SCM Ch. 9 Flashcards

What is inventory?

Stock of goods held by a business for production

What are the main types of inventory in manufacturing?

Raw materials

What is raw materials inventory?

Inputs used in the production process.

What is work-in-process (WIP) inventory?

Partially completed products in production.

What is finished goods inventory?

Completed products ready for sale.

What are supplies in inventory?

Items used to support operations (e.g.

What is service inventory?

Tangible goods and resources used to deliver a service.

Can services be stored as inventory?

No

Why are employees considered part of service inventory?

Their skills determine the services that can be provided.

What is an inventory policy?

A strategy that determines when to reorder and how much to order.

What are the two fundamental questions of inventory management?

When to order and how much to order.

Why do firms hold inventory to protect against lead time demand?

To meet demand while waiting for replenishment.

Why is inventory used to maintain independence of operations?

To prevent delays in one process from stopping others.

Why do firms carry inventory to balance supply and demand?

To handle seasonal or fluctuating demand.

Why is inventory used to buffer uncertainty?

Demand and supply are unpredictable.

Why do firms use economic purchase quantities?

Buying or producing in bulk lowers costs.

What is cycle stock?

Inventory ordered in batches to meet regular demand.

What is safety stock?

Extra inventory held to prevent stockouts due to uncertainty.

What is anticipation inventory?

Inventory built in advance of expected demand increases.

What is pipeline inventory?

Inventory that is in transit between locations.

What are MRO items?

Maintenance

What is holding (carrying) cost?

Cost of storing and maintaining inventory.

What is ordering (setup) cost?

Cost of placing and receiving orders.

What is shortage cost?

Cost incurred when inventory runs out.

How are holding costs typically expressed?

As a percentage of inventory value or per-unit dollar cost.

What is a fixed-order quantity system?

A system where a constant quantity is ordered whenever inventory reaches a reorder point.

What is another name for the fixed-order quantity system?

Economic Order Quantity (EOQ) model.

What variables define the fixed-order quantity system?

Order quantity (Q) and reorder point (ROP).

What is a fixed-time period system?

A system where inventory is reviewed at fixed intervals and order quantity varies.

What is inventory position (IP)?

Actual available inventory

When are orders placed in a fixed-order quantity system?

When inventory reaches the reorder point (ROP).

When are orders placed in a fixed-time period system?

At predetermined time intervals.

How does order quantity differ between systems?

Fixed-order: constant Q; fixed-time: variable Q.

Which system generally requires more recordkeeping?

Fixed-order quantity system.

Which system generally holds more inventory?

Fixed-time period system.

What is the purpose of EOQ?

To minimize total inventory costs.

What costs are included in EOQ total cost?

Purchase cost

How does holding cost change as order quantity increases?

Holding cost increases.

How does ordering cost change as order quantity increases?

Ordering cost decreases.

What is the reorder point (ROP)?

The inventory level at which a new order is placed.

What is the basic ROP formula?

ROP = demand during lead time.

What is the ROP formula including safety stock?

ROP = demand during lead time + safety stock.

Why is safety stock used?

To protect against demand and lead time variability.

What determines the amount of safety stock?

Desired service level (Z-value).

What is the Economic Production Quantity (EPQ) model?

A model where inventory is produced and added gradually rather than all at once.

How does EPQ differ from EOQ?

EOQ assumes instant delivery; EPQ assumes gradual production.

What is the target inventory level (R) in a fixed-time system?

The amount needed to meet demand until the next review.

What is the formula for target inventory level (R)?

R = demand during lead time + demand during review period + safety stock.

What is independent demand?

Demand for finished goods not tied to other items.

What is dependent demand?

Demand for components derived from finished goods.

What tool shows the relationship between dependent and independent demand?

Bill of Materials (BOM).

What system calculates dependent demand quantities?

Material Requirements Planning (MRP).

What is ERP in supply chain management?

An integrated system connecting MRP across the organization and supply chain.

What is ABC inventory classification?

A method of categorizing inventory based on importance and value.

What principle underlies ABC classification?

Pareto’s Law (few items account for most value).

What are A items in ABC classification?

High-value items (~70–80% of value

What are B items in ABC classification?

Moderate-value items (~30% of items

What are C items in ABC classification?

Low-value items (~50% of items

What are the steps in ABC inventory classification?

Determine annual usage → calculate percentage → rank items → classify into A

What is lumpy demand?

Irregular

What is periodic order quantity (POQ)?

An alternative to EOQ for handling variable demand.

Why can EOQ be adjusted in practice?

Costs are relatively flat near the optimal point.

What real-world factors affect EOQ decisions?

Truck sizes

What is the formula for average inventory?

Average inventory = (Q / 2) + safety stock.