Goods And Services Exam 3

Front 1

what is inventory?

Back 1

a supply of resources (or materials, goods, commodities) that are held back for the purpose of future utilization

Front 2

what function does inventory serve?

Back 2

make money, back-up

Front 3

what are some negative effects of inventory?

Back 3

depreciation, expiring products, theft

Front 4

Basic Inventory Questions:

Back 4

1. what to order
2. when to order
3. what is total cost

Front 5

inventory management primarily involves:

Back 5

establishing the amount of inventory to keep in stock

Front 6

the most important aspect of the inventory management process involves

Back 6

balancing the trade-offs between the COSTS of carrying inventory and the BENEFITS of carrying inventory.

correlates to "how much to order"(costs) and "when to order"(benefits)

Front 7

3 Basic Forms of Inventory:

Back 7

- raw materials and components
- work-in-process (WIP)
- finished goods

Front 8

4 Types of Inventory
(classified by how it is created)

Back 8

- cycle stock
- safety stock
- anticipatory
- pipeline(coming in;often ignored)

Front 9

Cycle Stock Inventory-

Back 9

represents the accumulated supply of goods which have been obtained for FUTURE USE or sale to SATISFY DEMAND.

Front 10

reasons for carrying cycle stock inventory:

Back 10

1. Economies of Scale
- price and quantity discounts
- transportation discounts
- production economics
2. Seasonal Constraints

Front 11

Safety Stock Inventory-

Back 11

represents an "extra" supply of goods held to protect against uncertainty and unforeseen events

Front 12

reasons for carrying Safety Stock

Back 12

- uncertainty about customer demand
- lead time delays
- disruptions in supply

Front 13

Anticipatory Inventory-

Back 13

represents a supply of goods held to buffer against PLANNED disruptions or anticipated demand

Front 14

reasons for carrying anticipatory inventory:

Back 14

- stockpile during "off-seasons" (before x-mas)
- scheduled shut down (highway closed)
- seasonal weather disruptions
- smooth production (change equipement)
- contract negotiation (possible labor stoppages)

Front 15

Pipeline Inventory (or in-transit) inventory-

Back 15

represents products moving from POINT TO POINT in the materials flow system. This consists of orders that have been placed but NOT YET RECEIVED

Front 16

reasons for carrying pipeline inventory:

Back 16

- time and distance
- work-in-process inventory (WIP)

Front 17

what are the inventory costs?

Back 17

1. item cost
2. ordering/set-up cost
3. shortage cost
4. inventory carrying (holding) cost

Front 18

item cost refers to the

Back 18

price of an item. =V
- diff prices from vendors
- price breaks
- quantity discounts

Front 19

ordering/set-up cost-

Back 19

refers to the cost associated with replenishing inventory

Front 20

shortage cost refers to

Back 20

the cost of being unable to meet demand
- lost sales
- back orders
- customer goodwill

Front 21

inventory carrying cost refers to the cost of

Back 21

holding items in inventory

Front 22

inventory carrying cost is the

Back 22

explicit and implicit costs of maintaining inventory.
- varies with level of inv and length of time item is held
- typically expressed as annual percentage of item's value
- ranges from 20-40% of items value

Front 23

inventory carrying cost includes:

Back 23

-capital cost
-storage space cost
-inventory service cost
-inventory risk cost

Front 24

Capital Cost is

Back 24

the cost associated with a foregone alternative use of the capital.
- aka OPPORTUNITY cost: the potential benefits obtained from another financially productive alternative
- often the largest component of inventory carrying cost
- set to firms "Hurdle" rate- minimum rate of return expected on new investments

Front 25

Storage Space Cost includes:

Back 25

- warehouse facilities (most firms only include only VARIABLE EXPENSES- those that vary with the amount of inventory in the short run)
- material handling, such as labor
- maintenance cost
- utility costs

Front 26

inventory service cost includes

Back 26

TAXES and INSURANCE for risk of loss or damage

Front 27

Inventory Risk Cost reflects the possibility that the inventory's dollar value may decline due to:

Back 27

- Obsolescence: equal to the original cost less salvage value
- deterioration (expiration)
- damage
- depreciation
- shrinkage (theft)

Front 28

how to determine the inventory carrying cost:

Back 28

1. determine the AVERAGE ANNUAL value (cost) of inventory held by the firm
2. express storage space, service cost, and risk cost as a PERCENTAGE of the average value of inv held by the firm over a one year period
3. add these costs and the firm's hurdle rate, expressed as a percentage

Front 29

ABC analysis is

Back 29

a method for classifying inventory items into three groups in terms of importance. For ex:
Class A: 20% of items, but 80% of dollar value
Class B: 50% of items, only 15% of dollar value
Class C: 30% of items, only 5% of dollar value

The idea is to establish inv policies that focus on the few critical items and not the many trivial ones
- Pareto's Law (80-20 rule)
- "trivial many" vs "vital few"

Front 30

Continuous Review (Q) System (or ROP System)

Back 30

- constantly monitor inv levels
- used for class A items
*determines if it is time to reorder whenever an item is taken from inventory
*a FIXED QUANTITY is ordered when the inv is reduced to the reorder point

Front 31

Periodic Review (P) System

Back 31

- monitor inv at fixed time intervals
- used for Class C items
*after a FIXED PERIOD OF TIME, an order is placed to bring inv position to a desired target level
- order quantity changes