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1MAN 3504 Test #3 Conceptual Review GuideCHAPTER 13Objective of Inventory Management: to keep enough inventory to meet customer demand, while being cost effectivePurpose of Inventory Management: to determine the amount of inventory to keep in stock, how much to order, + when to orderTypes of Inventory:1.Cycle Inventory – order extra just for today due to cost of placing orders(Goal: Balance cost of ordering + cost of holding inventory)2.Anticipation Inventory – based on seasonal/cyclical demandWhat Do We Inventory?Raw Materials WIP ProductsPurchased Parts + Supplies Finished GoodsTools + Equipment Items Being TransportedReasons to Hold Extra Inventory:1.Buffer against demand variations-Safety Stock (in case demand is higher than expected)-Decoupling Inventory (keep WIP inventory sitting around in case of machine breakdown)-Bullwhip Effect (as you move farther from actual demand, order quantities get larger)2.Ensure that production can continue smoothly even with work stoppagesLevel of Customer Service: ability to effectively meet internal demand as well as external demand in a timely, efficient manner(Inventory must be sufficient to provide high-quality customer service)Types of Demand:1.Dependent Demand – demand for items used to produce final products(dependent on your own decisions)*2.Independent Demand – demand that comes from external customersInventory Costs:Carrying Costs – cost of holding inventory (opportunity, spoilage, facility, obsolete costs)Ordering Costs – cost of replenishing inventoryShortage Costs – cost incurred when demand cannot be met2(losing customers, expediting costs, word of mouth)Types of Inventory Control Systems:Continuous System – Fixed-Order Quantity; constantly monitoring inventory level; place preset order amount when inventory hits preset amount(Quantity – Constant; Time – Variable)Periodic System – Fixed-Time-Period; based on calendar; place order at predetermined point in time; order enough to reach target inventory level(Quantity – Variable; Time – Constant)ABC Classification System (focusing/prioritizing mechanism)A Items – few items, sell large amount (pay most attention to these items)C Items – lots of items, sell small amountB Items – in between A + CEconomic Order Quantity (EOQ): the optimal order quantity that will minimize total inventory costs (associated with continuous inventory system)Assumptions of EOQ Model:-Demand is known + is constant-No shortages allowed ((only worry about holding + carrying costs)-Lead-time for receipt of orders is constant (time btw. place + receive order)-Order quantity is received all at onceOrder Cycle: the time between receipt of orders in an inventory cycle*Annual Ordering Cost (KNOW HOW TO CALCULATE)*Annual Carrying Cost (KNOW HOW TO CALCULATE)*Total Annual Inventory Cost (KNOW HOW TO CALCULATE)(annual ordering cost + annual carrying cost)*Optimal Q: the lowest point on the total cost curve(CALCULATION FORMULA ON FORMULA SHEET)*Reorder Point: the level of inventory at which a new order should be placed (CALCULATION FORMULA ON FORMULA SHEET)Quality Discounts: price per unit decreases as order quantity increases; given for specific higher order quantities(TOTAL COST W/ QUANTITY DISCOUNTS CALCULATION FORMULA ON FORMULA SHEET)-the calculation determines if an order size w/ a discount is more cost effective than optimal Q*Stockout: an inventory shortage; when you run out of inventory3Safety Stock: buffer added to on-hand inventory during lead time(rather expensive form of inventory; typically holding “just in case”)Service Level: the probability that you don’t stockoutReorder Point w/ Variable Demand (KNOW HOW TO CALCULATE)(In-Class Problem #3 from March 26th)A Periodic Inventory System normally requires a larger safety stock (time btw. orders is constant but order size varies)CHAPTER 2What is Quality? – the characteristics of a product/service that bear on its ability to satisfy stated/implied needsCustomer’s Perspective of Quality:Fitness for Use – how well the product/service does what it is supposed to doQuality of Design – designing quality characteristics into productProducer’s Perspective of Quality:Quality of Conformance – ensuring product/service is produced according to designDimensions of Quality (Manufactured Goods):1.Performance 6:Serviceability (ease of service)2.Features 7:Aesthetics3.Reliability 8:Safety4:Conformance (meet standards?) 9:Other Perceptions5:DurabilityDimensions of Quality (Services): not as easily measured1:Time + Timeliness 5:Accessibility + Convenience2:Completeness 6:Accuracy3:Courtesy 7:Responsiveness4:ConsistencyDeming Wheel: (PDCA Cycle)4.Act  1.Plan › fl3.Check  2.DoEvolution of Quality Management:4**W. Edwards Deming (statistician)-quality was about management philosophy-led to transform of Japan’s manufacturing systems*Joseph M. Juran-first to really consider the costs of quality-thought of as strategic issue to think about alwaysCost of Quality:-cost of achieving good quality (prevention + appraisal)-cost of poor quality (internal + external)(cost of poor quality exceeds cost of good quality)Prevention Cots:Project Planning Costs Training CostsProduct-Design Costs Information CostsProcess CostsAppraisal Costs:Inspection + Testing Costs Operator CostsTest Equipment CostsInternal Failure Costs: (incurred before it gets to the customer)Scrap Costs Process Downtime CostsRework Costs Price-Downgrading CostsProcess Failure CostsExternal Failure Costs: (incurred once it gets to the customer)Customer Complaint Costs Product Liability CostsProduct Return Costs Lost Sales CostsWarranty Claims CostsNote: Quality Saves You MoneyTotal Quality Management (TQM) Involves:Being Customer-Oriented Continuous ImprovementLeadership CooperationStrategic Planning Statistical MethodsEmployee Responsibility Training + EducationQuality Management Systems (QMS): systems to achieve customer satisfaction that complements other company systemsParticipative Problem Solving: employees are directly involved in the quality management process5Kaizen: involves everyone in a process of continuous improvementQuality Circle: group of workers + supervisors from the same area who address quality problemsProcess Improvement Team: includes members from the interrelated functions/departments that make up a processBenchmark: “best” level of quality achievement in one company that other companies seek to achieveSix Sigma: measure of how

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