Operations and Supply Chain Management The Core

INVENTORY MANAGEMENT chapter 11 377
The easiest time for stock to be counted is when there is no activity in the stockroom or
on the production floor. This means on the weekends or during the second or third shift,
when the facility is less busy. If this is not possible, more careful logging and separation
of items are required to count inventory while production is going on and transactions are
occurring.
The counting cycle depends on the available personnel. Some firms schedule regular
stockroom personnel to do the counting during lulls in the regular working day. Other
companies hire private firms that come in and count inventory. Still other firms use fulltime
cycle counters who do nothing but count inventory and resolve differences with the
records. Although this last method sounds expensive, many firms believe it is actually less
costly than the usual hectic annual inventory count generally performed during the two- or
three-week annual vacation shutdown.
The question of how much error is tolerable between physical inventory and records has
been much debated. Some firms strive for 100 percent accuracy, whereas others accept a
1, 2, or 3 percent error. The accuracy level often recommended by experts is ± 0.2 percent
for A items, ± 1 percent for B items, and ± 5 percent for C items. Regardless of the specific
accuracy decided on, the important point is that the level be dependable so that safety
stocks may be provided as a cushion. Accuracy is important for a smooth production process
so that customer orders can be processed as scheduled and not held up because of
unavailable parts.
CONCEPT CONNECTIONS
LO11–1 Explain how inventory is used and understand what it costs.
∙ Inventory is expensive mainly due to storage, obsolescence, insurance, and the value of the
money invested.
∙ This chapter explains models for controlling inventory that are appropriate when it is
difficult to predict exactly what demand will be for an item in the future and it is desired to
have the item available from “stock.”
∙ The basic decisions that need to be made are: (1) when should an item be ordered, and (2)
how large should the order be.
∙ The main costs relevant to these models are (1) the cost of the item itself, (2) the cost to hold
an item in inventory, (3) setup costs, (4) ordering costs, and (5) costs incurred when an item
runs short.
Inventory The stock of any item or resource used in an organization.
Independent demand The demands for various items are unrelated to each other.
Dependent demand The need for any one item is a direct result of the need for some other
item, usually an item of which it is a part.
LO11–2 Analyze how different inventory control systems work.
∙ An inventory system provides a specific operating policy for managing items to be stock.
Other than defining the timing and sizing of orders, the system needs to track the exact status
of these orders (have the orders been received by the supplier, have they been shipped, what
date is each expected, etc.).
∙ Single-period model—When an item is purchased only one time and it is expected that it will
be used and then not reordered, the single-period model is appropriate.
∙ Multiple-period models—When the item will be reordered and the intent is to maintain the
item in stock, multiple-period models are appropriate.