OM 300 1nd Edition Lecture 26 Outline of Last Lecture I Associate Forecasting II Monitoring and Controlling Forecasts III Adaptive Smoothing IV Focus Forecasting V Forecasting in the Service Sector Outline of Current Lecture I Inventory Management II Types of Inventory III ABC Analysis IV Cycle Counting V Inventory Costs Current Lecture Wheeled Coach Video Inventory represents close to 50 of capital one of businesses most expensive processes INVENTORY COSTS MONEY Build custom emergency vehicles therefore inventory is hard to manage throughout the year o Use cycle counting update quantities on hand to alleviate quarterly surprises Items are labeled by importance value based on ABC Analysis and accounted for at different times based on value to inventory Inventory management the objective is to strike a balance between investment and customer service Importance of Inventory One of the most expensive assets of many companies representing as much as 50 of total invested capital Operations Managers must balance inventory investment and customer service Functions of Inventory 1 To provide a selection of goods for anticipated demand and to separate the firm from fluctuations in demand 2 To decouple of separate various parts of the production process 3 To take advantage of quantity discounts 4 To hedge against inflation These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute Types of Inventory Raw material o Purchased but not processed Work in process o Undergone some change but not completed o A function of cycle time for a product Maintenance repair operating MRO o Necessary to keep machinery and processes productive Finished goods o Completed product awaiting shipment Managing Inventory 1 How inventory items can be classified ABC analysis 2 How accurate inventory records can be maintained ABC Analysis Divides inventory into three categories based on annual dollar volume o Class A high annual dollar volume o Class B medium annual dollar volume o Class C low annual dollar volume Used to establish policies that focus on the few critical parts and not the many trivial ones Other criteria than annual dollar volume may be used o Anticipated engineering changes o Delivery problems o Quality problems o High unit cost Policies employed may include o More emphasis on supplier development for A items o Tighter physical inventory control for A items o More care in forecasting A items Record Accuracy Accurate records are a critical ingredient in production and inventory systems Allows organization to focus on what is needed Necessary to make precise decisions about ordering scheduling and shipping Incoming and outgoing record keeping must be accurate Stockrooms should be secure Cycle Counting Items are counted and records updated on a periodic basis Often used with ABC analysis to determine cycle Has several advantages o Eliminates shutdowns and interruptions o Eliminates annual inventory adjustment o Trained personnel audit inventory accuracy o Allows causes of errors to be identified and corrected o Maintains accurate inventory records Control of Service Inventories Can be critical component of profitability Losses may come from shrinkage or pilferage Applicable techniques include o Good personnel selection training and discipline o Tight control on incoming shipments o Effective control on all goods leaving facility Independent v Dependent Demand Independent demand the demand for item is independent of the demand for any other item in inventory Dependent demand the demand for item is dependent upon the demand for some other item in the inventory Inventory Costs Carrying costs the costs of holding or carrying inventory over time Ordering costs the costs of placing an order and receiving goods Setup costs cost to prepare a machine or process for manufacturing an order o May be highly correlated with setup time
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