CHAPTER-12 : Discussion Questions
1. Describe the four types of inventory.
- Raw material inventory – used to separate suppliers from the production process.
- Work-in-process (WIP) inventory – raw material that have undergone some change but are not completed.
- MROs (maintenance/repair/operation) – devoted to supplies necessary to keep machinery and process productive
- Finished-goods inventory – is completed product awaiting shipment.
2. With the advent of low-cost computing, do you see alternatives to the popular ABC classifications?
The nearness of low-cost computing ought not to be viewed as preventing the essence for the ABC inventory classification scheme.
3. What is the purpose of the ABC classification system?
The purpose is to sort on-hand inventories into three categories based on the annual dollar volume.
4. Identify and explain the types of costs that are involved in an inventory system.
- Types of costs – holding cost: cost of capital invested and space required
- Shortage cost: the cost of lost sales or customers who never return; the cost of lost good will.
- Ordering cost: the costs associated with ordering, transporting, and receiving the items.
- Unit cost: the actual cost of the item.
5. Explain the major assumptions of the basic EOQ model.
- Quantity discounts are not possible.
- The lead time, that is, the time between the placement of the order and the receipt of the goods, is known and constant.
- The receipt of the inventory is instantaneous; i.e., the goods arrive in a single batch, at one instant in time.
- Demand is known and constant over time.
- If orders are placed at the right time, stock outs or shortages can be completely avoided.
- The only variable costs are the cost of setting up or placing an order and the cost of holding or storing inventory over time.
6. What is the relationship of the economic order quantity to demand? To the holding cost? To the setup cost?
The relationship between EOQ and demand, holding cost and setup cost is relatively insensitive especially when change is small.
7. Explain why it is not necessary to include product cost (price or price times quantity) in the EOQ model, but the quantity discount model requires this information.
Product cost is excluded in the EOQ model since most inventory models go for restraining total costs.