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Chapter 9

GMS 401 Chapter Notes - Chapter 9: Purchase Order, Sydney Trains S Set, A.D. Vision

Global Management Studies
Course Code
GMS 401
Robert Meiklejohn

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GMS – Chapter 9 – Inventory Management
Inventory – an idle material, part or product usually in a warehouse or stockroom
Inventory management – planning and controlling inventories
Functions of inventories
1. To wait while being transported. Items being transported are called in transit inventory
2. To protect against stock outs
3. Take advantage of economic lot size and quantity discount
4. To smooth seasonal demand or production
5. To decouple operations
6. To hedge against price increases
Understocking results in missed deliveries, lost sales, dissatisfied customers and production
Overstocking unnecessarily ties up funds that might be more productive elsewhere and ties up
storage space
Inventory management has two main concerns (1) the level of customer service (item
availability or fill rate) having the right goods in the right place at the right time and (2) the
costs of ordering and holding inventories
Inventory turnover – ratio of annual cost of goods sold to average inventory investment
Days of inventory on hand – indicates expected number of days of sales or usage that can be
supplied from existing inventory
Requirements of effective inventory management
1. Safely store and handle inventories
Warehouse management system (WMS) – a computer software that controls
the movement and storage of materials within a warehouse and processes the
associated transactions
2. Track inventories and use inventory control models
Inventory position – quantity on hand + on order – back ordered
Fixed interval/order up to level model – orders are placed at fixed time intervals
to bring the inventory position up to the order up to level
Perpetual or continual tracking – keeps track of removals from and additions to
inventory continuously, providing the current inventory position of each item
Fixed order quantity/reorder point model – an order of a fixed size is placed
when the inventory position 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 bin and leave the rest in the first bin
3. Forecast demands and lead times
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