Abu-Meshaal B203a Final Exam Review 2013-2014 Second

Abu-Meshaal B203a Final Exam review 2013-2014 second

Week 4 – Chapter 12 – Chapter 15 – Part 1

Chapter 12

Q1) Define what is meant by “Inventory or stock”, and explain with examples the types of inventories commonly known in the business life.

Inventory, or ‘stock’ as it is more commonly called in some countries, is defined here as the stored accumulation of material resources in a transformation system. Sometimes the term ‘inventory’ is also used to describe any capital-transforming resource, such as rooms in a hotel, or cars in a vehicle-hire firm, but we will not use that definition here. Usually the term refers only to transformed resources.

Q2) Discuss in some details why managing the inventory is necessary for any organization?

Revisiting operations objectives; the roles of inventory

Most of us are accustomed to keeping inventory for use in our personal lives, but often we don’t think about it. We may purchase some items because we have found something of exceptional quality, but intend to save it for a special occasion. In general, our inventory planning protects us from critical stock-outs; so this approach gives a level of dependability of supplies.

It is, however, entirely possible to manage our inventory planning differently.

They also reduce the risk of forgetting an item in the cupboard and letting it go out of date. Essentially, they purchase against specific known requirements (the next meal).

Why is inventory necessary?

No matter what is being stored as inventory, or where it is positioned in the operation, it will be there because there is a difference in the timing or rate of supply and demand. If the supply of any item occurred exactly when it was demanded, the item would never be stored.

Q3) Explain the adverse sequence a business may face in case of maintaining stock levels at high volume.

Although inventory plays an important role in many operations performance, there are a number of negative aspects of inventory.

● Inventory ties up money, in the form of working capital, which is therefore unavailable for other uses, such as reducing borrowings or making investment in productive fixed assets (we shall expand on the idea of working capital later).

● Inventory incurs storage costs (leasing space, maintaining appropriate conditions, etc.).

● Inventory may become obsolete as alternatives become available.

● Inventory can be damaged, or deteriorate.

● Inventory could be lost, or be expensive to retrieve, as it gets hidden amongst other inventory.

● Inventory might be hazardous to store (for example flammable solvents, explosives, chemicals and drugs), requiring special facilities and systems for safe handling.

● Inventory uses space that could be used to add value.

● Inventory involves administrative and insurance costs.

Q4) In the normal business cycle, several types of costs are directly associated with order size for organizations. Discuss the statement.

The same principles apply in commercial order-quantity decisions as in the domestic situation. In making a decision on how much to purchase, operations managers must try to identify the costs which will be affected by their decision. Several types of costs are directly associated with order size.

1 Cost of placing the order. Every time that an order is placed to replenish stock, a number of transactions are needed which incur costs to the company. These include the clerical tasks of preparing the order and all the documentation associated with it, arranging for the delivery to be made, arranging to pay the supplier for the delivery, and the general costs of keeping all the information which allows us to do this. Also, if we are placing an ‘internal order’ on part of our own operation, there are still likely to be the same types of transaction concerned with internal administration.

2 Price discount costs. In many industries suppliers offer discounts on the normal purchase price for large quantities; alternatively they might impose extra costs for small orders.

3 Stock-out costs. If we misjudge the order-quantity decision and our inventory runs out of stock, there will be costs to us incurred by failing to supply our customers. If the customers are external, they may take their business elsewhere; if internal, stock-outs could lead to idle time at the next process, inefficiencies and, eventually, again, dissatisfied external customers.

4 Working capital costs. Soon after we receive a replenishment order, the supplier will demand payment for their goods. Eventually, when (or after) we supply our own customers, we in turn will receive payment. However, there will probably be a lag between paying our suppliers and receiving payment from our customers. During this time we will have to fund the costs of inventory. This is called the working capital of inventory. The costs associated with it are the interest we pay the bank for borrowing it, or the opportunity costs of not investing it elsewhere.

5 Storage costs. These are the costs associated with physically storing the goods. Renting, heating and lighting the warehouse, as well as insuring the inventory, can be expensive, especially when special conditions are required such as low temperature or high security.

6 Obsolescence costs. When we order large quantities, this usually results in stocked items spending a long time stored in inventory. Then there is a risk that the items might either become obsolete (in the case of a change in fashion, for example) or deteriorate with age (in the case of most foodstuffs, for example).

7 Operating inefficiency costs. According to lean synchronization philosophies, high inventory levels prevent us seeing the full extent of problems within the operation. There are two points to be made about this list of costs. The first is that some of the costs will decrease as order size is increased The second point is that it may not be the same organization that incurs the costs.

For example, sometimes suppliers agree to hold consignment stock. This means that they deliver large quantities of inventory to their customers to store but will only charge for the goods as and when they are used. In the meantime they remain the supplier’s property so do not have to be financed by the customer, who does, however, provide storage facilities.

Q5) Briefly define the “Inventory profile” and draw its diagram.

Inventory

Inventory profiles

An inventory profile is a visual representation of the inventory level over time. Figure 12.5 shows a simplified inventory profile for one particular stock item in a retail operation. Every time an order is placed, Q items are ordered. The replenishment order arrives in one batch instantaneously. Demand for the item is then steady and perfectly predictable at a rate of D units per month. When demand has depleted the stock of the items entirely, another order of Q items instantaneously arrives, and so on. Under these circumstances:

• The average inventory = Q / 2 (because the two shaded areas in Fig. 12.5 are equal)
• The time interval between deliveries = Q / D
• The frequency of deliveries = the reciprocal of the time interval = D / Q

Q6) Define and explain the Economic Order Quantity (EOQ) concept.

The most common approach to deciding how much of any particular item to order when stock needs replenishing is called the economic order quantity (EOQ) approach. This approach attempts to find the best balance between the advantages and disadvantages of holding stock.

Generally, holding costs are taken into account by including:

● Working capital costs

● Storage costs

● Obsolescence risk costs.

Order costs are calculated by taking into account:

● Cost of placing the order (including transportation of items from suppliers if relevant);

● Price discount costs.

(1) An item used at a rate of 1000 per annum is purchased at a price of $40 per unit. The annual storage cost is estimated to be 25 percent of the purchase price. The ordering cost is $200 per order. Calculate the following:

(A) EOQ in units

(B) Number of orders per year

(C) Annual ordering cost

(D) Annual holding cost

(E) Total annual cost

(2) An item used at a rate of 3000 per annum is purchased at a price of $9.00 per unit. The annual storage cost is estimated to be 22% of the purchase price. The ordering cost is $25.00 per order.

(A) Calculate the Economic Order Quantity (EOQ).

(B) Explain the final result.

(3) A glass factory obtains a specific type of glass (Z) from a sole supplier. The demand for this type of glass is constant around the year at 200,000 meters. The cost of placing an order is estimated to be $20 per order. The annual holding cost of the glass is estimated to be $2 per meter.

(A) How much should the factory order at a time in order to minimize its total costs?

(B) Calculate the annual ordering costs, holding costs and total costs based on your EOQ answer.

(C) Explain two types of costs from which holding costs are derived.

(4) Olemo Speed is a car company that sells various types of cars. The demand for a specific car (V) is estimated to be 225 units yearly. The decision maker of the company orders 50 units of the car (V) every time he makes a new order. The cost of placing an order is estimated to be $10 per order. The annual holding cost for car (V) is estimated to be $5 per unit.

(A) Did the company decision maker make a good estimation on the order size? Discuss in terms of EOQ.

(B) Calculate the annual ordering costs, holding costs and total costs based on:

- The decision maker’s order size. - EOQ.

How much money would the company decision maker save if he orders the EOQ instead of her estimated order size?

(C) Explain two types of costs from which ordering costs are derived.

Question with answer
An item used at a rate of 5000 per annum is purchased at a price of $10 per unit. The Annual storage cost is estimated to be 25 per cent of the purchase price. The order cost is $30 per order.
Calculate the following:
1- EOQ in units
2- The number of orders per year
3- The annual ordering cost
4- The annual holding cost
5- The Total cost
Solution
Co = Ordering cost per Order = $30
D = Annual Usage = 5000
Ch = Storage cost per year = 25% = 0.25 X 10
C = Unit Purchase Price = $10
(1) EOQ in units
EOQ =SQRT (2*Co*D) / Ch
= SQRT (2X30X5000) / (0.25 X 10)
= 346.4 = 346 units (Rounded)
(2) Number of orders per year
Number of orders per year = __Annual usage (D)__
EOQ
5000
346
14.45 = 14 order (Rounded)
(3) Total ordering cost
Total ordering cost = number of orders per year X cost per order
= 14 X 30
= $ 420
(4) Total holding cost
Total holding cost = Median (Average) inventory X unit holding cost
= (EOQ) X unit holding
2
= 346 X 0.25 X 10
2
= $ 432.5
(5) Total cost
Total cost = Total ordering cost + Total holding cost
= 420 + 432.5
= $ 852.5 / Question with answer
An electronics chips supplier buys microchips from a large manufacturer. Last year the company supplied 1,500 specialist D/72 chips to customers. The cost of placing an order is $75 and the annual holding cost is estimated to be $2.5 per chip per year.
Calculate the following:
A. EOQ in units.
B. Calculate the annual ordering cost, the annual holding cost & the total cost based on your EOQ.
C. Enumerate and briefly discuss two types of costs which are generally associated with the holding costs.
A.
EOQ = SQRT (2CoD\Ch)
D = annual demand = 1,500 chips per year
Ch= storage cost = $ 2.5 per chip per year
Co = ordering cost per order = $75
EOQ = SQRT ((2x75x1,500) / (2.5)) = 300 chips or units
B.
The annual ordering cost
= number of orders per year x ordering cost per order
= Co x D / EOQ = $75 x 1,500 / 300 = $375
The annual holding cost
= average inventory x holding cost/ unit
= (EOQ /2) x Ch = (300/2) x 2.5 = $375
The total cost
= The annual ordering cost + the annual holding cost
= $375 + $375 = $750
C.
Holding costs are derived from: (Students are expected to discuss any two of the following)
a. Working capital costs: soon after receiving a replenishment order, the supplier will demand payment for their goods. Eventually, when (or after) we supply our own customers, we in turn will receive payment. During this time we will have to fund the costs of inventory. This is called the working capital of inventory. The costs associated with it are interest we pay to the bank for borrowing money, or the opportunity costs of not investing it elsewhere.
b. Storage costs: these are the costs associated with physically storing the goods. Renting, heating and lighting the warehouse, as well as insuring the inventory, can be expensive.
c. Obsolescence risk costs: when a large quantity is ordered, it usually results in stocked items spending a long time stored in the inventory. Then there is a risk that the items might either become obsolete, or deteriorate with age.

(5) Explain what is meant by “ABC analysis of stock”, and identify the main steps of ABC analysis.

(6) Al-Arkan company has the following inventory data:

Item # / Unit Value (K.D.) / Average Monthly Usage
Orange Juice / 100 / 30
Apple Juice / 20 / 25
Carrots Juice / 2 / 25
Chocolate Milk / 50 / 20
Water / 10 / 45

(A) Perform an ABC analysis for the above inventory data.

(B) Suppose you are the operations manager. What kind of actions would you take based on the analysis?

(7) Perform an ABC analysis for the following inventory data:

Item # / Unit Value (K.D.) / Average Monthly Usage
Motorbike / 10 / 40
Motorcycle / 10 / 60
Family Car / 200 / 30
Bus / 20 / 50
Sport Car / 50 / 40
Question: Omega factory has the following inventory data: Item # / Unit Value (K.D.) / Average Monthly Usage
Orange Juice / 100 / 30
Apple Juice / 20 / 25
Carrots Juice / 2 / 25
Chocolate Milk / 50 / 20
Water / 10 / 45

Chapter 15

Q1) A. What is lean and just-in-time

B. discuss the similarities and differences between MRP and JIT (lean synchronization).

A. What is lean and just-in-time

Lean operations

it means moving towards the elimination of all waste in order to develop an operation that is faster, more dependable ,produces higher-quality of products and services and operates at low cost (for the whole business rather than just manufacturing).

Just-in-time approach

It is an operation philosophy that aims to meet demand instantaneously with perfect quality and no waste.

It is a disciplined approach to improve overall productivity and eliminating waste.

It provides for cost-effective production and delivery of only the necessary quantity of parts and high quality at the right time and place, while using a minimum amount of facilitates material and human resource.

B. similarities and differences

Similarities

MRP and lean synchronization are both used for planning and control of operations.

• MRP and lean synchronization have similar objective: meeting customer demand through improved performance and cost minimization.
• The two approaches can reinforce each other in the same operation, provided their respective advantages are preserved.

Differences

Differences MRP / JIT
Manufacturing resource planning / Just-in-time
Used as a push system / Used as a pull system
MRP is planning and control ‘calculation mechanism’ / Has aims which are wider than the operations planning and control activity
Needs complex, centralized computer-based organization / Uses simple control systems
Assumes a fixed operations environment, with fixed lead times / Assumes resource flexibility and minimized lead times
Good at planning, weak at control / Good at control, weak at planning
More capable at dealing with complexity, as measured by numbers of items being processed / Less capable of responding instantaneously to changes in demand as the part count, options, and colors increase

Week 7 – Marketing – Chapter 1 – Chapter 2

Chapter 1

Q1) Define the term “Marketing”, and discuss in some details the evolution of the marketing concept throughout the time.

Marketing: an organizational function and a set of processes for creating, communicating and delivering value to customers and for managing customer relationships in ways that benefit the organization and its stakeholders.

–Marketing consists of individual and organizational activities that facilitate and expedite satisfying exchange relationships in a dynamic environment through the creation, distribution, promotion and pricing of goods, services and ideas.

–Marketing: is the sum of all the activities involved in planning, pricing, promoting, distributing, and selling of goods and services to satisfy consumers need and want.

Marketing concept throughout the time:

1) The Production Era –

Second half of the nineteenth century “The period of mass production following industrialization”

The industrial revolution was in full swing in Europe and the US. Electricity, railways, the division of labor, the assembly line and mass production made it possible to manufacture products more efficiently. Products poured into the marketplace, where consumer demand for manufactured goods was strong.

2) The Sales Era –

From the mid-1920s to the early 1950s, companies viewed sales as the major means of increasing profits.

As a result this period came to have a sales orientation.

Business people believed that the most important marketing activities were personal selling and advertising

The strong consumer demand for products subsided. Companies realized that products, which by this time could be made quite efficiently would have to be „sold‟ to consumers.

3) The Marketing Era – early 1950s

“As organizations realized the importance of knowing customers‟ needs, companies entered into the marketing era – the era of customer orientation”

Some business people began to recognize that efficient production and extensive promotion of products did not guarantee that customers would buy them. Companies found that they first had to determine what customers wanted and then produce it, rather than simply making products first and then trying to change customers‟ needs to correspond to what was being produced.

4) The Relationship Marketing Era – 1990s

The current ear is moving away from transaction-based marketing and towards nurturing ongoing relationships with costumer.

Transactional marketing focus was on the single transaction or exchange. However, relationship marketing recognized that long term success and market share gains depend on such transactions, but also on maintaining a customers’ loyalty and on repeatedly gaining sales from existing customers.