Exam summary Block 2 business, the Course year International Business.
Book: External Environment by Pearson, ISBN 7898. Hogeschool Rotterdam.
Exam summary block 2 - Operations & Supply Chain Management (OPS)
There is also a summary of a PDF file containing chapter 7 Demand Management & Manuf...
,Chapter 7 – Inventory Management
Inventory Stocks of goods and materials that are maintained for many purposes, the most
common being to satisfy normal demand patterns.
- Inventory is a key component in logistics because inventory decisions are often a starting point for
other business activities, like:
Warehousing.
Transportation.
Materials handling.
- Classifications of inventory:
Cycle, or base, stock Inventory that is needed to satisfy normal demand during the course
of an order cycle.
Safety, or buffer, stock Inventory that is held in addition to cycle stock to guard against
uncertainty in demand or lead time.
Pipeline, or in-transit, stock Inventory that is en route between various fixed facilities in a
logistics system such as a plant, warehouse, or store.
Speculative stock Inventory that is held for several reasons, including seasonal demand,
projected price increases, and potential shortages of a product.
Psychic stock Inventory carried to stimulate demand.
Assets cost money Inventory costs money.
Inventory carrying (holding) costs The costs associated with holding inventory.
In the twenty-first century, represent approximately one-third of total logistics costs.
Should factor into an organization’s inventory management policy.
Include:
o Ordering cost
o Carrying (Holding) cost
o Stockout cost
Components of Inventory carrying costs:
Obsolescence costs Products lose value through time.
Inventory shrinkage More items are recorded entering than leaving warehousing or
retailing facilities.
Storage costs Costs associated with occupying space in a plant, storeroom, or
warehousing facility.
Handling costs Costs of employing staff to receive, store, retrieve, and move inventory.
Insurance costs Insure inventory against fire, flood, theft, and other perils.
Taxes Calculated on the basis of the inventory on hand on a particular date; considerable
effort is made to have that day’s inventory be as low as possible.
Interest costs Money that is required to maintain the investment in inventory.
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, Orderings costs Costs associated with ordering inventory, such as order costs and setup costs.
Examples:
o Costs of receiving an order (wages).
o Conducting a credit check.
o Verifying inventory availability.
o Entering orders into the system.
o Preparing invoices.
o Receiving payment.
- Trade-Off Between Carrying (Holding) and Ordering Costs:
An increase in the number of orders leads to higher order costs but lower carrying costs.
- When deciding what levels of inventories to maintain, companies try to minimize the costs
associated with both too much and too little inventory.
- Too much inventory leads to high inventory carrying costs; too little inventory can lead to stockouts
and the associated stockout costs.
- The worst outcome of a stockout is to lose both a sale and all future business from the customer.
- Formula ORDERING COST:
ORDERING COST =number of orders per year∗ordering cost per order
- Formula CARRYING COST: CARRYING COST =avarage inventory x carrying costs
Stockout costs Lost income and expense associated with a shortage of inventory.
The higher the probability of a stockout, the better it is for the company to hold some
amount of inventory (safety stock) to protect against stockouts.
The higher the probability of slow sales, the better it is for a company to carry less inventory.
Back order Placed order for an item that is out of stock.
Trade-Off Between Carrying (Holding) and Stockout Costs:
Higher inventory levels means higher carrying costs, which result in lower chances of a
stockout (lower stockout costs).
- Understanding of a customer’s reaction to a
company being out of stock when a customer
wants to buy an item is important (Table 8.3).
- By keeping extra inventory, businesses are able
to respond quickly to consumers' needs, therefore they are able to minimize the opportunity of lost
sales and/or customers.
Fixed order quantity system Order of fixed amount of inventory.
Fixed order interval system Orders placed at fixed time intervals.
Reorder (trigger) point (ROP) The level of inventory at which a replenishment order is placed.
Formula: ROP=DD x RC
o DD = Daily Demand
o RC = Length of replenishment cycle
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