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1、Chapter Four Inventory ManagementI. Learning objectives and requirements 1. to know the types and characteristics of Inventory2. to know the inventory functionality3. to know some inventory-related definitions4. to know the components of inventory carrying cost5. to know the methods of determining w
2、hen to order and how much to order6. to know how to manage demand uncertainty and performance cycle uncertainty7. to understand inventory management policiesII. Learning contentsSection I. Inventory Functionality and Principles1. Main contents1) Inventory Types and Characteristicsa) Raw Material Inv
3、entoryb) Work-In-Process Inventoryc) Maintenance/Repair/Operating Supply (MRO) Inventoryd) Finished Goods Inventory2) Inventory FunctionalityTable 10-2 summarizes inventory functionality. These four functionsgeographical, specialization, decoupling, balancing supply and demand, and buffering uncerta
4、inty-require inventory investment to achieve managerial operating objectives.3) Inventory-Related Definitionsa) Inventory PolicyInventory policy consists of guidelines concerning what to purchase or manufacture, when to take action, and in what quantity. It also includes decisions regarding geograph
5、ical inventory positioning. b) Inventory Performance IndicatorsThe inventory policy essentially determines inventory performance. The two key indicators of inventory performance are service level and average inventory.i) Service LevelThe service level is the performance target specified by managemen
6、t. It defines inventory performance objectives. Service level is often measured in terms of an order cycle time, case fill rate, line fill rate, order fill rate, or any combination of these. ii) Average InventoryAverage inventory consists of the materials, components, work-in-process, and finished p
7、roduct typically stocked in the logistical system. From a policy viewpoint target inventory levels must be planned for each facility.c) Economic Order Quantity (EOQ)The Economic Order Quantity (EOQ) model provides a specific quantity balancing of these two critical cost components. By determining th
8、e EOQ and dividing it into annual demand, the frequency and size of replenishment orders minimizing the total cost of cycle inventory is identified. Prior to reviewing EOQ, it is necessary to identify costs typically associated with ordering and maintaining inventory.2. Key concepts and pointsInvent
9、ory, Raw Material Inventory, Work-In-Process Inventory, Maintenance/Repair/Operating Supply (MRO) Inventory, Finished Goods Inventory, Inventory Functionality, Geographical Specialization, Decoupling, Balancing Supply and Demand, Buffering Uncertainty, Inventory Policy, Inventory Performance Indicat
10、ors, Service Level, Performance Cycle, Case Fill Rate, Line Fill Rate, Order Fill, Average Inventory, Order Quantity, Safety Stock, Reorder Point, Inventory Turns, Economic Order Quantity (EOQ)3. Issues of applicationStudents shall know well that inventory management is risky, and risk varies depend
11、ing upon a firms position in the distribution channel; and the typical measures of inventory commitment are time duration, depth, and width of commitment.Section II. Inventory Carrying Cost ComponentsInventory carrying cost is the expense associated with maintaining inventory. Inventory expense is c
12、alculated by multiplying annual inventory carrying cost percent by average inventory value. Standard accounting practice is to value inventory at purchase or standard manufacturing cost rather than at selling price.1. Main contents1) Capital CostConfusion often results from the fact that senior mana
13、gement frequently does not establish a clear-cut capital cost policy. For logistical planning, the cost of capital must be thought out clearly since the final rate of assessment will have a significant impact on system design and performance.2) TaxesTaxing authorities typically assess inventory held
14、 in warehouses. The tax rate and means of assessment vary by location. The tax expense is usually a direct levy based on inventory level on a specific day of the year or average inventory level over a period of time.3) InsuranceInsurance cost is an expense based upon estimated risk or loss over time
15、. Loss risk depends on the product and the facility storing the product. Insurance cost is also impacted by facility characteristics such as security cameras and sprinkler systems that might help reduce risk.4) ObsolescenceObsolescence cost results from deterioration of product during storage. Obsol
16、escence also includes financial loss when a product be-comes obsolete in terms of fashion or model design. Obsolescence costs are typically estimated based on past experience concerning markdowns, donations, or quantity destroyed. 5) StorageStorage cost is facility expense related to product holding rather than product handling. Storage cost must be allocated on the requirements of specific products