Chapter 13

1. What are the primary reasons for holding inventory?
- To meet anticipated customer demand.

- To smooth production requirements.
- To decouple operations.
- To reduce the risk of stockouts.
- To take advantage of order cycles.
- To hedge against price increases.
- To permit operations.
- To take advantage of quantity discounts.
2. What are the requirements for effective inventory management?
 A system to keep track of the inventory on hand and on order.
 A reliable forecast of demand that includes an indication of possible forecast error.
 Knowledge of lead times and lead time variability.
 Reasonable estimates of inventory holding costs, ordering costs, and shortage costs.
 A classification system for inventory items.
3. Briefly describe each of the costs associated with inventory.
 Purchase cost - is the amount paid to a vendor or supplier to buy the inventory. It is
typically the larges of all inventory costs.
 Holding, or carrying costs - are the cost to carry an item in inventory for a length of time,
usually a year.
 Ordering costs - are the costs of ordering and receiving inventory.
 Setup costs - the costs involved in preparing equipment for a job.
 Shortage costs – costs resulting when demand exceeds the supply of inventory on hand.
These costs can include the opportunity costs of not making a sale, loss of customer
goodwill, late charges, backorder costs and similar cost.
4. What potential benefits and risks do RFID tags have for inventory management?
 RFID tags are a technological advancement in inventory management that provide real-
time information for tracking and processing items in various sectors. They transmit
product information to network-connected RFID readers via radio waves, enabling
businesses to identify, track, monitor, or locate objects within range. RFID technology
has been prioritized by major retail chains and governmental agencies, as it offers
improved safety, convenience, and inventory management. However, widespread
adoption, particularly in retail operations, could take several years. The main areas of
growth for RFID are in non-retail operations, as a global standard and disposable tags
are not yet established.
5. Why might it be inappropriate to use inventory turnover ratios to compare inventory
performance of companies that are in different industries?
 Because the desirable number of turns depends on the industry and what the profit
margins are.
6. How can managers use the results of A-B-C classification?
 Managers use the A-B-C concept in many different settings to improve operations. One
key use occurs in customer service, where a manager can focus attention on the most
important aspects of customer service by categorizing different aspects as very
important, important, or of only minor importance. The point is to not
overemphasize minor aspects of customer service at the expense of major aspects.
Another application of the A-B-C concept is as a guide to cycle counting, which is a
physical count of items in inventory.
7. a. List the major assumptions of the EOQ model
1. Only one product is involved.
2. Annual demand requirements are known.
3. Demand is spread evenly throughout the year so that the demand rate is reasonably
constant.
4. Lead time is known and constant.
5. Each order is received in a single delivery.
6. There are no quantity discounts.
b. How would you respond to the criticism that EOQ model tent to provide misleading results
because values of D, S, and H are, at best, educated guesses?
 The total costs curve is relatively flat in the vicinity of the EOQ, so that there is a “zone”
of values of order quantity for which the total cost is close to its minimum. The fact that
the EOQ calculation involves taking a square root lessens the impact of estimation
errors. Also, errors may cancel each other out.
8. Explain briefly how a higher carrying cost can result in a decrease in inventory.
 As the carrying cost increases, holding inventory becomes more expensive. To avoid
higher inventory carrying costs, by minimizing inventory on hand, increasing the
inventory turnover, or redesigning your warehouse space.
9. What is safety stock, and what is its purpose?
 Safety stock is an extra quantity of a product which is stored in the warehouse to
prevent an out-of-stock situation.
 It serves as insurance against fluctuations in demand.
10. Under what circumstance would the amount of safety stock held be large? Small? Zero?
 Safety stock is large when large variations in lead time and/or usage are present.
Conversely, small variations in usage or lead time require small safety stock. Safety stock
is zero when usage and lead time are constant, or when the service level is 50% (and
hence, z = 0).
11. What is meant by the term service level? Generally speaking, how is service level related to the
amount of safety stock held?
 Service level can be defined as the probability that demand will not exceed supply
during lead time.
 For a given order cycle service level, the greater the variability in either demand rate or
lead time, the greater the amount of safety stock that will be needed to achieve
that service level. Similarly, for a given amount of variation in demand rate or lead
time, achieving an increase in the service level will require increasing the amount of
safety stock. In short, the higher the desired service level, the more safety stock is
required.
12. Describe briefly the A-B-C approach to inventory control.
 A-B-C approach. Classifying inventory according to some measure of importance, and
allocating control efforts accordingly

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1. What are the primary reasons for holding inventory?

- To meet anticipated customer demand.

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