MGMT 339 Ch. 12

  1. Inventory
    A stock or store of goods
  2. Independent Demand Items
    Items that are ready to be sold or used
  3. Dependent Demand Items
    Components of finished products, rather than the finished products themselves.
  4. ROI
    Return on Investment- Profit after taxes / total assets
  5. Inventory Turnover
    Ratio of annual cost of goods sold to average inventory investment
  6. Periodic System
    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
  7. 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.
  8. Two-Bin System
    • Once bin #1 items are gone = Reorder time.
    • Bin #2 contains enough stock to satisfy expected demand.
  9. UPC
    Universal Product Code- Bar code on product.
  10. Lead Time
    Time interval between ordering and receiving the order
  11. Point-of-Sale System (POS)
    • Record items at the time of sale
    • Done electronically... Target
  12. Holding (carrying) Costs
    • The cost of physically having the item (inventory) in storage for a length of time (usually a year)
    • e.i: Interest, insurance, taxes, depreciation, spoilage, breakage, warehouse (light, heat, rent, security).
  13. Ordering Costs
    • Costs of ordering and receiving inventory
    • ei: Shipping, prepare invoices, inspection of quality upon arrival
  14. Shortage Costs
    • Demand exceed supply of inventory
    • e.i: cost of not making a sale, loss of customer goodwill, late charges
  15. A-B-C Approach
    • 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))
  16. Cycle Counting
    Physical count of inventory. To reduce discrepancies btwn records and actual quantities on hand.
  17. EOQ
    Economic Order Quantities- Optimal order quantity that minimizes annual cost
  18. EOQ Model
    Identify a FIXED order size that will minimize the sum of the annual costs of holding inventory and ordering inventory.
  19. Assumptions of EOQ Model
    • 1 product is involved
    • No discounts
    • Demand is known and is constant throughout the year
    • Lead time does not vary
    • Each order is received in a single delivery

    Pg. 559
  20. Optimal Order Quantity
    Is a balance between Carrying and Holding Costs

    Pg. 560
  21. Annual Carrying Costs (Equation)
    • Avg. amt of inventory on hand X Cost of holding 1 item for 1yr. (annual carrying cost per unit)
    • (Q/2)(H)
  22. # of orders per year (Equation)
  23. How is Q (Annual Demand) related to Carrying Costs & Ordering Costs?
  24. Annual Ordering Costs (Equation)
  25. How is annual ordering costs related to order size?
  26. Total annual cost (Equation)
  27. EOQ (Equation)
    Optimal Order Quantity
  28. Length of Order Cycle (Equation)
  29. At EOQ, ordering and carrying costs are________.
  30. EPQ
    Economic Production Quantity- production in batches
  31. Assumptions of EPQ
    Almost same as EOQ

    pg. 564
  32. Inventory Rate (Equation)
    Inventory rate = Production - Usage rate
  33. When will you achieve Max Inventory?
    What is the equation
    • When Production ceases
    • (Qp/p)(p-u)
  34. EPQ has ______ instead of ordering costs
    setup costs- prepare equipment for use, cleaning, adjusting, changing tools & fixtures
  35. # of runs (Equation)
  36. Annual Setup Cost (Equation)
    • # of runs X Setup cost per run
    • (D/Q)(S)
  37. Carrying Cost for EPQ (Equation)
    (Imax/2) (H)
  38. Economic Run Quantity (Equation)
    Qp=(Square root (2DS/H)) (Square root(p/p-u))
  39. Cycle Time. What does it show n (Equation)
    • Time between orders or Time between beginning of runs
    • Qp/u
  40. Run Time. What does it show. (Equation)
    • Production phase of the cycle
    • Qp/p
  41. Average Inventory Level (Equation)
  42. Quantity Discounts
    Price reductions for large orders
  43. 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
  44. 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
  45. 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
  46. 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
  47. ROP
    Reorder Point- When the quantity on hand of an item drops to this amount, the item is reordered. (perpetual inventory is required)
  48. Safety Stock
    Stock that is held in excess of expected demand due to variable demand and/ or lead time
  49. Service Level
    Probability that demand will not exceed supply during lead time
Card Set
MGMT 339 Ch. 12
Chapter 12 Vocabulary