Chapter 4 Inventory Management

Two models for determining When to Review?

- Continuous Review System - Periodic Review System

Inventory Turnover Ratio

Cost of Goods sold/ Average Inventory @cost

ROD

Demand(d)=600/month d-(600/30)=20/day Lead time= 6days ROD=dL=6*20=120

Single-Period Model

In which inventory is one-time stocking - The objective is to maximize profits

Safety Stock

Safety stock, also known as "buffer stock" is inventory that is above and beyond what is actually needed to meet anticipated demand A quantity of stock planned to be in inventory to protect against fluctuations in demand or supply Companies operating in a make-to-stock environment will generally maintain some amount of safety stock whether based on a management decision, or based on a safety stock determination formula

Radio Frequency Identification(RFID)

Successor to the barcode for tracking individual unit of goods, RFID does not require direct line of sight to read a tag and the information on the tag is updatable

External Inventory

The company by downstream supply chain trading partners

Maintenance, Repair& Operating (MRO) 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 - MRO inventory is separate from production inventory but it is just as important - Frequently these items are expensed at the time they purchased, and there may be a separate function, group, or individual who plans and orders these MRO items, from those who plan and order production items

How much to Order?

Two common inventory ordering system categories 1. Fixed- order Quantity System 2. Fixed-Time Period System

obsolecence

an order quantity which would create spoilage or obsolescence

ABC system

based on the degree of importance

Barcode reader

can read barcodes and transmit the data to computer

Indirect costs

cannot be traced directly to the unit produced(overhead; MRO items, buildings, equipments

carrying costs

costs for physically having inventory on-site and for maintaining the infrastructure needed to store the inventory and to secure and insure it over time

various costs

dependent on the unit volume produced vary with output level(materials, labor, utility power)

Direct costs

directly traceable to unit produced(materials, labor

2D Barcode

graphical image horizontally and vertically 2 paragraphs of information

Barcodes

help business track products and stock levels for inventory management

Carrying costs

incurred for holding inventory time value of inventory - cost of capitale - taxes - insurances - obsolescence - storage

Fixed costs

independent of the unit volume produced(buildings, equipment, rent allocated overhead costs

Order cost

labor costs associated with placing an order for inventory and the cost of receiving the order

Inventory Control Tools

offer the most flexibility and ease of use - Linear Barcode - 2D Barcode - Radio Frequency Identification(RFID)

Order costs

place order-> order costs

Limited capital

the company does not have sufficient available

Storage capacity

the company does not have sufficient storage capacity to handle at one time

unitization

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

Production lot size

the supplier may require the company to order an item in full production lot sizes

EOQ

全部根号2 x Order Cost x Annual Demand Volume/ Annual Carrying Cost % x Unit Cost

Inventory Turnover

The number of times that an inventory cycles, or "turns over," during the year.

Fixed-time Period System

The order quantity is the difference between the on-hand stock the review day, and the pre-determine target inventory level: Q=R-IP Q: order quantity R: target inventory level IP: inventory position

Inventory in the Service Industry

1. Companies in the service industry do not maintain inventory of services are basically produced and consumed immediately upon demand. 2. Companies can however, maintain inventory of "facilitate goods" which are those items that are used to help facilitate the service being provided. - Restaurants offer dining services, but cannot inventory the actual dining service; they can only begin the dining service when the customers arrive - Restaurants ca inventory the food, tableware, and other elements of the dining operation as these are facilitating goods necessary to provide the service - Resturants can even prepare some of their meal options in advance, such as salads or deserts. They can inventory these facilitating products so they are ready to go when the customers arrive for the dining service.

Volume Economies of Scale

1. Individual item purchase price discount 2. Multiple- Item purchase price discount 3. Transportation freight-rate discounts

Maintenance, Repair and Operating(MRO)

1. Materials that you need to run the manufacturing operation and the business but do not end up as part of the finished product. - Some MRO items are consumed during the process of converting raw materials into finished goods: oil for the manufacturing equipment - Other MRO items are used to facilitate the manufacturing operation: cleaning supplies, spare parts, - While still other MRO items may be used to facilitate the company's administrative activities: office supplies, coffee for the break room

To Decouple Dependencies in the Supply Chain

1. Separating operations in a process 2. Smoothing production and reducing peak period capacity needs

Linear Barcode

(1D) Limitations:1D, only can read horizontally and hold maximum 85

Other inventory systems

- ABC system - Bin system - Base stock level system - "Single-Period" inventory model

To Buffer Against Uncertainty in Demand and/or Supply(safety stock)

- Uncertainty in demand: sales or usage above expectations - Uncertainty in supply: shortage, delays, disruptions (or both)

Transportation

the item being ordered and transported may require specialized or dedicated transportation, impacting the quantity per order

Service Inventory

Activities carried out in advance of the customer's arrival

Advantage of Continuous Review System

- Allows for real-time updates of inventory, which can make it easier to know when to replenish - Facilities accurate accounting, since the inventory system can generate real-time costs of goods sold

Having too much inventory can result in effects like:

- Financial resources tied up inventory - Underlying problems being hidden rather than being exposed and solved, including quality problems not being immediately identifies - No incentive for process improvements

To Meet Customer Demand(cycle stock)

- Immediately fill customer orders - Deploy the product/ material near where it will be used

Cycle Stock

- Inventory that a company builds to satisfy its' immediate demand - Cycle stock depletes gradually as customer orders are received, and is replenished cyclically when supply orders are received - The amount of cycle stock that a company holds is dependent on actual demand in the immediate time period, supply replenishment lead time and other quantities

Constraints on the Practical use of EOQ

- Limited capital - Storage capacity - Transportation - Obsolesence 过时 - Production lot size - unitization 单元化

Disadvantage of Periodic Review System

- May not provide accurate inventory counts for businesses with high sales - Can be difficult to determine the best review/reordering intervals - It also can make inventory accounting less accurate

Internal inventory

- Meet customer demand - Buffer against uncertainty in demand and/ or supply - Decouple supply from demand - Decouple dependencies in the supply chain

Having too little inventory can result in effects like:

- Production disruptions - Longer delivery replenishment lead times - Reduced responsiveness - Lost revenue

Advantages of Periodic Review System

- Reduces the time spent analyzing inventory - Less expensive than a Continuous Review System

Assumptions of the EOQ Model

- The model must be calculated for one product at a time - The demand must be known and constant throughout the year - The delivery replenishment lead time is known and does not fluctuate - Replenishment is instantaneous - The purchase price is constant and no discounts or price breaks are factored into the model - Carrying cost is known and constant - Order cost is known and constant - Stockout are not allowed

Assumptions of Fixed-Order Quantity System

1. A constant demand(d) rate 2. Inventory position(IP) is reduced 3. Replenishment order placed when reorder point (ROP) is reached 4. When inventory is received, (IP) increases by the reoder quantity(Q) 5. (Q) computed using the economic order quantity(EOQ) model 6. Lead time(L) 7. Inventory position(IP) is reviewed on continual basis

Steps in ABC system

1. Determine annual usage or sales for each items 2. Determine %of total usage or sales that each item represents 3. Rank items for highest to lowest% 4. Classify items into groups A. Highest value B. Moderate Value C. Least Valuable

Inventory is an Asset and Potentially Liability

1. Holding some inventory may be necessary to maintain operations and ensure that products are available when customers demand them 2. Too much inventory ties up capital which could otherwise be used for purposes such as research and development, marketing and sales, stockholder dividends, salary increases, etc 3. The more inventory a company holds, the more space is needed, and space costs money 4. In addition to storage costs, a company may also have to pay for security, insurance, taxes, etc to hold inventory 5. Inventory can become a liability if it becomes unstable due to expiration, obsolescence, damage or spoilage.

Inventory Stock Levels

1. Internal inventory - Strategic Stock - Safety Stock - Cycle Stock 2. External Pipeline Inventory - Inventory in transit - Inventory held/ owned by suppliers, by wholesalers, distributors, retailers, and customers

To Decouple Supply from Demand(strategic stock)

1. Supply pattern is different from demand pattern: - Achieve economies of scale in purchasing: take advantage of volume price breaks/discounts - Speculative buying in anticipation of a price increase - Economical order size, lot size, production output - Seasonal products/demands

Functions of Inventor- Why hold inventory

1. To Meet Customer Demand(cycle stock) 2. To Buffer Against Uncertainty in Demand and/or Supply(safety stock) 3. To Decouple Supply from Demand(strategic stock) 4. To Decouple Dependencies in the Supply Chain

Work-in-Process

A good or goods in various stages of completion throughout the plant, spanning from raw material that has been released for initial processing up to fully processed material awaiting final inspection and acceptance as finished goods. 1. Due to the range of potential stages of completion, and the fact that materials in WIP may be in a stage of continuous transformation, many companies view WIP as the "black hole" of inventory as they may not have very good or very timely visibility into this part of their inventory. 2. Best practice generally suggests minimizing the amount of WIP inventory in the manufacturing area since too much WIP may clutter up the physical space and impede the process flow

Introduction- Inventory Management

A key decision in any product-based supply chain is how much inventory to keep on hand. 1. Inventory is usually one of the company's largest assets, so careful management of that asset is an essential business requirement 2. Maintaining adequate finished product inventory allows a company to fill customer orders immediately 3. Maintaining adequate materials inventory allows a company to support manufacturing operations and the production plan while avoiding delays 4. Failing to manage inventory adequate can lead to significant issues and inefficiencies throughout the supply chain, including dissatisfied customers, lost sales and revenue, and higher costs

ABC system

A method to determine which inventories should be counted and managed more closely than others - A item "80/20" 80 of total inventory cost, 20 of total number of items(highest priority) - B/C items 80 of total number of items, 20 of total inventory cost C(lowest value & priority)

Disadvantages of Continuous Review System

Cost of implementation. Generally requires an automated system. The hardware and software necessary to run the system can be expensive to purchase, install, and maintain.

Individual item purchase price discounts

Discounts for ordering larger quantities. If the volume discount is sufficient to offset the added cost from carrying additional inventory, then ordering a larger volume may be desirable.

Fixed-Order Quantity System

If the review determines that an order should be placed, then the order for a per-defined quantity for that item is placed. The main variables to calculate: - Reorder Point(ROP) - Order Quantity

Mutiple-item purchase price discount

If you purchase a combination of items from a supplier you may be able to take advantage of a volume discount based on the total volume across all the items purchased rather than just an individual item's volume.

Obsolete Inventory

Inventory items that have met the obsolescence criteria established by the company. Obsolete inventory is stock that is expired, damaged or no longer needed. Obsolete inventory will never be used or sold at full value. - Writing obsolete inventory off of the books and disposing of it may be a difficult decision to make as all or part of the obsolete product's value may be lost and it may reduce a company's profit. - Unusable inventory takes up space and costs money to maintain, so it may be better to absorb the loss as soon as an item has met the obsolescence criteria rather than delay and continue to lose money on storage and related fees. - There may be a cost associated with the actual disposal of the inventory - Some companies may donate this inventory to a non-profit organization if it has any remaining value, which not only helps the non-profit but also avoids disposal costs and may result in a tax-benefit for the company.

Continuous Review System

Inventory levels are continuously reviewed - More costly to conduct than a Periodic Review System, but it potentially requires less safety stock because inventory is constantly monitored, and replenishment actions are taken more quickly

Periodic Review System

Inventory levels are reviewed at a set frequency (weekly, monthly) At the time of review, if the stock levels are below the pre-determined level( a recorder point), an order for replenishment is placed, otherwise no action is taken until the next cycle. Since items are only reviewed periodically, there is a greater risk of inventory dropping well below the reorder point between reviews and, therefore, a greater potential need for safety stock.

Base Stock Level System

issues an order whenever a withdrawal is made from inventory - Replenishment order quantity is equal to the quantity withdrawn from inventory - This will maintain the inventory at a base stock level - Used primarily for very expensive items(airplane engine) - A form of just-in-time

Categories of Inventory

4 main categories of inventory: 1. Raw materials 2. Work-in-process(WIP) or Work in Progress 3. Finished Goods 4. Maintenance, repair, and operating (MRP) supplies Individual items within each of these inventory categories can be current or obsolete

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 A company may decided to carry strategic stock to: - hedge currency fluctuations - take advantage of a price discount - protect against a short-term disruptive event in supply - take advantage of a business opportunity - for life cycle changes: seasonal demand, new product launch, transition protection Called anticipation stock, build stock or seasonal stock

Rduo Frequency Identification

Automates the supply chain; - Materials Management-Goods automatically counted and logged as they enter the supply warehouse - Manufacturing- assembly instructions encoded on RFID tag provide information to computer controlled assembly devices - Distribution center- shipment leaving DC automatically updates ERP to trigger a replenishment order and notify customer for delivery tracing - Retail Store- no check out lines as scanner link RFID tagged goods in shopping cart with buyers credit card

Measuring Inventory Performance

Common metrics for inventory - Units - Dollars - Weeks of Supply - Inventory Turns

The economic Order Quantity(EOQ) Model

EOQ is a fixed-order quantity model Where the sum of the annual order costs&the annual inventory carrying costs is minimized 1. Order costs: incurred each time an order is placed 2. Carrying costs: incurred for holding inventory in storage Total cost= Purchase cost+Order cost+ Carrying cost

Inventory Police

Establishing the target inventory levels for all products and materials 3 questions: - When to review? - When to order? - How much to order?

Pipeline Inventory

Inventory in the transportation network and the distribution system. Inventory that is already out in the market held by wholesalers, distributors, retailers, and even consumers 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

What is Inventory?

Inventory is the quantities of goods and materials that are held in stock - Includes all of the raw materials and work-in-process items used to support production, all of the finished products needed to provide customer service, and all of the other materials and supplies needed to run a business, i.e. maintenance, repair, and operating supplies 2. Inventory can be one of the largest and most important assets of an organization 3. However, too much inventory can also be a significant liability

Bin system

Inventory system that uses either one or two bins to hold a quantity of the item being inventoried. - It is mainly used for small or low value items - When the inventory in the first bin has been depleted, an order is placed to refill or replace the inventory - The second bin is set up to hold enough inventory to cover demand during the replenishment lead time so as to last until the replacement order arrives

What is the right amount of inventory?

It depends on the supply chain strategy and set-up, the type of product(s) customers' expectations, customer service objectives, product shelf life

Maintenance, Repair and Operating(MRO)

Items used in support of general operations and maintenance such as maintenance supplies, spare parts, and consumables used in the manufacturing process and supporting operations.

Transportation freight-rate discounts

Ordering a larger quantity may mean that you can take advantage of Transportation freight-rate discounts which will lower the per unit costs.

Raw Materials

Purchased items or extracted materials that are converted via the manufacturing process into components and products 1. Every company that produces a product generally starts with some type of raw material, component part or starting material 2. There are strategies around the question of how much raw material a company should hold in inventory - Buy from a supplier and have it delivered to the operation just in time for when it is needed - Buy and hold a larger quantity for strategic reasons 3. Companies might be willing to increase costs by storing excess raw material inventory if they fear there may be a potential shortage of the material or if they suspect that there is an upcoming price increase and want to buy at the current lower price

Inventory Management

The function of planning and controlling inventories 1. The goal of inventory management is to help a company be more profitable by lowering the costs of goods sold and/or by increasing sales 2. In an effort to achieve this stated goal, effective inventory management balances two competing considerations: - Reducing the amount of inventory held in stock, while - Ensuring there is enough inventory to satisfy customer demand

When to order?

The lowest inventory level at which a new order must be placed to avoid a stockout is known as the Reorder Point(ROP) - The ROP is set at level that provides enough inventory so demand is covered during the lead time(L) needed to replenish inventory ROP= Demand during Lead Time(dL)

Absolute inventory value

The value of the inventory at either its cost or its market value.

Finished Goods

Those items on which all manufacturing operations, including final testing, have been completed. These products are available for sale and/ or shipment to the customer. 1. From a cost perspective, finished goods are usually worth much more than raw materials or WIP since all of the material, labor, and overhead costs are fully applied to finished goods. 2. The amount of finished goods inventory that a company decides to maintain is a strategic decision: - Companies can operate a Make-to-Order supply chain where the finished goods are not produced until a customer order is received, and the raw materials may not even be ordered from the supplier(s) in advance. Little to no finished goods inventory is maintained. - Companies can operate a Make-to-Stock supply chain where produced prior to receipt of a customer order. A forecast and demand plan are created and the finished goods are produced and held in inventory until a customer order is received. Significant amounts of finished goods inventory can sometimes be maintained.