Ch.14

CHAPTER 14

inventory management

Questions for writing and discussion

1. Ordering costs are the costs of placing and receiving an order. Examples include clerical costs, documents, insurance, and unloading.

2. Setup costs are the costs of preparing equipment and facilities so that they can be used for producing a product or component. Examples include wages of idled production workers, lost income, and the costs of test runs.

3. Carrying costs are the costs of carrying inventory. Examples include insurance, taxes, handling costs, and the opportunity cost of capital tied up in inventory.

4. Stockout costs are the costs of insufficient inventory (e.g., lost sales and interrupted production).

5. As ordering costs decrease, fewer and larger orders must be placed. This, in turn, increases the units in inventory and, thus, increases carrying costs.

6. Reasons for carrying inventory include the following: (a) to balance setup and carrying costs; (b) to satisfy customer demand; (c) to avoid shutting down manufacturing facilities; (d) to take advantage of discounts; and (e) to hedge against future price increases.

7. The economic order quantity is the amount that should be ordered so as to minimize the sum of ordering and carrying costs.

8. Reorder point = 3 12 = 36 units; Safety stock = 3(15 – 12) = 9 units

9. Safety stock is simply the difference between maximum demand and average demand, multiplied by the lead time. By reordering whenever the inventory level hits the safety stock point, a company is ensured of always having sufficient inventory on hand to meet demand.

10. JIT minimizes carrying costs by driving inventories to insignificant levels. Ordering costs are minimized by entering into long-term contracts with suppliers (or driving setup times to zero).

11. JIT manufacturing is a demand-pull approach to manufacturing. It differs from traditional manufacturing by significantly reducing reliance on inventories, forming manufacturing cells, using...