Inventory Management
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Questions and Answers

What does EOQ stand for?

Economic Order Quantity

Inventory can be defined as the tangible assets a company holds for what purpose?

  • For the purpose of sale
  • For use in production
  • Both A and B (correct)
  • None of the above

What are the types of inventory?

  • Raw materials
  • Work-in-progress
  • Finished goods
  • Maintenance, repair, and operating (MRO) supplies
  • Obsolete inventory
  • All of the above (correct)

Inventory management is the process of efficiently overseeing and controlling a company's inventory of goods or products. It involves every stage in the product ______, from procurement to storage and eventual sale.

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

Which of the following is a goal of inventory management?

<p>All of the above (E)</p> Signup and view all the answers

Which of the following is a challenge in inventory management?

<p>All of the above (F)</p> Signup and view all the answers

Which of the following is an inventory management technique?

<p>All of the above (D)</p> Signup and view all the answers

What does Economic Order Quantity refer to?

<p>The ideal order quantity that minimizes the total cost of inventory, which includes both ordering costs and holding costs.</p> Signup and view all the answers

Which of the following are ordering costs?

<p>All of the above (D)</p> Signup and view all the answers

Safety stock is the extra inventory a business keeps to protect itself from unexpected fluctuations in demand or supply.

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

Which of the following is a factor affecting safety stock?

<p>All of the above (D)</p> Signup and view all the answers

How to maintain safety stock?

<p>All of the above (F)</p> Signup and view all the answers

What is the reorder point?

<p>An inventory management metric that signifies the inventory level at which a new order for a specific product should be placed to ensure continuous supply and prevent stockouts.</p> Signup and view all the answers

What are the benefits of using a reorder point system?

<p>All of the above (F)</p> Signup and view all the answers

Flashcards

Inventory

Tangible assets a company holds for sale or use in production, including raw materials, work-in-progress, and finished goods.

Raw Materials

Basic inputs used in production.

Work-in-Progress

Partially assembled goods.

Finished Goods

Goods ready for sale.

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MRO Supplies

Items used to support production and operations.

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Obsolete Inventory

Inventory that is outdated or no longer usable.

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Inventory Management

Efficiently overseeing and controlling a company's inventory from procurement to sale.

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Minimize Inventory Costs

Reducing costs associated with inventory.

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Improve Order Fulfillment

Ensuring orders are fulfilled accurately and on time.

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Improve Inventory Turnover

Increasing the rate at which inventory is sold and replaced.

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Reduce Wastage

Reducing spoilage or obsolescence of stored goods.

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Forecasting Demand

Anticipating customer demand for products.

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Lead Time

The time it takes to receive inventory after placing an order.

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Hidden Costs

Overlooked expenses related to inventory.

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Product Obsolescence

When products become outdated or unsellable.

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Space Constraints

Limitations on storage space for inventory.

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Economic Order Quantity (EOQ)

Ideal order quantity to minimize total inventory costs.

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Ordering Costs

Costs associated with placing an order.

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Holding Costs

Costs associated with storing inventory.

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Constant Demand

Assuming demand remains constant.

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Constant Ordering Costs

Assuming order costs do not change.

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Constant Holding Costs

Assuming storage costs remain stable.

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Instantaneous Replenishment

Assuming inventory is replenished immediately.

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No Quantity Discounts

Assuming no discounts for large orders.

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Independent Demand

Assuming demand for one product doesn't affect another.

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Safety Stock

Extra inventory kept to protect against fluctuations in demand or supply.

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Demand Variability

Demand can change unexpectedly.

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Lead Time Variability

The time to receive orders can vary.

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Service Level

Level of customer satisfaction targeted.

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Reorder Point (ROP)

Inventory level at which a new order should be placed.

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Study Notes

Inventory

  • Inventory is a company's tangible assets that it holds for sale or use in production
  • Inventory includes raw materials, work-in-progress goods, and finished goods ready for distribution.

Types of Inventory

  • Raw materials: Wood for furniture manufacturing, cotton for textile production, steel for automobile manufacturing, and flour for a bakery
  • Work-in-progress: Partially assembled car on an assembly line, loaf of bread halfway through baking, and dress with the fabric cut but not yet sewn
  • Finished goods: Cars in a dealership's showroom, loaves of bread on a bakery shelf, and dresses hanging in a clothing store
  • Maintenance, repair, and operating (MRO) supplies include cleaning supplies, spare parts, tools, office supplies, and lab equipment
  • Obsolete inventory items include last year's fashion items, products replaced by newer models and damaged or expired inventory

Inventory Management

  • Inventory management is efficiently overseeing and controlling a company's inventory of goods or products
  • It includes every stage in the product lifecycle, from procurement to storage and eventual sale.

Goals of Inventory Management

  • Minimize costs, specifically holding, ordering, and stockout costs
  • Improve order fulfillment
  • Improve inventory turnover
  • Reduce wastage and obsolescence

Challenges in Inventory Management

  • Forecasting demand
  • Lead time variability
  • Hidden costs
  • Product obsolescence
  • Space constraints

Inventory Management Techniques

  • Economic Order Quantity (EOQ)
  • Safety Stock
  • Reorder Point

Economic Order Quantity (EOQ)

  • EOQ is the ideal order quantity that minimizes the total cost of inventory, including both ordering and holding costs.
  • Ordering costs are the costs associated with placing an order include order processing feeds, shipping and handling charges and aminstrative costs
  • Holding costs are the costs associated with storing inventory including storage space costs (ex: rent, utilities), insurance, and inventory taxes

EOQ Method Assumptions

  • Constant demand
  • Constant ordering costs
  • Constant holding costs
  • Instantaneous replenishment
  • No quantity discounts
  • Independent demand

EOQ Formula

  • EOQ = Square root of (2AB / C*S)
  • A = Annual Consumption
  • B = Buying cost per order
  • C = Cost per unit
  • S = Storage and Carrying cost (if given in % then apply on cost of the material)

Safety Stock

  • Safety stock is the extra inventory a business keeps on hand to protect itself from unexpected fluctuations in demand or supply
  • It acts as a buffer, ensuring the business can meet customer needs even when things don't go exactly as planned.

Importance of Safety Stock

  • Protection against demand spikes
  • A buffer stock for longer lead times
  • Prevention against price fluctuations

Factors Affecting Safety Stock

  • Demand variability
  • Lead time variability
  • Service level

How to Maintain Safety Stock

  • Accurate demand forecasting
  • Lead time forecasting
  • Regular inventory review
  • Use inventory management tools
  • Build strong supplier relationships

Other Factors to Maintain Safety Stock

  • Identify potential risks like economic factors, supply chain issues, or natural disasters
  • Identify the possibility of implementing JIT (Just In Time) method
  • Service Level Agreement (SLA)
  • Regular audit
  • Cross-Functional Collaboration (marketing, sales, procurement)

Safety Stock Challenges

  • Inaccuracy in demand forecasting
  • Unpredictable lead time
  • Excessive holding cost
  • Supply chain disruption
  • Data collection challenges
  • Outdated technology
  • Incorrect calculation
  • Poor decision making

Reorder Point (ROP)

  • ROP is an inventory management metric
  • It signifies the inventory level at which a new order for a specific product should be placed
  • Purpose is to ensure continuous supply and prevent stockouts.

Benefits of Using a Reorder Point System

  • Avoid stockouts
  • Reduce overstocking
  • Optimize cash flow
  • Streamline operations
  • Improve forecasting

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Related Documents

Inventory Management Basics PDF

Description

Overview of inventory types: raw materials, work-in-progress, finished goods, MRO supplies and obsolete items. Efficiently overseeing and controlling the acquisition, storage, and usage of inventory to optimize costs and meet customer demand.

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