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GMS 401 (199)

Chapther 12

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Ryerson University
Global Management Studies
GMS 401
Kirk Bailey

CHAPTER 12 – INVENTORY M ANAGEMENT - Independent demand – the demand for items that is unknown and has to be forecasted - Dependent demand – the demand for manufacturing parts and components that depends on the product schedule for the finished goods INTRODUCTION - Inventory: an idle material or product, usually in a warehouse or storeroom - Inventory management: planning and controlling the inventories ⋅ Functions (Purposes) of Inventories 1. To wait while being transported o Depending on the mode of transportation, the freight couple take up to a month to reach its destination o Items being transported are called in-transit inventory 2. To protect against stock-outs o Delayed deliveries and unexpected increases in demand increase the risk of stock- outs or shortages o Risk of shortage can be reduced by holding safety stocks, which are stocks in excess of average demand to compensate for variabilities in demand and delivery lead time 3. To take advantage of economic lot size quantity discount o To minimize purchasing, receiving, material handling, and accounts payable cost, an organization often buys in quantities that exceed their immediate requirements o Inventory storage enables an organization to buy or produce in economic lot sizes. Results in consecutive orders occurring after some interval of time, called order or replenishment cycle o The ability to store extra goods also allows a company to take advantage of price discounts for large orders 4. To smooth seasonal demand or production o Manufacturers that experience seasonal patterns in demand (beer manufactures) often build up inventory during off-seasons to meet high requirements during peak seasons o Some companies may store off season product’s (freezing/canning). These inventories are called seasonal inventories 5. To decouple operations o Inventory is used as a bugger between successive operations to maintain continuity of production that would otherwise be disrupted by events such as breakdowns of equipment and accidents that cause a portion of the operation to shut down temporarily 6. To hedge against price increases o Called anticipation inventory, when a manager suspects that prices will increase for the inventory needed, so they will purchase a larger-than-normal amount to avoid the price increase ⋅ Importance and Objectives of Inventory Management - Inadequate management of inventories can result in both under- and overstocking of times - Inventory management has two main concerns o The level of customer service (availability) – to have the right goods, in sufficient quantities, in the right place at the right time o The cost of ordering and holding inventories – achieve satisfactory levels of customer service (availability) while keeping inventory costs within reasonable bounds - Inventory turnover: ration annual costs of goods to average inventory investment R EQUIREMENTS OF EFFECTIVE INVENTORY M ANAGEMENT - Inventory managers are required to perform the following activities 1. Safely storing and using inventories 2. Tracking inventories and using inventory control models 3. Forecasting demands and lead times 4. Estimating inventory costs 5. Performing A-B-C classification ⋅ Safely Storing and Using Inventories - Warehouse management system: a computer software that controls the movement and storage of materials within a warehouse, and processes the associate transactions ⋅ Tracking Inventories and Using Inventory Control Models - Periodic counting: physical count of items in inventory made at periodic intervals o ADV – orders from the same supplier can be issued at the same time, which can result in economies in processing and shipping o DISADV – possibility of stock-outs between reviews o DISADV – the time and cost of a physical count - Perpetual tracking: keeps track of removals from and additions to inventory continuously, thus providing the current inventory level of each item - Fixed order quantity/recorder 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 o ADV – shortages can be avoided o ADV – the order quantity is fixed; management can determine an optimal order quantity and use it for every order o DISADV – the added cost of continual record keeping - Two bin system: reorder when the first bin is empty; use the second bin until order arrives; top off the second bin and leave the rest in the first bin; start drawing inventory from the first bin until it is empty again, and repeat o ADV – no need to record each withdrawal from inventory or keep track of inventory on hand o DISADV – the reorder card may not be turned in - Bar code: a number ass
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