Inventory Management and Control Basics
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Questions and Answers

What is the formula for calculating the Reorder Point (ROP)?

  • ROP = d x L + SS (correct)
  • ROP = d + L + SS
  • ROP = d x L - SS
  • ROP = d / L + SS

ABC analysis categorizes inventory items based on their share of total cost rather than revenue.

False (B)

What percentage of the Annual Dollar Value (ADV) do A items typically represent?

65%-80%

A items account for _____ of inventory items but generate _____ of the ADV.

<p>15%-20%; 65%-80%</p> Signup and view all the answers

Match the following ABC classification items with their descriptions:

<p>A items = 15%-20% of inventory items, 65%-80% of ADV B items = 15%-25% of inventory items, 25%-30% of ADV C items = 60%-70% of inventory items, 0%-10% of ADV</p> Signup and view all the answers

If a company has no safety stock, how is the ROP calculated?

<p>ROP = d x L (A)</p> Signup and view all the answers

C items in ABC analysis are the most valuable in terms of revenue generation.

<p>False (B)</p> Signup and view all the answers

What does the acronym SKU stand for?

<p>Stock-Keeping Unit</p> Signup and view all the answers

The formula to calculate daily demand (d) is annual demand divided by the number of _____ days.

<p>working</p> Signup and view all the answers

Which category of items in ABC classification accounts for the highest number of items but the least revenue?

<p>C items (C)</p> Signup and view all the answers

What is one primary purpose of inventory management?

<p>To balance inventory levels to meet customer demand (B)</p> Signup and view all the answers

Finished goods inventory consists of materials yet to be processed.

<p>False (B)</p> Signup and view all the answers

What are the fixed costs associated with holding inventory?

<p>Warehouse space, insurance, security systems, monitoring and management.</p> Signup and view all the answers

_______ costs arise when money tied up in inventory could have been invested elsewhere.

<p>Opportunity</p> Signup and view all the answers

Match the type of inventory with its description:

<p>Raw material inventory = Material awaiting processing Work in progress (WIP) = Material being processed Finished goods inventory = Products awaiting shipment Obsolescence costs = Costs from inventory becoming out of date</p> Signup and view all the answers

What can lead to carrying excess inventory?

<p>Quantity discounts for bulk purchases (B)</p> Signup and view all the answers

Higher inventory turnover indicates lower inventory costs for a firm.

<p>True (A)</p> Signup and view all the answers

What does inventory turnover measure?

<p>A firm’s performance in inventory management.</p> Signup and view all the answers

The types of inventory are raw materials, ______, and finished goods.

<p>WIP (Work in Progress)</p> Signup and view all the answers

Which of the following is NOT a cost associated with holding inventory?

<p>Transaction costs (D)</p> Signup and view all the answers

What is the primary purpose of safety stock?

<p>To cover unforeseen issues leading to insufficient inventory (A)</p> Signup and view all the answers

In-transit inventory includes items that are being transported on ships and trucks.

<p>True (A)</p> Signup and view all the answers

What does MRP stand for in inventory management?

<p>Materials Requirements Planning</p> Signup and view all the answers

The inventory that comes before the final product in the supply chain is known as __________ inventory.

<p>dependent</p> Signup and view all the answers

Match the following inventory management systems to their descriptions:

<p>MRP = Tracks items needed to make a product ERP = Spans across multiple organizations in the supply chain VMI = Vendor-managed inventory system Independent demand = Products ordered independently of others</p> Signup and view all the answers

Which of the following is a consequence of keeping excess safety stock?

<p>Higher inventory holding costs (C)</p> Signup and view all the answers

ERP systems do not allow for integration across different stages of the supply chain.

<p>False (B)</p> Signup and view all the answers

Which technique aims to reduce in-transit inventory?

<p>Logistics optimization</p> Signup and view all the answers

Safety stock is calculated based on the desired __________ level a firm wants to achieve.

<p>service</p> Signup and view all the answers

Which type of demand is characterized by products ordered independently of others?

<p>Independent demand (A)</p> Signup and view all the answers

Flashcards

What is inventory?

Materials held by a company to meet customer demand, including internal and external customers.

What is the purpose of inventory management?

Managing the amount of inventory a company holds to balance meeting customer needs and minimizing costs.

Why do companies hold inventory?

To cope with fluctuations in demand and provide customer choice.

What is raw material inventory?

Materials purchased but not yet processed.

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What is work in progress (WIP) inventory?

Materials currently being processed along the production line.

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What is finished goods inventory?

Completed products ready for shipment to customers.

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What are inventory holding costs?

Costs associated with holding and managing inventory, including storage, insurance, and opportunity costs.

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What are obsolescence costs?

Costs associated with having too much inventory that becomes outdated or unwanted.

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What is inventory turnover?

A ratio that measures how effectively a company manages its inventory.

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How does inventory turnover relate to inventory costs?

A higher turnover ratio means the company is managing its inventory effectively and minimizing storage costs.

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Safety Stock

Extra inventory held to protect against unexpected demand or supply chain disruptions.

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In-transit Inventory

Inventory that is moving between different points in the supply chain, like being transported on trucks or ships.

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Inventory Control Systems

A method for planning and controlling the movement and storage of inventory along the supply chain. It helps determine what materials are needed, when they are needed, and how much to order.

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Material Requirements Planning (MRP)

A planning system developed after World War II. It identifies the materials and components needed for production, calculates how much to order and when, and determines how much inventory to keep on hand.

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Enterprise Resource Planning (ERP)

A planning system that connects various parts of a business, from production and procurement to sales and finance. It integrates data across departments and provides a holistic view of the supply chain.

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Independent Demand

Items that are ordered independently of other products. For example, a customer orders a bicycle directly.

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Dependent Demand

Items that are ordered based on the demand for other related products. For example, the demand for bicycle tires depends on the demand for bicycles.

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Vendor Managed Inventory (VMI)

A collaborative approach where a supplier manages the inventory for its customers. The supplier takes responsibility for maintaining appropriate inventory levels based on the customer's needs.

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Reorder Point

A technique used in inventory planning and control. It helps determine the ideal time to reorder inventory by considering factors like lead time, demand, and inventory holding costs.

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Just-in-Time (JIT) Inventory

An inventory management strategy that aims to minimize the amount of inventory held in stock. It focuses on efficient production and delivery processes to meet customer needs with minimal buffer stock.

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Inventory Turnover

A measure of how efficiently a company uses its inventory. It calculates how many times inventory is sold and replaced over a specific period, typically a year. A higher turnover indicates better inventory management and less risk of obsolescence.

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ABC Analysis

A method used to categorize inventory items based on their value or contribution to overall sales revenue. This helps companies prioritize their inventory management efforts by focusing on the most valuable items.

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Reorder Point (ROP)

The point at which a new order for inventory should be placed to avoid stockouts. It's calculated considering the daily demand, lead time, and desired safety stock.

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Lead Time

The time it takes for a new order for inventory to be received and ready for use. This includes the time it takes for the supplier to process the order, transport the goods, and prepare them for sale.

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Working Days

The number of working days in a year used to calculate daily demand for inventory. This helps determine how much inventory is needed each day to meet sales requirements.

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Annual Demand

The total yearly demand for a specific inventory item, measured in units or quantity.

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SKU (Stock Keeping Unit)

A unique code used to identify a specific product type or SKU (Stock Keeping Unit) within a company's inventory system. It helps track and manage individual products efficiently.

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Annual Dollar Value (ADV)

The total value of an inventory item, calculated by multiplying its annual demand by the price per unit. It helps prioritize items for ABC analysis.

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Beginning Inventory

The amount of inventory a company has on hand at the beginning of a specific period, typically a year. It's used to calculate inventory turnover and assess how much inventory is available for sale.

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Study Notes

Inventory Management, Planning, and Control

  • Inventory is another name for materials, held by a firm to meet customer demand (internal or external).
  • Inventory is found at multiple points in the supply chain (supplier, factory, customer).
  • Inventory management aims to balance inventory levels with customer demand.

Reasons for Holding Inventory

  • Meeting fluctuating customer demand and offering choice.
  • Handling variations in supply availability.
  • Leveraging quantity discounts (but be aware of excess inventory).

Inventory Categorization

  • Raw materials: purchased and awaiting processing.
  • Work-in-progress (WIP): materials being processed.
  • Finished goods: products ready for shipment.

Inventory Holding Costs

  • Fixed costs: warehousing, insurance, security, monitoring.
  • Variable costs: utilities (heat, light, refrigeration), labor, damage.
  • Opportunity costs: lost potential earnings from alternative investments.
  • Obsolescence costs: inventory becoming outdated or unwanted.

Inventory Turnover

  • Measures a firm's inventory management performance.
  • Turnover ratio: annual sales compared to average inventory.
  • Higher turnover = lower inventory costs (more efficient).
  • Formula: Inventory Turnover = Cost of Goods Sold / Average Inventory.

Inventory Turnover: Example

  • Example of PH Pharmaceuticals:
    • Cost of goods sold: $600,000
    • Beginning inventory: $110,000
    • Ending inventory: $130,000.

ABC Analysis

  • Categorizes inventory items based on their annual dollar volume (ADV).
  • Prioritizes items by value:
    • A Items: High value, small quantity (65-80% of ADV, but 15-20% of items).
    • B Items: Moderate value, moderate quantity (25-30% of ADV, 15-25% of items).
    • C Items: Low value, high quantity (0-10% of ADV, but 60-70% of items).

Inventory Control Systems: Reorder Point (ROP)

  • Systems for deciding when and how much inventory to order.
  • ROP: Demand per day * Lead time + Safety Stock.
  • Safety stock accounts for possible lead time and/or demand variations.
  • (If no safety stock is required, ROP = Demand per day * Lead time.).

Inventory Control Systems: Safety Stock

  • Buffer inventory to cover unexpected issues (unforeseen lead times, variations in demand).
  • Maintaining safety stock carries costs ( storage space, capital). Trade-off between costs of holding excess stock and the costs of inventory shortages.

Inventory Control Systems: In-Transit Inventory

  • Inventory in transit across the supply chain (e.g., in transportation, at warehouses).
  • Account may significant portion of total inventory.
  • Firms aim to minimize in-transit inventory (faster movement, efficiency).

Inventory Planning and Control Techniques

  • MRP (Material Requirements Planning): System for managing dependent demand items.
  • ERP (Enterprise Resource Planning): Modern system encompassing MRP and more.
  • VMI (Vendor-Managed Inventory): Vendor manages inventory based on set parameters, agreed with the customer. (VMI involves a shift of inventory control and visibility from customer to vendor).

Driving Forces for Performance Measurement in Logistics and Supply Chain Management

  • Growing reliance on contract manufacturers.
  • Strategic importance of Logistics Service Providers (LSPs).
  • Increased use of manufacturing techniques like JIT and Six Sigma.
  • Customer expectations.
  • Need for visibility in resource utilization.
  • Technological advancements (information technology developments).
  • Empowering employees with visibility into KPIs.

Examples of Strategic and Operational KPIs

  • Asset utilization
  • Inventory turnover
  • Financial metrics
  • Market share
  • Carbon footprint
  • Order lead time
  • Forecasting accuracy
  • Efficiency

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Chapter 10 Inventory Management Planning and Control PDF

Description

This quiz explores the fundamental concepts of inventory management, planning, and control. It covers the reasons for holding inventory, its categorization, and the associated holding costs. Test your understanding of how effective inventory management can impact customer satisfaction and company profitability.

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