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Chapter 14

1. Inventory management involves balancing ordering, setup, and carrying costs. Traditional reasons for holding inventory include balancing costs, meeting customer demand, avoiding shutdowns, and hedging against price increases. 2. Just-in-time (JIT) aims to reduce inventories. It emphasizes preventative maintenance and total quality control to avoid shutdowns from failures or defects. The Kanban system ensures needed parts are available. 3. The theory of constraints recognizes that a firm's performance is limited by its constraints. It uses five steps to improve performance by identifying, exploiting, and elevating the binding constraint.

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Hafizh Galih
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53 views

Chapter 14

1. Inventory management involves balancing ordering, setup, and carrying costs. Traditional reasons for holding inventory include balancing costs, meeting customer demand, avoiding shutdowns, and hedging against price increases. 2. Just-in-time (JIT) aims to reduce inventories. It emphasizes preventative maintenance and total quality control to avoid shutdowns from failures or defects. The Kanban system ensures needed parts are available. 3. The theory of constraints recognizes that a firm's performance is limited by its constraints. It uses five steps to improve performance by identifying, exploiting, and elevating the binding constraint.

Uploaded by

Hafizh Galih
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Nama : Yudistira AKUNTANSI MANAJEMEN

NIM : 12030117140152 KELAS - E

CHAPTER 14

Inventory Management

Traditional Inventory Management

Inventory Costs

1. Ordering costs are the costs of placing and receiving an order. Examples include the
costs of processing an order (clerical costs and documents), the cost of insurance for
shipment, and unloading costs.
2. Setup costs are the costs of preparing equipment and facilities so they can be used to
produce a particular product or component.
3. Carrying costs are the costs of carrying inventory. Examples include insurance,
inventory taxes, obsolescence, the opportunity cost of funds tied up in inventory,
handling costs, and storage space.

Traditional Reasons for Holding Inventory

1. To balance ordering or setup costs and carrying costs.


2. To satisfy customer demand (for example, meet delivery dates).
3. To avoid shutting down manufacturing facilities because of a. machine failure b.
defective parts c. unavailable parts d. late delivery of parts
4. To buffer against unreliable production processes.
5. To take advantage of discounts.
6. To hedge against future price increases.

Economic Order Quantity:The Traditional Inventory Model


In developing an inventory policy, two basic questions must be addressed:
1. How much should be ordered (or produced)?
2. When should the order be placed (or the setup done)?
Demand Uncertainty and the Reorder Point If the demand for the part or product is not
known with certainty, the possibility of stockout exists. Safety stock is extra inventory carried
to serve as insurance against fluctuations in demand.
Basic Features of JIT
Plant Layout The type and efficiency of plant layout is managed differently under JIT
manufacturing. Manufacturing cells contain machines that are grouped in families, usually in
a semicircle.
Grouping and Empowerment of Employees Another major structural difference between
JIT and traditional organizations relates to the grouping and responsibilities of employees.
Total Quality Control JIT necessarily carries with it a much stronger emphasis on managing
quality.
Traceability of Overhead Costs A costing system uses three methods to assign costs to
individual products: direct tracing, driver tracing, and allocation. Of the three methods, direct
tracing is the most accurate and, thus, is preferred over the other two methods.
Inventory Effects JIT typically reduces inventories to very low levels. The pursuit of
insignificant levels of inventories is vital to the success of JIT.

Setup and Carrying Costs:The JIT Approach


Long-Term Contracts, Continuous Replenishment, Electronic Data Interchange, and JIT II
Ordering costs are reduced by developing close relationships with suppliers. With
continuous replenishment, a manufacturer assumes the inventory management function for
the retailer.
Electronic data interchange (EDI) is an early form of e-commerce that essentially is an
automated method of transmitting information from computer to computer. In the beginning,
value-added networks (VANs) were required to transmit this information.

Due-Date Performance:The JIT Solution


Due-date performance is a measure of a firm’s ability to respond to customer needs. In the
past, finished goods inventories have been used to ensure that a firm is able to meet a
requested delivery date.

Avoidance of Shutdown and Process Reliability:The JIT Approach


Most shutdowns occur for one of three reasons: machine failure, defective material or
subassembly, and unavailability of a material or subassembly. Holding inventories is one
traditional solution to all three problems.
1. Total Preventive Maintenance Zero machine failures is the goal of total preventive
maintenance. By paying more attention to preventive maintenance, most machine
breakdowns can be avoided.
2. Total Quality Control The problem of defective parts is solved by striving for zero
defects.
3. The Kanban System To ensure that parts or materials are available when needed, the
Kanban system is employed. This is an information system that controls production
through the use of markers or cards.
Discounts and Price Increases:JIT Purchasing versus Holding Inventories
Traditionally, inventories are carried so that a firm can take advantage of quantity discounts
and hedge against future price increases of the items purchased. The objective is to lower the
cost of inventory. JIT achieves the same objective without carrying inventories. The JIT
solution is to negotiate long-term contracts with a few chosen suppliers located as close to the
production facility as possible and to establish more extensive supplier involvement.

JIT’s Limitations
JIT is not an approach that can be purchased and plugged in with immediate results. Its
implementation should be more of an evolutionary process than a revolutionary process.
Patience is needed. JIT is often referred to as a program of simplification— yet it is not
necessarily simple or easy to implement. Time is required, for example, to build sound
relationships with suppliers.

Theory of Constraints
Every firm faces limited resources and limited demand for each product. These limitations
are called constraints. The theory of constraints recognizes that the performance of any
organization is limited by its constraints.

Basic Concepts
Throughput is the rate at which an organization generates money through sales. . Inventory is
all the money the organization spends in turning materials into throughput. Operating
expenses are defined as all the money the organization spends in turning inventories into
throughput.
1. Better Products Better products mean higher quality. It also means that the company
is able to improve products and provide these improved products quickly to the
market.
2. Lower Prices High inventories mean more productive capacity is needed and, thus,
more investment in equipment and space.
3. Responsiveness Delivering goods on time and producing goods with shorter lead
times than the market dictates are important competitive tools.

TOC Steps
The theory of constraints uses five steps to achieve its goal of improving organizational
performance:
1. Identify the organization’s constraint(s).
2. 2. Exploit the binding constraint(s).
3. 3. Subordinate everything else to the decisions made in Step 2.
4. 4. Elevate the binding constraint(s).
5. 5. Repeat the process.

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