Chapter 12 Inventory Control

Review and discussion questions

1. A demand is considered to be an independent demand if it is not linked to other

products. McDonalds: The demand for products leads to this independent demand.
An integrated manufacturer of copiers: Since the manufacturer is integrated, the
production of equipment or systems is performed internally. Thus, it can be said that
the demand for the number of copiers is independent. In a pharmaceutical company,
only the end product is transported to the supplying plant where the production
takes place. So there is no difference in dependent and independent requirements.
2. In process inventory defines the quantity of stock that is tied up in the production
levels by released orders.
Safety stock refers to the quantity of a particular material that should always be
available in the warehouse for safety reasons. Changes to the delivery quantities or
delivery dates can thus be cleared and missing parts costs avoided.
Seasonal stock, this stock makes it possible to plan in advance the periods in the
course of the year in which business activity increases and in which more orders are
assembled than usual.
3. 1. holding (or carrying) costs.
2. set-up costs (or production changes).
3. ordering costs.
4. shortage costs.

4. A plant manager would elect to use fixed-order quantity model when holding costs
are high. He would elect to use fixed time period model when holding costs are low.
The disadvantage of a fixed-time period inventory system is that inventory levels
must be higher to offer the same protection against stockout as a fixed-order
quantity system. A fixed-order quantity system can operate with a perpetual count.

5. Any inventory control model or rule must establish when items should be ordered,
and how many should be ordered.
6. Assumptions are inherent in production setup cost, carrying costs and ordering costs
is as follows: • It’s implicit that the demand of a exacting product is same and stable
for the entire time period • The time taken from ordering turn over the time of
receipt which’s called lead time is constant • Products’ price for each unit is constant.
• The cost of set up or order is too constant. • The holding cost of inventory is mostly
depending on average inventory. • It’s too assumed that all the demand will be met
and there will be no backorders. The on tops of mentioned assumptions are totally
unrealistic and not valid in real time. It isn’t at all possible that the demand will be
similar during the period as there are several factors that affect demand of the
product negatively as well as positively.
7. Unfortunately, there is no model or set of models universally applicable to all
inventory situations. As stated in the chapter several times, each situation is different
and requires a model to suit those conditions. Students frequently try to memorize
specific models rather than the process of building any inventory model.
8. a) Supplying your kitchen with fresh food - I would use order quantity because we
generally pick up items as we need them when the supply runs low. b.) Obtaining a
daily newspaper- I would use a periodic model because most people buy a new
newspaper before finishing the other one on a daily basis. c) Buying gas for your car- I
would use a hybrid type model because the car indicator lets me know that I need to
fill up the tank to a certain point. The highest stockout cost would be running out of
gas because I would not be able to get anywhere such as school, stores, work. This
would amount in being late or not being able to feed my family
9. An important aspect of managing inventory is to have a way to classify it based on
its importance. All items in the supply chain are not of equal importance. Some are
very important, such as specialized surgical equipment. Others are less important,
such as latex gloves in a hospital. The first step in managing inventory is to classify
inventory based on its degree of importance to manage it properly. The tool for this
is ABC classification. Classifying inventory based on degree of importance allows us to
give priority to important inventory items and manage those with care. It also
prevents us from wasting precious resources on managing items that are of less
importance. ABC analysis is extremely important for determining order policies. The
most sophisticated inventory systems should be used for A items. In fact, many
managers personally oversee these. By contrast, C items are typically left for
automated ordering systems as they do not warrant the cost of managerial
involvement.

Chapter 8 Logistics
Review and discussion questions

1. There are a variety of reasons; both positive and negative. Firms may wish to
move closer to markets or sources of supply. Cost reduction is another major
reason. A company might need an educated work force, thereby moving near
a major university. On the negative side, firms relocate to avoid costly
regulation or unionization. Students should be able to cite a large number of
reasons.

2. Answers will vary depending upon the location. Possibilities include quality of
education, tax advantages, proximity of supply, proximity of markets, or
favorable quality of life.

3. In many ways, the decisions are similar. However, since the customer is
often involved in the production of the service, proximity to the
customer is of greater importance. Services often utilize multiple sites to
remain close to the customer. Market needs impact services location
decisions. Alternatively, resource consideration have much more impact
 on manufacturing. In addition, the cost of establishing a service facility is
relatively low when compared to manufacturing. Manufacturing
decisions are often based on cost minimization while service decisions
are based on profit maximization.

4. According to the product life cycle concept, mature products require

more of a cost orientation due to price competition and low product
differentiation. In such industries, many firms are evaluating the
cost/benefit tradeoffs associated with moving operations to Mexico.
Labor cost are significantly lower in Mexico. Land is relatively cheap and
there is less regulation. The low cost of producing goods in Mexico is the
primary reason for the boom in Mexico manufacturing. In many cases,
this reduced cost more than offsets the problems that companies can
face when moving operations to Mexico. These issues include a less
educated workforce, quality problems, higher logistic costs, longer
transportation times, and an extended supply chain to manage.

5. A variety of features will affect what makes a location suitable or not suitable
for a business, and the wise entrepreneur will examine those features carefully
before deciding to move forward with a venture. Software development could
happen anywhere. I would want a place with really strong Intellectual Property
laws, and a culture of IP protection. Of course, there would have a to be a
sufficient supply of software developers with the skills I needed, and have to
haveaccess to great communications, but that could be just about anywhere. It
is also important to take into consideration tax and legal incentives. One could
make an argument for Eastern Europe, or Hong Kong, but overall, I think India
still seems a likely place (it is the world's second-fastest growing economy).