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Ryerson University
Global Management Studies
GMS 401
Ricardo Reyes

Chp. 12 Terms: Inventory: An idle material or product, usually in a warehouse or storeroom Inventory Management: Planning and controlling the inventories Inventory Turnover: Ratio annual cost of goods to average inventory investments Warehouse Management System: A computer software that controls the movement and storage of materials within a warehouse, and the processes the associated transactions Periodic Counting: Physical count of items in inventory made at periodic intervals Perpetual Tracking: Keeps track of removals from and additions to inventory continuously, thus providing the current inventory level of each item Fixed Order Quantity/ Reorder Point Model: An order of a fixed size is placed when the amount on hand drops to or below a minimum quantity called the reorder point Two Bin System: Reorder when the first bin is empty; use the second bin until order arrives; Top off the second bun and leave the rest in the first bin; Start drawing inventory from the first bin until it is empty again, and repeat Bar Code: A number assigned to an item or location, mad of a group of vertical bars of different thickness that are readable by a scanner Purchase Lead Time: Time interval between ordering and receiving the order Point of Sale (POS) System: Software for electronically recording sales at the time and location of sale Holding (Carrying) Cost: Cost to keep an item in inventory Ordering Cost: Cost of the actual placement of an order (not including the purchase cost) Setup: Preparing the machine for the job by adjusting it, changing cutting tools, etc. Shortage Cost: Cost of demand exceeding supply of inventory on hand; includes unrealized profit per unit, loss of goodwill, etc. A-B-C Classification: Grouping inventory items into three classes according to some measure of importance, and allocating inventory control efforts accordingly Cycle Counting: Regular actual count of the items in inventory on a cyclic schedule Economic Order Quantity (EOQ): The order size that minimizes total inventory control cost Quantity Discounts: Price reductions for large orders Safety Stock: Stock that is held in excess of expected demand due to variability of demand and/or lead time Lead Time Service Level: Probability that demand will not exceed supply during a lead time Annual Service Level: The percentage of annual demand filled Fixed Order Interval/ Order up to Level Model: Orders are placed at fixed time intervals to bring the inventory level up to the order up to level Single Period Model: Model for ordering of perishables and other items with limited useful lives Excess Cost: Difference between purchase cost and salvage value of an item left at the end of the period Independent Demand - Finished goods or other end items that are sold to someone (a whole car) - Random, no way of knowing how many would be demanded during a given period of time - Must be forecasted - Uncertain Dependant Demand - Parts used to make final product (e.g. wheels for a car) - Demand is found by seeing how many final products we plan to make (e.g. we need 4 cars, therefore 4 cars x 5 wheels per car[4 for car + 1 spare] = 20 wheels needed) - Certain Forecasting Demand - Lead time - Point of Sale (POS System) Four EOQ Related Models (all can be calculated and are on the formula sheet) 1. Basic Economic Order Quantity (EOQ) 2. Economic Production Quantity (EPQ) 3. EOQ with Quantity Discounts 4. EOQ with planned shortages Assumptions of Basic EOQ (economic order quantity) Model 1. Only one product is involved 2. Annual demand requirements known 3. Demand is even throughout the year 4. Lead time does not vary 5. Each order is received in a single delivery 6. There are no quantity discounts 7. Shortage is not allowed - The EOQ model is robust, works even if all the parameters are not met - Cost curve is flat near the EOQ, especially on the right side Economic Production Quantity (EPQ) - Production done in batches or lots - Production capacity per part > usage or demand rate per part (basically more is made then needed) - Assumptions for EPQ are same as EOQ except orders are received incrementally during production EOQ with Quantity Discounts - Price reductions are offered as an incentive to buy larger quantities - Weight benefits of reduced purchase price against increased holding costs - Must consider purchase price in calculation with total cost in order to compare - In order to find which one is feasible, find the one where the EOQ falls in the range given Assumptions of EOQ with Planned Shortages - All shorted demand is back ordered - Back orders incur shortage costs - Shortage cost is proportional to waiting time - All other basic EOQ assumptions also apply Reorder Points (ROP) - Demand and lead time must have the same time units - When inventory drops to the ROP, the item is reordered Chp. 14 Terms Dependant Demand: Demand for subassemblies, parts or raw materials that are derived from the plan for production of finished goods Material Requirements Planning: the activity that determines the plans for purchas
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