PowerPoint
Presentations for
Cornerstones of
Cost Accounting
First Canadian Edition
Adapted by
George Gekas
Ryerson University
Copyright © 2013 Nelson Education Ltd.
INVENTORY
MANAGEMENT:
ECONOMIC ORDER
QUANTITY, JIT, AND THE
THEORY OF CONSTRAINTS
18
18-2
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Just-in-Case Inventory
Management
•
1
Three types of inventory costs can be readily
identified with inventory:
•
Cost of acquiring inventory
•
Cost of holding inventory
•
Stock-out costs (the cost of lost sales by not
having inventory on hand when needed)
18-3
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Just-in-Case Inventory
Management
1
• Ordering Costs: The costs of placing and receiving
an order
• Examples: Clerical costs, documents, insurance
for shipment, and unloading
• Carrying Costs: The costs of carrying inventory
•
Examples: Insurance, inventory taxes,
obsolescence, opportunity cost of capital tied up in
inventory, and storage
18-4
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Just-in-Case Inventory
Management
1
• Setup Costs: The costs of preparing equipment and
facilities so they can be used to produce a particular
product or component
•
Examples: Setup labour, lost income (from idled
facilities), and test runs
• Stock-Out Costs: The costs of not having sufficient
inventory to service sales
•
Examples: Lost sales, costs of expediting (extra
setup, transportation, etc.), and the costs of
interrupted production
18-5
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Just-in-Case Inventory
Management
1
18-6
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Just-in-Case Inventory
Management
1
• Objective of Inventory Management
• To develop an inventory policy that deals with the
tradeoff between acquisition costs and carrying
costs
• Two basic questions must be addressed:
•
•
How much should be ordered (or produced) to minimize
inventory costs?
When should the order be placed (or the setup done)?
18-7
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Just-in-Case Inventory
Management
1
Total ordering and carrying cost can be
described as:
TC = OD/Q + CQ/2
where
TC = The total cost of ordering and carrying inventory
O = The ordering cost (placing and receiving an order)
D = The annual demand or sales
Q = The number of units ordered each time an order is
placed
D/Q = Number of orders placed
C = The cost of carrying one unit of stock for one year
Q/2 = Average units in inventory
18-8
Copyright © 2013 Nelson Education Ltd.
Just-in-Case Inventory
Management
1
Economic Order Quantity
Refers to the order quantity that minimizes the
total cost. The objective of inventory
management to minimize total inventory costs.
EOQ  2 DP / C
See Cornerstone 18-1
18-9
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Just-in-Case Inventory
Management
1
When to Order
Reorder Point
• Point in time when a new order should be placed
Lead Time
• Time required to receive the economic order
quantity once an order is placed or a setup is
initiated
Reorder point = Rate of usage × Lead time
See Cornerstone 18-2
18-10
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Just-in-Case Inventory
Management
1
When to Order
Because the demand for a product is not known with
certainty, the possibility of a stock-out exits. Safety
stock can help avoid this.
Safety stock: Extra inventory carried to serve as
insurance against fluctuations in demand
Reorder point = (Average rate of usage
× Lead time) + Safety stock
See Cornerstone 18-2
18-11
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Just-in-Case Inventory
Management
1
18-12
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Just-in-Case Inventory
Management
1
18-13
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JIT Inventory Management
2
Features and Benefits
•
JIT reduces the costs of acquiring inventory to
insignificant levels by:
Drastically reducing setup time
2. Using long-term contracts for outside purchases
1.
•
Carrying costs are reduced to insignificant levels
by reducing inventories to insignificant levels.
18-14
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JIT Inventory Management
2
The JIT Approach
• Lead times are reduced so the company can meet
requested delivery dates and respond quickly to
customer demand
• Lead times are reduced by:
•
•
•
•
•
•
Reducing setup times
Improving quality
Using cellular manufacturing
Total preventive maintenance to reduce machine failures
Total quality control to reduce defective parts
Use of the Kanban system to avoid shortages of material
and parts
18-15
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JIT Inventory Management
2
Kanban System
• A card system is used to monitor work in
process
Uses three cards:
1. Withdrawal Kanban
2. Production Kanban
3. Vendor Kanban
The Kanban system is
responsible for ensuring
that the necessary
products are produced in
the necessary quantities
at the necessary time.
18-16
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JIT Inventory Management
2
18-17
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JIT Inventory Management
2
18-18
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JIT Inventory Management
2
• Takes advantage of discounts and hedges against
price increases
• Careful vendor selection
• Long-term contracts with vendors
•
•
•
Prices are stipulated (usually producing a significant
savings)
Quality/specifications are stipulated
The number of orders placed are reduced
18-19
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JIT Inventory Management
2
JIT Limitations
1. Implementation time is required.
2. Implications of JIT should be taken into
account.
3. JIT may cause lost sales and stressed workers.
4. Production may be interrupted due to an
absence of inventory.
18-20
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Theory of Constraints:
Constrained Optimization
3
• Every firm operates under limited resources and
limited demand for each product, called Constraints
• External constraints: Market demand
• Internal constraints: Machine or labour time
availability
•
Constrained optimization is choosing the
optimal mix given the constraints faced by the
firm.
18-21
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Theory of Constraints:
Constrained Optimization
3
Linear Programming Model
• Expresses a constrained optimization problem as a
linear objective function subject to a set of linear
constraints
Feasible Solution
• Satisfies the constraints in the linear programming model
Linear Programming
• Method that searches among possible solutions until it
finds the optimal solution
See Cornerstone 18-4
Copyright © 2013 Nelson Education Ltd.
18-22
Theory of Constraints
(TOC)
4
• TOC focuses on three operational measures of
systems performance:
•
•
•
Throughput = (sales revenue – unit level variable
expenses)/time
Inventory Cost (all the money the organization
spends in turning materials into throughput)
Operating expenses (all the money the organization
spends in turning inventories into throughput and all
expenses)
• Goal:
• To maximize returns under the limitations the
organization operates
18-23
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Theory of Constraints
4
Five-step method for improving performance:
1. Identify an organization’s constraints
2. Exploit the binding constraints
3. Subordinate everything else to the decisions made
in Step 2
4. Elevate the organization’s binding constraints
5. Repeat the process as a new constraint emerges to
limit output
18-24
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Theory of Constraints
4
Drum-Buffer-Rope (DBR) System
18-25
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End of
Chapter 18
18-26