Chapter 4 Inventory Management
Strategic Stock
Additional inventory beyond cycle and safety stock, generally used for a very specific purpose or future event maintained for a defined period of time. A company may carry strategic stock to: take advantage of a price discount take advantage production economies balance production and demand volume mismatch support key customers or strategic projects
EOQ quantity Discount COntinued
Due to the step-wise shape of the total inventory cost curve, the optimal order quantity lies on either one of the feasible EOQs or at the price break point.
Obsolete Inventory
Inventory items that is expired, damaged, or no longer able to be sold at full value.
Inventory management System
Inventory management systems are methods to control this important asset: ABC System Bin System Base Stock Level System "Single-Period" Inventory Model
Barcodes
Barcode systems help businesses track products and stock levels for inventory management.
Work - in - Process (WIP)
Material in various stages of completion, spanning from raw material that has been released for initial processing through fully processed material awaiting final inspection and acceptance as finished goods.
Cycle Stock
The main Finished Goods Inventory that a company maintains to sell. Cycle stock depletes as customer orders are filled and is replenished when product is produced or supply orders are received. The amount of cycle stock that a company holds is dependent on forecasted demand, supply replenishment lead time and financial constraints.
Base Stock Level System
a type of inventory system that issues an order whenever a withdrawal is made from inventory.
Reorder Point With Safety Stock
ROP = Demand (D) during Lead Time (LT) = DxLT+SS
Safety Stock
Safety stock, aka "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. Safety stock can be maintained at every point in the supply chain and is impacted by the ability of supply chain partners to communicate effectively.
3 Levels of Internal Inventory
Strategic, Safety and Cycle Stock
Obsolete Inventory (3)
There is a cost associated with the actual disposal of the inventory which must follow recycling and disposal regulations.
Total Cost Formula
Total Cost = Purchase Cost + Order Cost + Carrying Cost
WIP Value
WIP value is higher then Raw materials as it now includes labor cost. It is valued at a point in time as it is in a state of continuous transformation through the production process.
Main Category of Inventory 2
Work-in-process items (semi-produced but not complete),
EOQ
[√2 *(order cost) (Annual Demand Volume)]/[(Annual Carrying Cost %) (Unit Cost)
Fixed-Order Quantity System:
An order for a pre-defined quantity for that item is used from order to order. When the inventory position drops to a predetermined reorder point, a predetermined fixed order quantity is placed The time between orders (i.e., order period) varies from order to order.
Days / Weeks of Supply
(on-hand inventory) / (avg. daily / weekly usage)
Continuous Review System Advantages
Advantages: Allows for real-time updates of inventory, which can make it easier to know when to replenish.
Reorder Point
The lowest inventory level at which a new order must be placed to avoid a stockout is known as the Reorder Point (ROP)
Manufacturing (RFID)
assembly instructions encoded on RFID tag provide information to computer controlled assembly devices
Indirect Costs
cannot be traced directly to the unit produced (e.g., overhead; etc.)
Variable Costs
dependent on the unit volume produced vary with output level (e.g., materials, labor, etc.)
Units
the number of units owned
Main Category of Inventory 3
finished products to provide customer service,
Reorder Point Equation/Example
ROP = Demand (D) during Lead Time (LT) = DxLT Example: if demand = 600/month and order led time = 6 days D = (600 / 30 days) = 20/day ROP = DxLT = (20) x (6) = 120
Obsolete Inventory (4)
Some companies donate this inventory to non-profit organizations, which not only helps the non-profit but also avoids disposal costs and may result in a tax benefit for the company.
Fixed-Time Period System:
Inventory is checked in fixed time periods against a target inventory level. If the inventory is less than target, a quantity necessary to bring inventory back up to the target level is ordered. The amount of inventory ordered will potentially vary from period to period based on the remaining inventory at each time interval checked.
Inventory Control Tools
Many inventory control tools exist in today's market. Those that incorporate barcode tracking or RFID tagging generally offer the most flexibility and ease of use. Linear Barcode 2D Barcode Radio Frequency Identification (RFID)
Obsolete Inventory (1)
Obsolete inventory must be valued at the lower market value to correct the financial records. This will reduce the company's profit.
"Single-Period" Inventory Model
a type of inventory system in which inventory is only ordered for a one-time stocking. The objective is to maximize profits. Examples: Superbowl Championship gear, Christmas tree lots, and Newspaper stands.
Fixed Costs
independent of the unit volume produced (e.g., buildings, equipment, security, etc.)
Distribution Center
shipment leaving DC automatically updates ERP to trigger a replenishment order and notify customer for delivery tracking
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.
Raw Materials
Crude or processed material that can be converted by a manufacturing process into a new and useful product
Bin System
Inventory system that uses bins to hold a quantity of the item being inventoried. It is mainly used for small or low value items. (e.g. parts) Inventory is managed based on bins, not individual units. When the bin is near depletion, an order is placed for another bin quantity to refill or replace the inventory.
External Inventory
Pipeline Inventory (inventory in transit; Inventory that is held/owned by suppliers)
Inventory Turnover
The number of times that an inventory "turns over," during the year. The more turns the better
Holding / Carrying Costs
costs for physically holding inventory, maintaining the infrastructure needed to store the inventory, secure and insure it over time.
Direct Costs
directly traceable to unit produced (e.g., materials, labor, etc.)
Materials Management - (RFID)
goods tautomatically counted and logged as they enter the supply warehouse
A barcode reader (or barcode scanner)
is an electronic device that can read barcodes and transmit the data to a computer. These might be handheld cordless devices, corded devices that attach directly to a PC's USB port, or computers with integrated laser scanners
Main Category of Inventory 4
maintenance, repair, and operating supplies needed to run a business
Retail Store
no check out lines as scanners link RFID tagged goods in shopping cart with buyers credit card
Linear (2D) Bar Codes
2D Bar Codes are a graphical image that stores information both horizontally and vertically. 2D Barcodes can store over 7,000 characters, allowing transmission of almost two paragraphs of information.
A Items
A items are the most important in sales volume and are the highest priority.
Inventory Intro
A key decision in any product-based supply chain is how much inventory to keep on hand.
The Economic Order Quantity (EOQ) Model
A quantitative decision model based on the trade-off between annual inventory carrying costs and annual order costs. EOQ is a fixed-order quantity model Where the sum of the annual order costs & the annual inventory carrying costs is minimized.
Periodic Review System Advantages
Advantages: Reduces the time spent analyzing inventory. Less expensive than a Continuous Review System.
ABC System
An ABC system classifies inventory based on the degree of importance to the company Determines which inventories should be counted & managed more closely than others
B Items
B items are of medium importance, often being relatively more expensive (per unit).
Inventory Calculation
Beginning Inventory + receipts - shipments +/- adjustments = Ending Inventory
Primary Function of Inventory
Buffer uncertainty in the marketplace & Decouple dependencies in the supply chain (safety stock)
C Items
C items have the lowest priority
Carrying Costs
Carrying Costs are costs that are incurred for holding inventory in storage. Cost of capital - specified by senior management Taxes - on inventory held in warehouses Insurance - based on estimated risk or loss over time and facility characteristics Obsolescence - deterioration of product during storage, and shelf-life Storage - facility expense related to product holding rather than product handling
Companies in service industry cannot
Companies in the service industry cannot maintain inventory of services since services are produced and consumed immediately upon demand.
Companies in service industry can
Companies in the service industry do maintain inventory of "facilitating goods," which are those items that are used in the service being provided.
Physical Inventory Management
Computer systems keep the "Book Inventory" which needs to be verified with the physical existence of the inventory.
Inventory Turnover Ratio
Cost of Goods Sold (COGS)/Average Inventory
Continuous Review System Disadvantages
Disadvantage: 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.
Periodic Review System Disadvantages
Disadvantages: Inaccurate inventory levels are not uncovered until the next review. Can be difficult to determine the reasons for the inaccuracy. It can make inventory accounting less accurate.
Raw Material Strategies
Have the supplier hold and deliver to the operation just in time for production Buy and hold a large quantity as it is the lowest cost inventory Establish a VMI arrangement Storing excess raw material inventory if they fear there may be a potential shortage or they suspect that there is an upcoming price increase.
Inventory
Inventory is the goods and materials that are held in stock for sales, service, production and maintenance.
Continuous Review System
Inventory levels are continuously reviewed. After each movement, the remaining physical inventory balance is verified vs. book inventory. 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, e.g., weekly, monthly At the time of review, all stock is counted and verified to book records. Since items are only reviewed periodically, there is a greater risk of physical inventory being out of sync with book inventory and, therefore, a greater need for safety stock.
Order Costs
Order Costs are costs that are incurred each time an order is placed. Order preparation costs Order transportation costs Order receipt processing costs Material handling costs
Assumption of Physical Inventory
Order quantity & ROP models assume that the physical inventory is precisely known at every point in time Reality shows that stock records and actual quantity are different & requires review of inventory to determine discrepancies
Main Category of Inventory 1
Raw materials used in production
Base Stock Level System Continued
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, e.g., airplane engine A form of just-in-time.
Radio Frequency Identification
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.
EOQ quantity Discount
The Quantity Discount Model or price-break model Relaxes the constant price assumption by allowing purchase quantity discounts.
Inventory Management
The goal of inventory management is to meet customer expectations while also meeting the company's financial targets: Enable Sales Increase profitability Improve Cash Flow
Absolute Inventory Value
The value of the inventory at its cost.
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. Finished goods are the highest value and the amount the company maintains is a strategic decision.
Obsolete Inventory (2)
Unusable inventory takes up space and costs money to store. So it may be better to absorb the loss as soon as an item has been deemed obsolete.
Linear (1D) Bar Codes
are "a series of alternating bars and spaces printed or stamped on parts, containers, labels, or other media, representing encoded information that can be read by electronic readers. Linear bar codes do have some limitations: they are one-dimensional, can only be read horizontally, and can only hold a maximum of 85 characters.
Order / Setup Costs
direct costs associated with placing an order for inventory or setting up production machines.
Postponement Strategy in responsive supply chains
suggests maintaining an amount of almost completed WIP inventory near the point of consumption to enable quick response to customer orders for customized products