Management Accounting - Hansen Mowen CH19
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Transcript of Management Accounting - Hansen Mowen CH19
19 -1
Inventory Inventory ManagementManagement
CHAPTERCHAPTER
19 -2
1. Describe the traditional inventory management model.
2. Discuss JIT inventory management.3. Explain the theory of constraints, and tell
how it can be used to manage inventory.
ObjectivesObjectivesObjectivesObjectives
After studying this After studying this chapter, you should chapter, you should
be able to:be able to:
After studying this After studying this chapter, you should chapter, you should
be able to:be able to:
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Inventory CostsInventory CostsInventory CostsInventory Costs
1. Ordering costs are the costs of placing and receiving an order.
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.
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1. To balance ordering or setup costs and carrying costs.
2. To satisfy customer demand.
3. To avoid shutting down manufacturing facilities because of machine failure, defective parts, unavailable parts, or late delivery of parts.
4. To buffer against unreliable production processes.
5. To take advantage of discounts.
6. To hedge against future price increases.
Traditional Reasons for Carrying InventoryTraditional Reasons for Carrying InventoryTraditional Reasons for Carrying InventoryTraditional Reasons for Carrying Inventory
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The Appropriate Inventory PolicyThe Appropriate Inventory Policy
How much should be ordered or produced?
When should the order be placed or the setup be performed?
Two Basic Questions Must be Addressed
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Total Costs = Ordering costs + Carrying costs
TC = PD/Q + CQ/2
The Traditional Inventory ModelThe Traditional Inventory ModelThe Traditional Inventory ModelThe Traditional Inventory Model
Where TC = The total ordering (or setup) and carrying costs
P = The cost of placing and receiving an order (or the cost of setting up a production run)
Q = The number of units ordered each time an order is placed
D = The known annual demand
C = The cost of carrying one unit of stock for one year
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The Traditional Inventory ModelThe Traditional Inventory ModelThe Traditional Inventory ModelThe Traditional Inventory Model
Economic order quantity (EOQ)
= 2PD/C
D = 10,000 units
Q = 1,000 units
P = $25 per order
C = $2 per unit
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The Traditional Inventory ModelThe Traditional Inventory ModelThe Traditional Inventory ModelThe Traditional Inventory Model
EOQ = ($2 x $25 x 10,000)/2
EOQ = 250,000
EOQ = 500 units
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Reorder point = Rate of usage x Lead time
Example: The producer uses 50 parts per day and that the lead time is 4 days.
Reorder point = 4 x 50 = 200 units
Thus, an order should be placed when inventory drops to 200 units.
Reorder PointReorder PointReorder PointReorder Point
Demand is CertainDemand is Certain
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Reorder PointReorder PointReorder PointReorder Point
Demand is CertainDemand is Certain
500
400
300
200
100
Inventory (units)
(EOQ)
(ROP)
2 4 6 8 10 12 14 16 18 20Days
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Reorder PointReorder PointReorder PointReorder Point
Safety StockSafety Stock
If the refrigerator part was used at a rate of 60 parts a day instead of 50, the firm would use 200 parts after three and one-third days. The safety
stock is determined as follows:Maximum usage 60
Average usage 50
Difference 10
Lead time x4
Safety stock 40
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Reorder PointReorder PointReorder PointReorder Point
Safety StockSafety Stock
ROP = (Average rate of usage x Lead time) +Safety stock
ROP = (50 x 4) + 40
ROP = 240 units
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A Manufacturing Example
The manager of Benson Company is trying to determine the size of the production runs for the blade fabrication.
The controller supplies the following information:
Average demand for blades 320 per dayMaximum demand for blades 340 per dayAnnual demand for blades 80,000Unit carrying cost $5Setup cost $12,500Lead time 20 days
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A Manufacturing Example
EOQ =2PD
C
2 x 80,000 x 2,500=
5
400,000,000=
= 20,000 blades
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A Manufacturing Example
Maximum usage 340
Average usage 320
Difference 20
Lead time x20
Total safety stock 400
Reorder point = (Average usage x Lead time) + Safety stock= (320 x 20) + 400= 6,800 units
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Push-through system Significant inventories Large supplier base Short-term supplier contracts Departmental structure Specialized labor Centralized services Low employee involvement Supervisory management style Acceptable quality level Driver tracing dominates
Traditional Inventory SystemsTraditional Inventory SystemsTraditional Inventory SystemsTraditional Inventory Systems
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Traditional Manufacturing LayoutTraditional Manufacturing LayoutTraditional Manufacturing LayoutTraditional Manufacturing Layout
Product A
Product B
Department. 1
Lathes
Finished Product A
Finished Product B
Each process passes Each process passes through departments through departments that specialize in one that specialize in one
process.process.
Each process passes Each process passes through departments through departments that specialize in one that specialize in one
process.process.
Abrasive Grinders
A
B
Department 2
A
B
Welding
Equipment
Department 3
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JIT Inventory SystemsJIT Inventory SystemsJIT Inventory SystemsJIT Inventory Systems
Pull-through system Insignificant inventories Small supplier base Long-term supplier contracts Cellular structure Multiskilled labor Decentralized services High employee involvement Facilitating management style Total quality control Direct tracing dominates
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JIT has two strategic objectives:JIT has two strategic objectives:
JIT Inventory SystemsJIT Inventory SystemsJIT Inventory SystemsJIT Inventory Systems
To increase profits
To improve a firm’s competitive positions
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JIT Manufacturing LayoutJIT Manufacturing LayoutJIT Manufacturing LayoutJIT Manufacturing Layout
Welding
Grinder
Cell A
Lathe
Product A
Finished Product
Cell B
Welding
Grinder
Lathe
Product B
Finished Product
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JIT And Inventory Management
JIT reduces the costs of acquiring inventory to insignificant levels by:
1. Drastically reducing setup time
2. Using long-term contracts for outside purchases
Carrying costs are reduced to insignificant levels by reducing inventories to insignificant levels
Setup and Carrying Costs: The JIT Approach
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Lead times are reduced so that the company can meet requested delivery dates and to respond quickly to customer demand.
Lead times are reduced by:
reducing setup times
improving quality
using cellular manufacturing
JIT And Inventory ManagementDue Date Performance: The JIT Solution
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JIT And Inventory ManagementAvoidance of Shutdown: The JIT Approach
Total preventive maintenance to reduce machine failures
Total quality control to reduce defective parts
Cultivation of supplier relationships to ensure availability of quality raw materials and subassemblies
The use of the Kanban system is also essential
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What is the Kanban System?What is the Kanban System?What is the Kanban System?What is the Kanban System?
A Card System is used to monitor work-in-processA withdrawal Kanban
A production Kanban
A vendor Kanban
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Withdrawal KanbanWithdrawal KanbanWithdrawal KanbanWithdrawal Kanban
Item No.___________________ _____________
Item Name_________________ _____________
Computer Type_____________ _____________
Box Capacity_______________ _____________
Box Type__________________ _____________
15670T07
Circuit Board
TR6547 PC
8
C
Processing Process
CB Assembly
Subsequent Process
Final Assembly
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Production KanbanProduction KanbanProduction KanbanProduction Kanban
Item No.___________________ _____________
Item Name_________________ _____________
Computer Type_____________
Box Capacity_______________
Box Type__________________
15670T07
Circuit Board
TR6547 PC
8
C
Process
CB Assembly
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Vendor KanbanVendor KanbanVendor KanbanVendor Kanban
Item No.___________________
Item Name_________________ _____________
Box Capacity_______________
Box Type__________________
Time to Deliver
Name of Supplier
15670T08
Computer Casing
8
C
Name of Receiving Co.
Electro PC
Receiving Gate
75
8:30 A.M., 12:30 P.M., 2:30 P.M.
Garry Supply
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Lot with P-Kanban
Production
Ordering Post
(6) Signal
CD Assembly
Remove
(4) P-Kanban
Attach to Post
(5) Attach
W-Kanban(1) Remove
W-Kanban
Attach to
Post
Withdrawal Post
(2), (3)
(7)
Final Assembly
(1)
Kanban ProcessKanban ProcessKanban ProcessKanban Process
CB StoresCB Stores
WithdrawalWithdrawalStoreStore
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JIT’s LimitationsJIT’s LimitationsJIT’s LimitationsJIT’s Limitations
Time is required to build sound relationships with suppliers.
Sharp reductions in inventory buffers may cause a regimented workflow and high levels of stress among production workers.
The absence of inventory to buffer production interruptions.
Current sales are placed at risk to achieve assurance of future sales.
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JIT And Inventory ManagementDiscounts and Price Increases: JIT Purchasing
Versus Holding Inventories
Careful vendor selection
Long-term contracts with vendors
Prices are stipulated (usually producing a significant savings)
Quality is stipulated
The number of orders placed are reduced
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Throughput
Inventory
Operating expenses
Three Measures of Organizational Performance
Theory of ConstraintsTheory of Constraints
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Five Steps to Improve Performance
1. Identify the organization’s constraint(s).
2. Exploit the binding constraint(s).
3. Subordinate everything else to the decisions made in Step 2.
4. Elevate the binding constraint(s).
5. Repeat the process.
Theory of ConstraintsTheory of Constraints
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Materials
Process AProcess A
Process BProcess B
DrummerDrummer ProcessProcess
Time BufferFinished Goods
Drum-Buffer-Rope SystemDrum-Buffer-Rope SystemDrum-Buffer-Rope SystemDrum-Buffer-Rope System
Process CProcess C
Final ProcessFinal ProcessRope
Initial ProcessInitial Process
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Drum-Buffer-Rope SystemDrum-Buffer-Rope SystemDrum-Buffer-Rope SystemDrum-Buffer-Rope System
Material for 12 Parts per Day (Part X: 6 and Part Y: 6)
DRUMMERDRUMMERDrilling Drilling ProcessProcess
Grinding Grinding ProcessProcess
Polishing Polishing ProcessProcess
RopeTime
12 Units Part X
6 Units Part X per Day6 Units Part Y per Day
Confer Company
Confer Company
Buffer12 Units
Part Y
Finished Goods
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The EndThe EndThe EndThe End
Chapter NineteenChapter Nineteen
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