Supply chain Flashacrds - Ch 4

Why is inventory management important?

It’s one of a company’s largest assets; poor management leads to dissatisfied customers, lost revenue, and higher costs.

What does inventory include?

All goods and materials held in stock that support production, customer service, and operations.

Why can inventory be both an asset and a liability?

Asset: supports operations. Liability: excess ties up cash, needs storage/insurance, risks obsolescence or damage.

Why can inventory be both an asset and a liability?

Asset: supports operations. Liability: excess ties up cash, needs storage/insurance, risks obsolescence or damage.

What are the 4 categories of inventory?
A: Raw materials, Work-in-Process (WIP), Finished Goods, MRO supplies.

Why minimize WIP inventory?

To improve efficiency and reduce costs.

What’s the difference between make-to-stock and make-to-order for finished goods?

Make-to-stock = hold lots for quick sales. Make-to-order = hold little, produce per demand

Why can’t services be inventoried?

They’re produced and consumed simultaneously.

What can be inventoried in services?

Facilitating goods (e.g., food, tableware).

What are 4 main reasons companies hold inventory?

Meet customer demand, buffer against uncertainty, decouple supply & demand, decouple dependencies in processes.

Difference between internal and external inventory?

Internal = held by the company. External = held by distribution partners.

What is obsolete inventory?

Expired, damaged, or outdated stock that should be written off/disposed.

What are the main cost categories related to inventory?

Direct, indirect, variable, fixed, carrying, and order costs.

What are hidden costs of too much inventory?

Ties up money, hides quality/process issues, limits improvement.

Hidden costs of too little inventory?

Production disruption, higher costs, delays, lost sales

Formula for Inventory Turnover?

COGS ÷ Average Inventory. (Higher = better).

What is absolute inventory value?

Total cost or market value of inventory (on balance sheet).

Periodic Review System – key features?

Inventory checked at intervals, order if below reorder point. Simple/cheap but risk stockouts.

Continuous Review System – key features?

Inventory tracked constantly, auto-replenish at reorder point. Accurate but costlier.

Formula for Reorder Point (ROP)?

ROP = (Demand/day × Lead time) + Safety stock.

Fixed-Time Period vs Fixed-Order Quantity systems?

Fixed-Time = order at set intervals, amount varies. Fixed-Order = place fixed qty when at ROP.

What’s EOQ and its purpose?

Economic Order Quantity balances order vs carrying costs, minimizes total inventory cost.

EOQ formula?

EOQ=2×Order Cost×Annual DemandCarrying Cost×Unit CostEOQ=Carrying Cost×Unit Cost2×Order Cost×Annual Demand​​

What real-world factors limit EOQ?

Capital, storage, transport, obsolescence risk, supplier restrictions.

What’s the ABC system?

Classifies inventory by importance (A = high value, B = medium, C = low).

What’s the bin system?

Two bins: order when first bin empties.

What’s the base stock level system?

Always replenish withdrawals to keep constant stock; useful for costly/JIT items

What’s the single-period model?

Inventory for one-time/seasonal events (e.g., newsstand).

Difference between barcodes and RFID?

Barcodes = scanned line-of-sight. RFID = no line-of-sight, auto-updates

Why use automation in inventory management?

Increases speed, accuracy, and reduces errors in manufacturing/warehousing/retail

4 ways to measure inventory performance?

• Units

• dollars

• weeks of supply

• inventory turns

Why is reducing inventory important?

Directly increases company savings.