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Questions and Answers
What is the formula for calculating the Reorder Point (ROP)?
What is the formula for calculating the Reorder Point (ROP)?
ABC analysis categorizes inventory items based on their share of total cost rather than revenue.
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?
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.
A items account for _____ of inventory items but generate _____ of the ADV.
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Match the following ABC classification items with their descriptions:
Match the following ABC classification items with their descriptions:
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If a company has no safety stock, how is the ROP calculated?
If a company has no safety stock, how is the ROP calculated?
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C items in ABC analysis are the most valuable in terms of revenue generation.
C items in ABC analysis are the most valuable in terms of revenue generation.
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What does the acronym SKU stand for?
What does the acronym SKU stand for?
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The formula to calculate daily demand (d) is annual demand divided by the number of _____ days.
The formula to calculate daily demand (d) is annual demand divided by the number of _____ days.
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Which category of items in ABC classification accounts for the highest number of items but the least revenue?
Which category of items in ABC classification accounts for the highest number of items but the least revenue?
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What is one primary purpose of inventory management?
What is one primary purpose of inventory management?
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Finished goods inventory consists of materials yet to be processed.
Finished goods inventory consists of materials yet to be processed.
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What are the fixed costs associated with holding inventory?
What are the fixed costs associated with holding inventory?
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_______ costs arise when money tied up in inventory could have been invested elsewhere.
_______ costs arise when money tied up in inventory could have been invested elsewhere.
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Match the type of inventory with its description:
Match the type of inventory with its description:
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What can lead to carrying excess inventory?
What can lead to carrying excess inventory?
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Higher inventory turnover indicates lower inventory costs for a firm.
Higher inventory turnover indicates lower inventory costs for a firm.
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What does inventory turnover measure?
What does inventory turnover measure?
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The types of inventory are raw materials, ______, and finished goods.
The types of inventory are raw materials, ______, and finished goods.
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Which of the following is NOT a cost associated with holding inventory?
Which of the following is NOT a cost associated with holding inventory?
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What is the primary purpose of safety stock?
What is the primary purpose of safety stock?
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In-transit inventory includes items that are being transported on ships and trucks.
In-transit inventory includes items that are being transported on ships and trucks.
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What does MRP stand for in inventory management?
What does MRP stand for in inventory management?
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The inventory that comes before the final product in the supply chain is known as __________ inventory.
The inventory that comes before the final product in the supply chain is known as __________ inventory.
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Match the following inventory management systems to their descriptions:
Match the following inventory management systems to their descriptions:
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Which of the following is a consequence of keeping excess safety stock?
Which of the following is a consequence of keeping excess safety stock?
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ERP systems do not allow for integration across different stages of the supply chain.
ERP systems do not allow for integration across different stages of the supply chain.
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Which technique aims to reduce in-transit inventory?
Which technique aims to reduce in-transit inventory?
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Safety stock is calculated based on the desired __________ level a firm wants to achieve.
Safety stock is calculated based on the desired __________ level a firm wants to achieve.
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Which type of demand is characterized by products ordered independently of others?
Which type of demand is characterized by products ordered independently of others?
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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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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.
