CBA 390 (H/R) CH 12 – INVENTORY MANAGEMENT I. Type of Inventory A. Raw material B. Work-in-progress C. Maintenance/repair/operating supply D. Finished goods II. The Functions of Inventory A. To “decouple” or separate various parts of the production process B. To provide a stock of goods that will provide a “selection” for customers C. To take advantage of quantity discounts D. To hedge against inflation and upward price changes III. Disadvantages of Inventory A. Higher costs 1. Item cost (if purchased) 2. Ordering (or setup) cost a. Costs of forms, clerk’s wages, etc. 3. Holding (or carrying) cost a. Building, lease, insurance, taxes, etc. B. Difficult to control C. Hides production problems IV. The Material Flow Cycle A Run time: Job is at machine and being worked on. B. Setup time: Job is at the work station, and the work station is being “setup”. C. Queue time: Job is where it should be, but is not being processed because other work precedes it. D. Move time: The time a job spends in transit. E. Wait time: When one process is finished, but the job is waiting to be moved to the next work area. F. Other: “Just-in-case” inventory. V. ABC Analysis A. Divided on-hand inventory into classes. B. Basis is usually annual $ volume. 1. $ volume = Annual demand × Unit cost C. Policies based on ABC Analysis. 1. Develop class A suppliers more 2. Give tighter physical control of A items 3. Forecast A items more carefully VI. Independent versus Dependent Demand A. Independent Demand – demand for an item is independent of demand for any other item. B. Dependent Demand – demand for an item is dependent on the demand for some other item. VII. Inventory Costs A. Holding costs – associated with holding or “carrying” inventory over time. B. Ordering costs – associated with costs of placing orders and receiving goods. C. Setup costs – cost to prepare a machine or process for manufacturing an order.