Textbook Notes (368,317)
Canada (161,798)
Business (2,391)
BU395 (28)
Chapter 12

Chapter 12 BU395.docx

5 Pages
125 Views
Unlock Document

Department
Business
Course
BU395
Professor
Maryam Hafezi
Semester
Winter

Description
BU395 Chapter 12 – Inventory Management Week 3 Introduction -Good inventory management is important for the successful operation of most organizations and their supply chains -Poor inventory management hampers operations, diminishes customer satisfaction, and increases operating costs -Inventory – an idle material or product usually in a warehouse or storeroom -Inventory management – planning and controlling the inventories Importance of Inventories -A typical company probably has about 30% of its current assets and perhaps as much as 90% of its working capital invested in inventories -The major source of revenue Functions (Purposes) of Inventories 1. To wait while being transported 2. To protect against stock-outs 3. To 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 - occasionally a buyer or manager will suspect that a substantial price increase is about to occur and will purchase large than normal amounts to avoid the price increase – anticipation inventory Importance and Objectives of Inventory Management -Inadequate management of inventories can result in both under- and overstocking of items -Understocking results in missed deliveries, lost sales, dissatisfied customers, and production stoppage -Overstocking unnecessarily ties up funds that might be more productive elsewhere and also ties up storage space -Inventory management has two main concerns: 1. Level of customer service (Availability) – to have the right goods, in sufficient quantities, in the right place, at the right time 2. Costs of ordering and holding inventories -The overall objective of inventory management is to achieve satisfactory levels of customer service while keeping inventory costs within reasonable bounds -A buyer must make two fundamental decisions: -Timing of order -Size of order -Managers have a number of measures of performance they can use to judge the effectiveness of their inventory management -Inventory turnover – ratio annual cost of goods to average inventory investment -The higher the ratio the better -A benefit of this measure is that is can be used to compare companies of different size in the same industry -Days of inventory is a number that indicates the expected number of days of sales or usage that can be supplied from existing inventory Requirements for Effective Inventory Management -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 BU395 Chapter 12 – Inventory Management Week 3 Safely Storing and Using Inventories -Most inventory items need to be protected from harsh outdoor environments such as rain and snow -Inventory is usually stored indoors -A warehouse should be uncluttered so that items can be stored and retrieved easily -Warehouse management system – a computer software that controls the movement and storage of materials within a warehouse, and processes the associated transactions -Some inventoried items are expensive, so access to the building should be controlled, and items that are prone to theft should be locked p in secure areas -A common problem is items going obsolete -To be efficient, outdated items should be either sent back to the supplier or sold at a discount Tracking Inventories and Using Inventory Control Models -Periodic counting- physical count of items in inventory made at periodic intervals (Ex. Weekly, monthly) -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 bin 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, made of a group of vertical bars of different thickness that are readable by a scanner Forecasting Demands and Lead Times -Purchase lead time – time interval between ordering and receiving the order -Point-of-sale (POS) systems – software for electronically recording sales at the time and location of sale Estimating Inventory Costs -Three basic costs are associated with inventory: holding, ordering, and shortage costs -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) -Shortage cost – cost of demand exceeding supply of inventory on hand; includes unrealized profit per unit, loss of goodwill, etc. -Setup – preparing the machine for the job by adjusting it, changing cutting tools, etc. Performing A-B-C Classification -Items held in inventory are typically not of equal importance in terms of dollars invested, profit potential, sales or usage quantity, or shortage cost -A-B-C Classification – grouping inventory items into three classes according to some measure of importance, and allocating inventory control efforts accordingly -A = very important -B = moderately important -C = least important -A items generally account for about 15 to 20 percent of the types of items in inventory but about 70 to 80 percent of the annual dollar value -C items may account for about 50 to 60 percent of SKUs but only about 5 to 10 percent og the annual dollar value (ADV) -A items should receive close attention through better forecasting, more frequent ordering, and better safety stock determination -The C items should receive only loose control, and the B items should have controls that lie BU395 Chapter 12 – Inventory Management Week 3 between the two extremes -Annual dollar value may be the primary factor in classifying inventory items -Cycle counting – regular actual count of the items in inventory on a cyclic
More Less

Related notes for BU395

Log In


OR

Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Sign up

Join to view


OR

By registering, I agree to the Terms and Privacy Policies
Already have an account?
Just a few more details

So we can recommend you notes for your school.

Reset Password

Please enter below the email address you registered with and we will send you a link to reset your password.

Add your courses

Get notes from the top students in your class.


Submit