Learning Objectives
LO 7-1: Describe the types of inventory.
Raw materials inventory is purchased items used in manufactured goods or services. Work-in-process inventory is items in some intermediate stage of processing. Finished goods inventory is the completed products. Maintenance, repair, and operating supplies inventory is purchased items consumed in-house or used to support manufacturing and services processes.
LO 7-2: Explain the functions of inventory.
There are five functions of inventory which result in a specific class or purpose of the inventory. Anticipated inventories allow demand to be met during periods of expected high demand. Cycle inventories are created when the firm purchases or produces a quantity large enough to last until the next purchase or production period. Hedge inventories occur when companies stockpile inventories to protect against price increases or supply shortages. Safety stocks are used to satisfy demand when production problems, etc. occur. Transportation inventories are owned by the firm and are in-transit, i.e. either in-bound to the firm or out-bound to the customer.
LO 7-3: Interpret the costs, risks, and value of inventory.
There are four types of costs of inventory. Order cost is the administrative costs associated with purchasing items. Inventory carrying cost is cost associated with storing items. Stockout cost is cost of lost sales, lost goodwill, etc. Purchase cost is the actual cost of the item bought from suppliers. When discussing the risk of inventory, the primary issue is having too little inventory; thus, incurring the risk of a stockout and its associated costs. The value of inventory is that carrying more inventory means more customers will be serviced in a timely manner; thus, creating satisfied and repeat customers.
LO 7-4: Calculate the EOQ and reorder point under various demand and lead time conditions.
EOQ (economic order quantity) is calculated by taking the square root of two times the annual demand (D) times the setup or ordering cost of each order (S) divided by the holding or carrying cost per unit per year (iC). Reorder point (ROP) is calculated by multiplying the daily demand (d) times the order lead time (L).
LO 7-5: Discuss the importance of inventory management performance measures.
Inventory management performance measures must assess the performance both inside and outside the firm. They are important in preventing the stocking of out-of-date items and low usage items, carrying too much safety stock, double stocking, and in identifying poorly determined EOQs. Furthermore, inventory management performance measures can enable improvements in customer retention, competitiveness, and economic success.
Chapter Outline
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