MGMT 339 Ch. 12
Card Set Information
MGMT 339 Ch. 12
Chapter 12 Vocabulary
A stock or store of goods
Independent Demand Items
Items that are ready to be sold or used
Dependent Demand Items
Components of finished products, rather than the finished products themselves.
Return on Investment- Profit after taxes / total assets
Ratio of annual cost of goods sold to average inventory investment
A physical count of items in inventory is made at periodic intervals (weekly, monthly) in order to decide how much to order of each item
Perpetual Inventory System
AKA Continual System- Keeps track of removals from inventory on a continuous basis, so the system can provide information in the current level of inventory for each item.
Once bin #1 items are gone = Reorder time.
Bin #2 contains enough stock to satisfy expected demand.
Universal Product Code- Bar code on product.
Time interval between ordering and receiving the order
Point-of-Sale System (POS)
Record items at the time of sale
Done electronically... Target
Holding (carrying) Costs
The cost of physically having the item (inventory) in storage for a length of time (usually a year)
: Interest, insurance, taxes, depreciation, spoilage, breakage, warehouse (light, heat, rent, security).
Costs of ordering and receiving inventory
: Shipping, prepare invoices, inspection of quality upon arrival
Demand exceed supply of inventory
: cost of not making a sale, loss of customer goodwill, late charges
Classifies inventory items according to some measure of importance, usually annual dollar value and then by control efforts.
Annual $ amt (dollar value per unit multiplied by annual usage rate (demand))
Physical count of inventory. To reduce discrepancies btwn records and actual quantities on hand.
Economic Order Quantities- Optimal order quantity that minimizes annual cost
Identify a FIXED order size that will minimize the sum of the annual costs of holding inventory and ordering inventory.
Assumptions of EOQ Model
1 product is involved
Demand is known and is constant throughout the year
Lead time does not vary
Each order is received in a single delivery
Optimal Order Quantity
Is a balance between Carrying and Holding Costs
Annual Carrying Costs (Equation)
Avg. amt of inventory on hand X Cost of holding 1 item for 1yr. (annual carrying cost per unit)
# of orders per year (Equation)
How is Q (Annual Demand) related to Carrying Costs & Ordering Costs?
Annual Ordering Costs (Equation)
How is annual ordering costs related to order size?
Total annual cost (Equation)
Optimal Order Quantity
Length of Order Cycle (Equation)
At EOQ, ordering and carrying costs are________.
Economic Production Quantity- production in batches
Assumptions of EPQ
Almost same as EOQ
Inventory Rate (Equation)
Inventory rate = Production - Usage rate
When will you achieve Max Inventory?
What is the equation
When Production ceases
EPQ has ______ instead of ordering costs
setup costs- prepare equipment for use, cleaning, adjusting, changing tools & fixtures
# of runs (Equation)
Annual Setup Cost (Equation)
# of runs X Setup cost per run
Carrying Cost for EPQ (Equation)
Economic Run Quantity (Equation)
=(Square root (2DS/H)) (Square root(p/p-u))
Cycle Time. What does it show n (Equation)
Time between orders or Time between beginning of runs
Run Time. What does it show. (Equation)
Production phase of the cycle
Average Inventory Level (Equation)
Price reductions for large orders
Buyers goal with quantity discounts is to select an order quantity that will ___________.
select an order quantity that will minimize total cost.
Where total cost = carrying cost + ordering cost + PURCHASING Cost
With quantity discounts there are 2 different ways to determine overall EOQ
1. Carrying Costs are Constant
2. Carrying Costs are expressed as a percentage
Quantity Discounts - What are the steps to determine Optimal Order Quantity when carrying costs are constant?
1. Find EOQ (common min pt) = (Square root (2DS/H))
2. Find TC for EOQ as well as the min. EOQ of cheaper options and compare.
Optimal Order Quantity will be the cheapest TC
Quantity Discounts - What are the steps to determine Optimal Order Quantity when carrying costs are expressed as a percentage?
1. Determine Holding costs for each price range
2. Starting with the lowest price first, find the EOQ that matches the price for that range.
3. Starting with the EOQ you found in step 2, calculate the TC. Then calc the TC for all the cheaper options avail.
4. Lowest TC = Optimal Order Quantity
Reorder Point- When the quantity on hand of an item drops to this amount, the item is reordered. (perpetual inventory is required)
Stock that is held in excess of expected demand due to variable demand and/ or lead time
Probability that demand will not exceed supply during lead time