OMIS 4300 Exam 3

John Woosley SELU Fall 2025 Productions and Operations Mgmt

Inventory Definition:

A stock or store of goods.

Independent Demand Items Definition:

Items that are ready to be sold or used.

Types of Inventory:

Raw materials and purchased parts, Work-in-process (WIP), Finished goods/merchandise, Tools and supplies, Maintenance and repairs (MRO) inventory, and Goods-in-transit (pipeline inventory).

WIP:

Work-in-process

MRO

Maintenance and Repairs

Effective Inventory Management Requires:

A system to track inventory, a reliable demand forecast, knowledge of lead time and its variability, reasonable estimates of holding, ordering, and shortage costs, and an inventory classification system.

Inventory Management Definition:

The process of overseeing and controlling the ordering, storage, and use of an organization's inventory to achieve satisfactory levels of customer service while keeping inventory costs within reasonable bounds.

The goal is to effectively balance the costs of ordering and carrying inventories with the desired level of customer service. It encompasses the entire process of forecasting demand, deciding when to order, and how much to order.

Inventory Management

Inventory Control Definition

The part of inventory management concerned with the physical tracking and maintenance of stock once it is on hand. It is the day-to-day activity of managing stock within the storage location.

The focus is on maintaining accurate inventory records, preventing discrepancies, loss, and theft, and ensuring that the stock stays in good condition. It is the day-to-day activity of managing stock within the storage location.

Inventory Control

Why is Inventory Important?

Inventories are a vital part of business. They are necessary for operations and contribute to customer satisfaction. A "typical" firm has roughly 30% of its current assets and as much as 90% of its working capital invested in inventory

What are the functions of inventory?

To meet anticipated customer demand.

To smooth production requirements.

To decouple operations.

To protect against stockouts.

To take advantage of order cycles.

To hedge against price increases.

To permit operations.

To take advantage of quantity discounts

Inventory Management focuses on _______ Demand

Independent Demand

MRP focuses on _______ Demand

Dependent Demand

Periodic System Definition:

Physical count of items made at periodic intervals.

Perpetual Inventory System Definition:

Tracks removals continuously; an order is placed when inventory drops to a predetermined minimum level.

Purchase Cost Definition:

Amount paid to buy the inventory.

Holding (Carrying) Costs Definition:

Cost to carry an item in inventory for a length of time, usually a year.

Ordering Costs Definition:

Costs of ordering and receiving inventory.

Setup Costs Definition:

Costs to prepare equipment for a job (analogous to ordering costs).

Shortage Costs Definition:

Costs resulting when demand exceeds supply; often unrealized profit per unit.

ABC Classification System Definition:

Classifying inventory based on importance (annual dollar value) to allocate control efforts accordingly.

Single-Period Model Application:

Ordering perishables and items with limited useful lives.

Single-Period Model Goals:

Balance the costs of inventory overstock and understock.

Fixed Order Quantity (Q-Model) Characteristics:

Event triggered, uses continuous review (perpetual system), order is placed when inventory drops to the reorder point (R).

Fixed Order Quantity Assumptions (Basic EOQ):

Only one product, annual demand is known and even, lead time is constant, order received in a single delivery, no quantity discounts.

Reorder Point Determinants:

Rate of demand, lead time, variability of demand/lead time, and acceptable stockout risk (service level).

Safety Stock Definition: 

Stock held in excess of expected demand due to variability; the higher the safety stock, the lower the risk of stockout and the higher the service level.

Fixed-Time Period (P-Model) Characteristics:

Time triggered, inventory checked only at the review period (T), requires a larger average inventory (safety stock) to protect against stockouts during the review period.

Aggregate Planning (AP) Definition:

Intermediate-range capacity planning (3 to 18 months).

Aggregate Planning Goal/Purpose:

Achieve a production plan that effectively utilizes the organization’s resources to satisfy demand.

Sales and Operations Planning (S&OP):

Intermediate-range planning decisions to balance supply and demand, integrating financial and operations planning.

AP Inputs:

Resources (workforce/production rates, facilities/equipment), Demand forecast, Policies (workforce changes, subcontracting, inventory levels, back orders), and Costs (inventory carrying, hiring/firing, overtime, etc.).

AP Strategic Approaches:

Proactive, Reactive, and Mixed.

Proactive (AP Strategic Approach) Definition:

Alter demand to match capacity (e.g., pricing, promotion, back orders).

Reactive (AP Strategic Approach) Definition:

Alter capacity to match demand (e.g., hiring/layoff, overtime, subcontracting, inventory).

Mixed (AP Strategic Approach) Definition:

Uses both demand and capacity options.

Master Schedule (MS) Definition:

Result of disaggregating an aggregate plan; shows the quantity and timing of specific end items for a scheduled horizon.

Cumulative Lead Time Definition:

The sum of the lead times that sequential phases of a process require, from ordering of parts to completion of final assembly. The MS should cover at least this period.

Time Fences Definition:

Series of time intervals during which order changes are allowed or restricted. The nearest fence is most restrictive.

Frozen Time Fence Definition:

No schedule changes allowed (most restrictive).

Moderately Firm (Slushy) Time Fence Definition:

Specific changes allowed as long as parts are available.

Flexible (Liquid) Time Fence Definition:

Significant variation allowed as long as overall capacity requirements remain at the same levels (least restrictive).

Material Requirements Planning (MRP) Definition:

A computer-based information system that translates Master Schedule requirements for end items into time-phased requirements for subassemblies, components, and raw materials.

MRP:

Material Requirements Planning

MRP Goal:

Determine what is needed, how much is needed, and when it is needed.

MRP Demand Focus:

Deals with dependent demand for subassemblies or component parts, which is often sporadic or "lumpy.”

Master Production Schedule (MPS) Definition:

States which end items, when, and in what quantities are to be produced.

MPS:

Master Production Schedule

Bill of Materials (BOM) Definition:

A listing of all the assemblies, subassemblies, parts, and raw materials needed to produce one unit of a product.

BOM:

Bill of Materials

Product Structure Tree Definition:

A visual depiction of the requirements in a BOM, listing components by levels.

Low-Level Coding Definition:

Restructuring the BOM so multiple occurrences of a component coincide with the lowest level at which it occurs.

Inventory Records File Definition:

Status of each item by time period ("time buckets"). Includes gross requirements, scheduled receipts, expected amount on hand, lead time, and lot size policy.

Gross Requirements Definition: 

Total expected demand for a component or raw material.

Scheduled Receipts Definition:

Open orders scheduled to arrive.

Projected Available (On Hand) Definition:

Expected inventory on hand at the beginning of each period

Net Requirements Definition:

Actual amount needed in each time period.

Planned-Order Receipts Definition:

Quantity expected to be received at the beginning of the period to cover the net requirement.

Planned-Order Releases Definition:

Planned amount to order in each time period, offset by the lead time (when the order must be placed).

Lot-for-Lot (L4L) Definition: 

Order size equals the demand for that period; minimizes inventory but requires a new setup for each run.

L4L:

Lot for Lot

Economic Order Quantity (EOQ) Definition:

Can lead to minimum costs if item usage is uniform.

Safety Stock/Time Definition:

Involves scheduling orders to arrive or complete ahead of need to reduce shortage probability.

Is safety stock required?

MRP theoretically shouldn't need safety stock, but variability (e.g., late orders, long fabrication times) may necessitate its strategic use.

Backflushing Definition:

Exploding an end item's BOM to determine the quantities of components that were used to make the item, useful for inventory usage tracking.

Primary Reports:

Planned orders, Order releases (authorizing execution), and Changes (revisions/cancellation).

Secondary Reports:

Performance-control reports (e.g., missed deliveries), Planning reports (e.g., future material requirements), and Exception reports (e.g., late orders, excessive scrap).

MRP II (Manufacturing Resources Planning) Definition:

Expanded approach to production resource planning, involving other areas of the firm (e.g., capacity requirements planning, simulation).

Closed Loop MRP Definition:

MRP II systems that include feedback loops to evaluate a proposed material plan against available capacity (capacity requirements planning).

ERP (Enterprise Resource Planning) Definition:

Next evolution step, integrating standardized software modules across different areas of an organization (e.g., Accounting/Finance, Marketing, Production Planning) for information sharing and system management.

Dependent Demand Definition:

Demand for items that are subassemblies or component parts to be used in the production of finished goods.

What are the primary functions of inventory related to matching supply with anticipated sales and production flow?

To meet anticipated customer demand.

To smooth production requirements.

To decouple operations.

To permit operations.

What are the key functions of inventory related to mitigating financial or operational risks?

To protect against stockouts.

To hedge against price increases.

What are the functions of inventory related to optimizing ordering and purchasing costs?

To take advantage of order cycles.

To take advantage of quantity discounts.