C215 - Chapter 12

Question 1

3 objectives of inventory?

Answer 1

1. Customer service : ability to satisfy customer requirements
2. Cost-efficient operations:
   - use WIP to buffer operations
   - Maintain a level workforce throughout the year
   - building inventory in long production runs
   - buy in bulk to save money
3. Minimum-inventory investments : level of customer demand satisfied by supply on hand
   • the least inventory (and money) you must hold to keep operations running smoothly.

Question 2

Inventory Objectives: How to measure Customer Service (4)

Answer 2

• Whether or not a product is available for customer when customer wants it*

1. % orders shipped on schedule
   
   • use when all orders have similar value
     - checks if whole order was delivered on time
2. % of line items shipped on schedule
   - recognizes not all orders are equal
   - doesn’t take into account dollar value of orders
   - use when orders vary in number of line items ordered
3. % dollar volume shipped on schedule
   - appropriate when customer orders vary in value

4.idle time due to material/component shortages
- applies to internal customer service

Question 3

Inventory Objectives: How to achieve Cost-Efficient Operations (4)

Answer 3

1. Use WIP inventory to buffer operations
2. Use inventories to maintain a level workforce throughout the year
3. Reducing Setup Costs by building inventory in long production runs
4. Buy in bulk at a discount

Question 4

Inventory Objectives: How to measure Minimum Inventory Investment (3)

Answer 4

1. Inventory turnover : level of customer demand satisfied by supply on hand👉 In short: Inventory turnover = how quickly inventory “moves” through the system.

👉 In short:
• High turnover = lean, efficient, but risky if demand jumps.
• Low turnover = safe from shortages, but costly and wasteful

2. Weeks of Supply : how many weeks your inventory will last if demand continues at the same rate
3. Days of Supply : how many days your inventory will last if demand continues at the same rate

Question 5

What is Periodic Counting?

-What are the 4 steps ?

Answer 5

Counting inventory at set intervals (usually yearly)

• Satisfies auditors that inventory records accurately reflect value of inventory on hand.

1: Count items and record on a ticket attached to item
2: Verify by recounting
3: Collect Tickets
4: Reconcile inventory records with actual counts

•Periodic = count everything at once, but only sometimes.

Question 6

What is Cycle Counting?

-3 Advantages

Answer 6

Counting pre-specified items throughout the year, usually daily.
- Frequency of counting of particular items depends on importance and value ( A items counted more often)

1. Timely detection and correction of inventory problems
2. Elimination of lost production time since company doesn’t need to shut down operations
3. Use of employees dedicated to counting

•	Cycle = count small parts often, so mistakes don’t build up.

Question 7

Manufacturing vs Retail vs Service Industries Inventory Management

Answer 7

1. Manufacturing : Manages raw materials, work-in-process (WIP), and finished goods.
   - Have tangible inventory
2. Retail : Manages finished goods only (what’s on the shelves)
3. Service : Usually has little or no physical inventory of products.

   •          - “Inventory” is often supplies (like medical gloves) or capacity (seats on a plane, hospital beds).

Question 8

5 Types of inventories

Answer 8

1. Raw : purchased items or extracted materials to be transformed into components or products.
2. Components: parts or subassemblies
3. Work-in-Progress: items in process throughout plant
4. Finished Goods: products sold to customers
5. Distribution: finished goods in distribution system

Question 9

How Manufacturers Use Inventory 1

1. Anticipation
2. Fluctuation
3. Lot-size

Answer 9

1: Items built in anticipation of future demands. Allows company to maintain a level production throughout the year.

2: Protects against unexpected demand variations. Assures customer service levels.

3: When buying more quantity than needed.

Results from the actual quantity purchased. Allows for lower unit costs, extra units not sold

Question 10

How Manufacturers Use Inventory 2

4. Transportation
5. Speculative
6. MRO

Answer 10

4: Items in movement between locations. Inventory moves from manufacturer to distribution facilities.
Items not available for customer demands until they reach distribution warehouse

5: Extra inventory built up or purchased to protect against some future events. Allows for continuous supply.

6:Includes maintenance supplies, spare parts, lubricants, cleaning agents, and daily operating supplies. Facilitates day-to-day operations.

Question 11

Inventory Costs (4)

Item, Holding, Ordering, Shortage

Answer 11

1. Item Cost: price paid per item plus any other direct costs associated with getting the item to the plant

ex: inbound transport, insurance, duty, taxes

2. Holding Costs : Expenses related to volume of inventory held
   A -Capital : highest of either cost of capital or opportunity cost
   B - Storage : space, worker, equipments
   C - Risk : obolescence, damage, theft, insurance, taxes
3. Ordering Costs : Fixed, constant dollar amount incurred for each order placed
4. Shortage Costs : Loss of customer goodwill, back-order handling, and lost sales

Question 12

Set up costs

Answer 12

Costs associated with preparing the equipment for the next product being produced

EX: scraps, calibration, downtime

Question 13

Capital Costs

• Cost of Capital vs Opportunity cost

Answer 13

Cost of capital : interest rate paid to borrow money to invest in inventory

Opportunity Cost: Rate of return the company could have earned on the money if it were used for something other than investing in inventory