CHAPTER 9: INVENTORY MANAGEMENT
1. What is inventory turnover? How can a high inventory turnover ratio be detrimental to a firm? Inventory turnover refers to the number of times that inventory is sold in a one year period. It can be calculated by dividing the cost of goods sold for a particular period by the average inventory for that period. High inventory turnover may signal a low level of inventories, which can increase the chance of product stockouts.
2. Distinguish among cycle, safety, pipeline, and speculative stock. Cycle (base) stock refers to inventory that is needed to satisfy normal demand during the course of an order cycle. Safety (buffer) stock refers to inventory that is held in addition to cycle stock to guard against uncertainty in demand and/or lead time. Pipeline (in-transit) stock is inventory that is en route between various nodes in a logistics system, while speculative stock is inventory that is held for several reasons to include seasonal demand, projected price increases, and potential product shortages.
3. Define what is meant by inventory carrying costs. What are some of its main components? Inventory carrying costs refer to the costs associated with holding inventory. Inventory carrying costs consist of a number of different components, and their importance can vary from product to product. These components include obsolescence costs, shrinkage costs, storage costs, taxes, and interest costs.
4. Discuss the concept of stockout costs. How can a stockout cost be calculated? Stockouts refer to situations where customers demand items that are not immediately available and stockout costs refer to the costs associated with not having items available. Calculation of a stockout cost first requires a company to classify potential customer responses to a stockout (e.g., delays the purchase, lost sale, lost customer). Next, the company needs to assign probabilities to the various responses as well as to assign monetary losses to the various responses. The respective probabilities and losses are multiplied together and then all costs are summed to yield an average cost of stockout.
5. Distinguish between a fixed order quantity and fixed order interval system. Which one generally requires more safety stock? Why? In a fixed order quantity system, the order size stays constant (although the time interval between orders may vary); in a fixed order interval system, the time interval is constant (although the order size may vary). The infrequency of inventory monitoring makes a fixed order interval system more susceptible to stockouts and thus there is likely to be higher levels of safety stock in a fixed order interval system.
6. Explain the logic of the EOQ model.
The logic of the EOQ model is as follows: determining an order quantity requires a company to balance two costs; the costs of carrying the inventory and the costs of ordering it. Inventory carrying costs are in direct proportion to order size; that is, the larger the order, the greater the inventory carrying costs. Ordering costs, by contrast, tend to decline with order size but not in a linear fashion. The EOQ attempts to find the point (quantity) at which ordering costs equals carrying costs.
7. How can inventory flow diagrams be useful to a logistics manager? They present a visual depiction of additions to, and subtractions from, inventory. This could be helpful in identifying any patterns that might be occurring. In addition, inventory flow examples illustrate how safety stock can offset an increased rate of demand as well as longer than normal replenishment cycles.
8. Discuss what is meant by ABC analysis of inventory. What are several measures that can be used to determine ABC status? ABC analysis is an approach that recognizes all inventories are not of equal value to a firm and, as a result, all inventory should not be managed in the same way. Measures that can be used to determine ABC...
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