chapter 20 managing inventory and quality. the importance of inventory management §cope with...
TRANSCRIPT
Chapter 20
Managing inventory and quality
The importance of inventory management
Cope with uncertainties in customer demand and in production processes
Qualify for quantity discountsAvoid future price increases in raw
materialsAvoid the costs of placing numerous small
orders with suppliers
Conventional approaches to inventory management
Focused on balancing ordering costs
• the incremental costs of placing an order for inventory
carrying costs• the costs of carrying inventory in stock
shortage costs (or out of stock costs)
Economic order quantity (EOQ)
The optimum order size for individual inventory items, to minimise the total ordering and carrying costs
EOQ = 2 x annual requirements x cost per order
annual carrying cost per unit
Timing of orders under EOQ
Inventory reorder point (ROP) the level of inventory on hand that triggers the
placement of a new order (or setup)
safety stock• the extra inventory kept on hand to cover any
above-average usage or demand
(inventory used per period of time + safety stock) x order lead time
Assumptions underlying EOQ
Demand is known and constantIncremental ordering costs are known,
constant per orderAcquisition cost per unit is constantEntire order is delivered at one timeCarrying costs are known, constant per unitOn average, one-half of order is in stock at
any time
MRP
Material requirements planning (MRPI) assists managers to estimate inventory
requirements and to schedule production
Manufacturing resource planning (MRPII) allows managers to link production planning to
the overall planning function of the business
MRP is a push system
MRP terminology
Bill of materials identifies all the materials, components and sub-
assemblies required to make a product
Inventory master file records the quantity of inventory on hand and
movements in and out of stock
Master production schedule identifies the quantity and timing of each item
to be produced in each department
Benefits of MRP
Increased customer responsiveness significantly more on-time deliveries much less expediting
Increased labour productivityReduced inventory levels
reduced cost of holding inventory
Costs of MRP
Expensive to installRequires extensive employee training and
disciplineIf bill of materials or inventory master files
are inaccurate - system is unreliable
Just-in-time (JIT) inventory management
JIT inventory and production system is a comprehensive system for controlling the
flow of manufacturing in a multistage production environment
An underlying philosophy of simplifying the production process by removing non-value-added activities
Key features of JIT production
A pull method of co-ordinating production, uses kanbans
Simplified production processesPurchase of materials, and manufacture of
sub-assemblies and products in small lotsQuick and inexpensive setups of production
machinery
Cont.
Key features of JIT production
High-quality levels for raw materials, components and finished products
Effective preventative maintenance of equipment
Flexible work cells to take advantage of group technology and
remove bottlenecks
JIT purchasing
A few suppliersLong-term contracts with suppliersMaterials and parts delivered in small lots
as neededMinimal inspection of delivered materials
and partsGrouped payments to each supplier
Costs of JIT
Substantial investment to change the production to minimise non-value-added activities
An increase in the risk of inventory shortages and the associated loss of production, expediting materials costs and loss of sales
Benefits of JIT
Savings in inventory-carrying costsLower insurance costsFewer losses due to spoilage, obsolescence
and theftNo opportunity costs of high inventoryElimination of non-value-added activitiesMeets customers needs more effectively
JIT and backflush costing
Backflush costing a simplified method of product costing under
JIT no raw material or WIP inventory account raw material charged to raw and in process
inventory (RIP) account used conversion costs charged to finished goods
inventory
Costs and benefits of backflush costing
Benefits of backflush costing simpler and less expensive than conventional
costing
Costs of backflush costing are provides much less detail than conventional
costing
Is the loss of detail overcome by cost savings?
Role of the management accountant in managing inventory
MPR: may maintain inventory master files and bills of material for all products
JIT co-ordinate the flow of information to eliminate
non-value activities provide reports to appropriate levels of
management
Managing quality
TQM is a management approach that focuses on meeting customer requirements by achieving continuous improvement in products or services
TQM is a broad philosophy with a number of features which are not included in JIT
Quality accreditation
Organisations may achieve quality accreditation by meeting a series of quality standards set out in the ISO 9000 series.
ISO 9000’s are expensive to implement and maintain may have little relevance to many small
businesses and service organisations
Quality accreditation (QA) versus total quality management (TQM)
Organisations can have QA without TQMTQM is a philosophy - QA is a
documentation processQA may encourage employees to think
about quality
Features of TQM
TQM is holisticCustomer-drivenInvolves empowermentHas a process perspectiveIs supported by a quality management
systemInvolves continuous improvement
Benefits and costs of TQM
Benefits improved quality shorter lead times increased efficiency improved customer satisfaction
TQM can be difficult and expensive to achieve because it may involve a change in organisational culture
Cost of quality reports
Quality of design degree to which a product’s design
specifications meet customers’ expectations
Quality of conformance degree to which a product meets formal design
specifications
Cont.
Cost of quality reports
Costs incurred in ensuring that the organisation maintains a high level of quality in its products, and the costs that arise from having poor-quality products
Internal failure costs incurred when defective products or services
are detected before they leave the firm
Cost of quality reports
External failure costs incurred as a result of defective products or
services being delivered to customers
Appraisal costs incurred to determine whether defects exist
Prevention costs incurred to prevent internal or external failures
and to minimise appraisal activities
Usefulness of cost of quality reports
Places a dollar figure on the costs of poor quality
Helps prioritise quality improvement programsHelps managers monitor the effects of the
‘quality effort’Can help identify the optimal level of quality
for the firm
Reasons for lack of use of cost of quality reports
Managers may believe costs outweigh the benefits
Information is difficult to extract from conventional costing systems
Many of the quality costs are spread across the organisation
Exhibit 20.3
Exhibit 20.4
Exhibit 20.6