Business Logistics Chapter 7 - Inventory Management

- strategic stock - safety stock - cycle stock

3 levels of internal inventory held by companies

Economic Order Quantity

A quantitative decision model based on the trade-off between the annual ordering costs and the annual carrying costs

safety stock

A quantity of stock planned to be in inventory to protect against fluctuations in demand or supply

Distribution Requirements Planning

A time-phased finished good inventory replenishment plan in a distribution network. - The function of determining the need to replenish inventory at branch warehouses

strategic stock

Additional inventory beyond cycle and safety stock, generally used for a very specific purpose or future event, and for a defined period of time

Days of supply formula

Average Inventory / Monthly Demand x 30

80,20

B and C items account for the other ___% of the total number of items, but only ___% of total inventory cost

- Performance cycle - Order fill - Case Fill Rate - Line Fill Rate

Common measures of service level include:

Inventory turnover formula

Cost of Goods Sold / Average Inventory

depletes gradually, replenished cyclically

Cycle stock _____________ as customer orders are received, and is ____________________ when supply orders are received.

Review Frequency

Defines how often inventory levels are reviewed

Reorder Point

Defines when a replenishment order is initiated

independent

Forecasted demand = ____________ demand

- Raw Materials - Work-in-Process (WIP) - Finished Goods - Maintenance, Repair and Operating supplies

Four main categories of inventory:

20,80

Generally, A items account for approximately ___% of the total number of items, but about ___% of the total inventory cost.

20-30

Generally, carrying costs equal approximately _________% of a company's inventory value

higher

Generally, the higher the service level target, the __________ the amount of inventory you will need to assure the target is achieved

Finished goods

Goods that are completely ready for sale

Dependent demand

Internal demand for parts and materials based on the demand for the final product in which the parts and materials are used - Ex: automobile engine

Inventory days of supply formula

Inventory On Hand / Average Daily Usage

imputed, doesn't

Inventory carrying cost is an__________ cost. It ____________ appear in the financial statement.

Obsolete inventory

Inventory items that have met the obsolescence criteria established by the company

Fill rate formula

(1 - ((Total Items - Shipped Items) / Total Items)) x 100

Benefits of a Segmentation Strategy

- End of Life Management - Supplier Negotiation - Inventory Optimization - Strategic Pricing - Resource Allocation - Customer Service Levels

Pipeline Inventory

- Inventory in transit. - Inventory held / owned by suppliers, or by wholesalers, distributors, retailers, and customers.

Constraints on the use of EOQ

- Limited capital - Storage capacity - Transportation - Obsolescence - Production lot size - unitization

Finished product inventory

Maintaining adequate __________________________allows a company to fill customer orders immediately

Materials inventory

Maintaining adequate _________________allows a company to support manufacturing operations and the production plan while avoiding delays.

Inventory carrying cost

Measures how much it costs a company to store inventory over a given period of time

3-4

Product leaders in the market have an inventory turnover of _________ times per year

Reorder point of a periodic review

ROP = (D X (T + P/2)) + SS where: ROP = Reorder Point D = Average Daily Demand T = Average Lead Time in Days P = Review Period in Days SS = Safety Stock

reorder point of a perpetual review

ROP = (D X T) + SS where: ROP = Reorder Point D = Average Daily Demand T = Average Lead Time in Days SS = Safety Stock

ABC Classification

Segmentation Strategy that classifies inventory based the degree of importance

100, stockout

Service level is equal to _____% minus the probability % of a __________

Obsolete Inventory

Stock that is expired, out-of-date or no longer needed

Pipeline inventory

The 1 type of external inventory

actual demand, lead time

The amount of cycle stock that a company holds is dependent on _______________ in the immediate time period, supply replenishment _____________ and order quantities.

managerial policy, 24

The carrying cost percent used by a firm is a _______________. It is typically around ___%

Independent demand

The demand for the final product. Demand pattern affected by trends, seasonal patterns, & market conditions - Ex: automobile

Ordering Costs, Inventory Carrying Cost, Total Cost

The intersection of the Annual _______________ and the Annual __________________________ will yield the lowest Annual _____________

Limited capital

The model may generate an order quantity which the company does not have sufficient available funds to purchase at one time

Storage capacity

The model may generate an order quantity which the company does not have sufficient storage capacity to handle at one time

Days of Supply

The most common KPI used by managers in measuring the efficiency in supply chain

Inventory days of supply

The number of days it would take to run out of supply if it was not replenished

Inventory turnover

The number of times that a company's inventory cycles per year

Pipeline inventory

The ownership of this inventory has been transferred to the trading partners but may still influence decisions the company makes regarding how they manage and control their internal inventory, and how much safety stock and/or strategic stock to hold

Fill rate

The percentage of a customer's order that is filled on the first shipment. This can be represented as the percentage of items, SKUs or order value that is included with the first shipment.

Perfect Order Measurement

The percentage of orders that are error-free.

Unitization

The supplier may require the company to order an item in full pack, case, or pallet configurations

Inventory accuracy

The variance between perpetual inventory and physical inventory

Maintenance, Repair & Operating supplies

These are materials that you need to run the manufacturing operation and the business but do not end up as part of the finished product

safety stock

What type of stock is used to Buffer Against Uncertainty in Demand and/or Supply

Strategic stock

What type of stock is used to Decouple Supply from Demand and to Decouple Dependencies in the Supply Chain

cycle stock

What type of stock is used to meet customer demand?

Dependent

_____________ demand does not require forecasting because there is no uncertainty

Vendor Managed Inventory

a modified QR that eliminates the need for replenishment orders

Quick response

a technology-driven cooperative effort between retailers and suppliers to improve inventory velocity while matching supply to consumer buying patterns

ABC Classification

allows different inventory management techniques to be applied to different segments of the inventory in order to increase revenue and decrease costs.

Work in process goods

any raw material that is in any stage of production process, even if it's a finished good that hasn't gone through quality check yet

- add safety time - increase replenishment order - utilize statistical techniques to set safety stocks directly for a component

approaches to introduce safety stock into dependent demand situations

Ordering Costs

are incurred each time an order is placed

dependent

calculated demand = _____________ demand

Policies and Parameters

defined at the detail level - Ex: data requirements, software applications, performance objectives, and decision guidelines

Perfect order

delivered complete, on time, at the right location, in perfect condition, with complete and accurate documentation

Replenishment programs

designed to streamline the flow of goods within the supply chain

Fair share allocation

determines a fair share % of the available supply which is then allocated to each competing demand. - Provides each distribution facility with an equitable distribution of available inventory

Profile replenishment

extends QR and VMI by giving suppliers the right to anticipate future requirements according to their knowledge of a product category (JIT II)

Maintenance, Repair and Operating supplies

goods that are not directly related to product creation.

Product/Market Classification

groups products, markets, or customers with similar characteristics together to facilitate inventory management - Ex: classify by sales, profit contribution, inventory value, usage rate or item category. ABC Classification System

Supply uncertainty

how long will it take to replenish inventory with our customers?

Requirements planning

integrates across the supply chain taking into consideration unique requirements

Cycle stock

inventory that a company builds to satisfy its immediate demand

Safety stock

inventory that is above and beyond what is actually needed to meet anticipated demand

Periodic review

monitor inventory status of an item at regular intervals such as weekly or monthly

Perpetual review

monitor inventory status of an item continuously

External inventory

no longer own this inventory (sold to wholesaler, distributor, retailer, end consumer)

Safety Time

ordering an item earlier than necessary based on the lead time, to ensure timely arrival

Service Level

performance target specified by management and defines inventory performance objectives

Segmentation Strategy

specifies all aspects of inventory management for each segment of inventory - Ex: service objectives, forecasting method, management technique, and review cycle by segment

Performance cycle

the elapsed time between release of a purchase order by the buyer to the receipt of shipment

Inventory Carrying Cost

the expense associated with maintaining inventory

Case fill rate

the percent of cases ordered that are shipped as requested

Order fill rate

the percent of customer orders filled completely as requested

Line fill rate

the percent of order lines (items) that were filled completely as requested

Intent of replenishment programs

to reduce reliance on forecasting and position inventory using actual demand on a just-in-time basis

Demand Uncertainty

when and how much product will our customers order?

Steps to plan safety stock

1. Determine the likelihood of a stockout using a probability distribution, i.e., forecast accuracy/error 2. Estimate the demand during a potential stockout period 3. Establish the desired level of stockout protection, i.e., the desired service level

Why hold Inventory?

1. To Meet Customer Demand 2. To Buffer Against Uncertainty in Demand and/or Supply 3. To Decouple Supply from Demand 4. To Decouple Dependencies in the Supply Chain