is the reorder point if the desired service level is set at 90%?

16 spools Signup and view all the answers

What is the acquisition lead time for Paper Clips, Etc. if their order lead time for the office chair is 4 days?

2 weeks Signup and view all the answers

For Hucbaby Motor Services, Inc., what is the safety stock needed for copper wire when the desired service level is at 90% and z=1.28?

11 spools Signup and view all the answers

Based on the given information, how many days per year is PCE's store open?

300 days Signup and view all the answers

What is one of the disadvantages of ERP systems mentioned in the text?

Involves high customization costs Signup and view all the answers

Which aspect does aggregate planning aim to minimize over the planning period?

Cost Signup and view all the answers

What is a strategy recommended for aggregate planning to meet future high demand?

Increase inventory in low demand periods Signup and view all the answers

Why can shortages in inventory during high demand periods be problematic?

Result in lost sales and poor customer service Signup and view all the answers

What is a key issue related to ERP implementation according to the text?

Requirement for significant changes in company processes Signup and view all the answers

Which type of workforce variation is suggested as a way to accommodate changes in demand?

Utilizing part-timers, overtime, or idle time Signup and view all the answers

Study Notes

Inventory Management

Finished goods are completed products awaiting shipment, classified into three categories based on annual dollar volume: Class A (high), Class B (medium), and Class C (low)
ABC Analysis is used to establish policies focusing on critical parts, with other criteria available beyond annual dollar volume
Examples of ABC Analysis policies:
- More emphasis on supplier development for A items
- Tighter physical inventory control for A items
- More care in forecasting A items
Record accuracy is crucial, enabling organizations to make precise decisions about ordering, scheduling, and shipping
Cycle counting involves counting and updating records periodically, often used with ABC analysis
Example: 5000 items in inventory, with A items counted every month, B items every quarter, and C items every 6 months

Independent and Dependent Demand

Independent demand: demand for an item is independent of other items in inventory
Dependent demand: demand for an item is dependent on demand for another item in inventory
Holding, ordering, and setup costs:
- Holding costs: costs of holding or carrying inventory over time
- Ordering costs: costs of placing an order and receiving goods
- Setup costs: costs of preparing machines or processes for manufacturing an order

Inventory Models for Independent Demand

Basic Economic Order Quantity (EOQ) model:
- Demand is known, constant, and independent
- Lead time is known and constant
- Receipt of inventory is instantaneous and complete
- Quantity discounts are not possible
- Only variable costs are setup and holding
- Q = number of pieces per order, Q* = optimal number of pieces per order (EOQ)

MRP Structure and Lead-Times

MRP systems require 99% accuracy
Lead times: the time required to purchase, produce, or assemble an item
Determining gross requirements: starts with a production schedule for the end item, using lead time to determine when to release orders

Aggregate Planning and ERP Systems

Aggregate planning: determines quantity and timing of production for the immediate future, aiming to minimize cost by adjusting production, labor, inventory, overtime, and subcontracting
ERP Systems:
- Advantages: increases communication, provides off-the-shelf software, and may provide a strategic advantage
- Disadvantages: expensive, complex, and involves major changes in the company
Aggregate planning strategies:
- Capacity options: changing inventory levels, increasing or decreasing workforce size, using part-timers or overtime, and subcontracting

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Description

Learn about ABC analysis, a technique used in inventory management to categorize items based on their importance. Understand how it helps in establishing policies that focus on critical parts and prioritize resources efficiently.