Chapter 13

Inventory Management (Part A)

After completing this chapter, you should be able to:

1. Define the term inventory, list the major reasons for holding inventories, and list the main
requirements for effective inventory management.
2. Discuss the nature and importance of service inventories.
3. Explain periodic and perpetual review systems.
4. Explain the objectives of inventory management.
5. Describe the A-B-C approach and explain how it is useful.
6. Describe the basic EOQ model and its assumptions and solve typical problems.
7. Describe the economic production quantity model and solve typical problems.
8. Describe the quantity discount model and solve typical problems.
9. Describe reorder point models and solve typical problems.
10. Describe situations in which the singleperiod model would be appropriate, and solve typical
problems.

Glossary

A-B-C approach Classifying inventory according to some measure of importance, and

allocating control efforts accordingly.

cycle counting A physical count of items in inventory.

cycle stock The amount of inventory needed to meet expected demand.

economic order The order size that minimizes total annual cost.
quantity (EOQ)

excess cost Difference between purchase cost and salvage value of items left over at the
end of a period.

fill rate The percentage of demand filled by the stock on hand.

fixed-order-interval Orders are placed at fixed time intervals.

(FOI) model

holding (carrying) Cost to carry an item in inventory for a length of time, usually a year.
cost

inventory A stock or store of goods.

inventory turnover Ratio of average cost of goods sold to average inventory investment.

lead time Time interval between ordering and receiving the order.

Little's Law The average amount of inventory in a system is equal to the product of the
average demand rate and the average time a unit is in the system.

ordering costs Costs of ordering and receiving inventory.

periodic system Physical count of items in inventory made at periodic intervals (weekly,
monthly).

perpetual inventory System that keeps track of removals from inventory continuously, thus
system monitoring current levels of each item.

point-of-sale (POS) Record items at time of sale.

system
purchase cost The amount paid to buy the inventory.

quantity discounts Price reductions for larger orders.

reorder point (ROP) When the quantity on hand of an item drops to this amount, the item is
reordered.

safety stock Extra inventory carried to reduce the probability of a stockout due to demand
and/ or lead time variability.

service level Probability that demand will not exceed supply during lead time.

setup costs The costs involved in preparing equipment for a job.

shortage costs Costs resulting when demand exceeds the supply of inventory; often
unrealized profit per unit.

single-period model Model for ordering of perishables and other items with limited useful lives.

two-bin system Two containers of inventory; reorder when the first is empty.

universal product Bar code printed on a label that has information about the item to which it is
code (UPC) attached.

Supply Chain Management (Part B)

After completing this chapter, you should be able to:

1. Discuss the key issues of supply chain management.

2. Name the recent trends in supply chain management.
3. Summarize the motivations and risks of outsourcing as a strategy.
4. State some of the complexities that are involved with global supply chains.
5. List some of the strategic, tactical, and operational responsibilities of supply chain
management.
6. Give examples of some advantages of e-business.
7. Explain the importance of supplier partnerships.
8. Discuss the issues involved in managing returns.
9. List the requirements of an effective supply chain.
10. Name some of the challenges in creating an effective supply chain.

Glossary

Avoidance Finding ways to minimize the number of items that are returned.

Bullwhip effect Inventory oscillations become progressively larger looking backward

through the supply chain.

Centralized purchasing Purchasing is handled by one special department.

Closed-loop supply chain A manufacturer controls both the forward and reverse shipment of
product.
Cross-docking A technique whereby goods arriving at a warehouse from a supplier are
unloaded from the supplier’s truck and loaded onto outbound trucks,
thereby avoiding warehouse storage.

Decentralized Individual departments or separate locations handle their own purchasing

purchasing requirements.

Delayed differentiation Production of standard components and subassemblies, which are held
until late in the process to add differentiating features.

Disintermediation Reducing one or more steps in a supply chain by cutting out one or more
intermediaries.

E-business The use of electronic technology to facilitate business transactions.

Event management The ability to detect and respond to unplanned events.

Fill rate The percentage of demand filled from stock on hand.

Gatekeeping Screening returned goods to prevent incorrect acceptance of goods.

Information velocity The speed at which information is communicated in a supply chain.

Inventory velocity The speed at which goods move through a supply chain.

Logistics The movement of materials, services, cash, and information in a supply

chain.

Order fulfillment The processes involved in responding to customer orders.

Purchasing cycle Series of steps that begin with a request for purchase and end with
notification of shipment received in satisfactory condition.

Reverse logistics The process of transporting returned items.

Radio frequency A technology that uses radio waves to identify objects, such as goods in
identification (RFID) supply chains.

Strategic partnering Two or more business organizations that have complementary products
or services join so that each may realize a strategic benefit.

Strategic sourcing Analyzing the procurement process to lower costs by reducing waste and
nonvalue-added activities, increase profits, reduce risks, and improve
supplier performance.

Supply chain A sequence of organizations—their facilities, functions, and activities—

that are involved in producing and delivering a product or service.

Supply chain The strategic coordination of the supply chain for the purpose of
management integrating supply and demand management.

Supply chain visibility A major trading partner can connect to its supply chain to access data in
real time.

Third-party logistics (3- The outsourcing of logistics management.

PL)

Traffic management Overseeing the shipment of incoming and outgoing goods.

Vendor analysis Evaluating the sources of supply in terms of price, quality, reputation,
and service.

Vendor-managed Vendors monitor goods and replenish retail inventories when supplies are
inventory (VMI) low.