Notes on Inventory

Topics: Inventory, Costs, Management accounting Pages: 10 (1974 words) Published: April 2, 2013
Chapter 7 Supply Chain Management

_______ Types of inventory

* By stages of production and value added
* Raw materials (RM)
* Work-in-progress (WIP)
* Finished goods (FG)
* They’re not equally costly
* Finished goods are more valuable
* They need to be managed differently
* By function
* Cycle stock (working stock): amount of inventory that you expect to sell * Safety stock (buffer stock): amount of inventory that you don’t expect to sell * Seasonal stock (anticipation stock): you don’t sell this particular product at all times * In-transit stock (pipeline stock): you bought something and they have shipped it, but you haven’t still received it. It may have costs such as insuring it. Also the slower the product moves, the later you can get your rate of return on the investment * Decoupling stock:

________ Reasons for carrying inventory

* To reduce the negative effects of uncertainty
* Demand
* Supply
* Production
* Transportation
* To gain economies of scale
* Purchasing
* Production
* Transportation

1. Uncertainty
a. Uncertainty in demand
i. Customer demand is usually unknown
ii. Maintain target customer service levels
iii. Stock-out cost (you lose sales) vs. inventory carrying costs (you’re able to meet customer demand, but then you have extra) b. Uncertainty in supply
iv. Availability, prices may vary (raw material may not be available at all times, and their prices may vary. Thus, when prices go down, it is more beneficial to buy inventory) v. Maintain uninterrupted flow of raw material

vi. Stock-out costs vs. inventory carrying costs
c. Production
vii. Process times, sequences may vary
viii. Minimize idle time, maximize utilization
ix. Stock-out cost vs. inventory carrying costs
d. Transportation
x. Transit times may vary
xi. Avoid stock-outs due to delays
xii. Transportation costs vs. inventory costs
2. Economies of scale (volume discounts)
e. Purchasing
xiii. Price discounts based on quantity
xiv. Purchase costs vs. inventory carrying cost
xv. Items with low storage costs tend to be bought in bulk to qualify for volume discounts xvi. Raw materials are generally bought in bulk
xvii. Finished goods?
xviii. Benefits of buying in bulk
f. Production
xix. Unit production cost decreases with size of production run (automation). However, you may have a lot of inventory if you have long runs xx. The production cost has two components

1. Variable cost (cost of producing additional unit) 2. Fixed cost (cost of starting a production run) xxi. Lot-sizing costs vs. inventory carrying costs
g. Transportation
xxii. Discounts based on quantity
xxiii. LTL rates are normally higher than TL or CL rates xxiv. Largest shipments may qualify for even lower multiple truckload, carload, trainload rates xxv. Lower freight rates are often reflected in lower consumption prices xxvi. Transportation costs vs. inventory carrying costs

_________ Inventory management

* Inventory models are either deterministic or stochastic * Deterministic (under certainty) **** EOQ
* Everything is known with certainty
* Demand rate, lead time, price, etc
* Stochastic (uncertainty)
* Some variables are random (not known with certainty) * DETERMINISTIC
* Look at power point to see the example (pp 12)

_____________ Assumptions

* Purchase price should not change
* Transportation costs should be constant
* There are no stock-outs under EOQ
* Inventory in transit is ignored
* Infinite planning horizon...
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