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Ch. 21 Inventory Control

Ch. 21 Inventory Control. Learning Objectives. Analyze the importance of inventory. Describe the features of an inventory control system. Analyze the costs associated with inventory. Apply the economic order quantity (EOQ) model to solve inventory control problems. Inventory.

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Ch. 21 Inventory Control

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  1. Ch. 21 Inventory Control

  2. Learning Objectives • Analyze the importance of inventory. • Describe the features of an inventory control system. • Analyze the costs associated with inventory. • Apply the economic order quantity (EOQ) model to solve inventory control problems.

  3. Inventory • Stock of goods.

  4. Functions of inventory • To meet anticipated demand. • To decouple the production process. • To minimize the seasonal effect. • To protect against stockouts. • To take advantage of future price increases. • To purchase in a round lot.

  5. Periodic inventory system • An inventory management system in which a physical count of item sin inventory is made at periodic intervals to determine the quantities on hand.

  6. Perpetual inventory system • An inventory management system in which the inflows and removals of items are kept track of on a continuous basis.

  7. Inventory carrying costs as a percentage of inventory value Annual inventory carrying costs = Average inventory level (in dollars) * Inventory carrying costs • Indirect inventory costs associated with holding the inventories.

  8. Average inventory level

  9. Stockout costs • A special type of inventory cost which includes tangible costs, such as special delivery costs, lost sales and profits, etc., and intangible costs because the stockout may upset customers which in turn will damage the reputation and goodwill of the firm.

  10. Inventory ordering costs • Indirect inventory costs which refer to the costs of placing and processing orders.

  11. Annual inventory ordering costs = Number of orders placed in a year * Cost per order Annual inventory ordering costs = D / Q * CPO

  12. Economic order quantity • The order quantity at which total inventory costs will be minimized.

  13. An EOQ model

  14. Annual inventory carrying costs Annual inventory ordering costs = Q / 2 * UC * ICC = D / Q * CPO Q = √2(D)(CPO) / (UC)(ICC) = EOQ √2(D)(CPO) / (UC)(ICC)

  15. Number of orders placed in a year Expected annual demand (D) / Order quantity (Q) = 365 days / Number of orders placed in in year = Order interval

  16. Reorder point • The quantity of inventory on hand when an order is placed.

  17. Safety stock • Stock that is carried in excess of expected demand.

  18. Expected demand during the time interval between when the order is placed and when the order arrives + Safety stock (or buffer stock) = Reorder point

  19. Inventory cycle

  20. Just-in-time (JIT) • Approach in managing inventory materials by having materials arrive just before they are needed.

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