CPIM 7

safety lead time

An element of time added to normal lead time to protect against fluctuations in lead time so that an order can be completed before its real need date.

cycle counting

An inventory accuracy audit technique where inventory is counted on a cyclic schedule rather than once a year.

Wall-to-Wall Inventory

An inventory management technique in which material enters a plant and is processed through the plant into finished goods without ever having entered a formal stock area.

stockout costs

The costs associated with a stockout. Those costs may include lost sales, backorder costs, expediting, and additional manufacturing and purchasing costs.

Fixed overhead

Traditionally, all manufacturing costs—other than direct labor and direct materials—that continue even if products are not produced. Although fixed overhead is necessary to produce the product, it cannot be directly traced to the final product.

Inventory Management

"the branch of business management concerned with planning and controlling inventories"

Stock Keeping Unit (SKU)

1) An inventory item. For example, a shirt in six colors and five sizes would represent 30 different items. 2) In a distribution system, an item at a particular geographic location. For example, one product stocked at the plant and at six different distribution centers would represent seven items.

Reorder quantity

1) In a fixed-reorder quantity system of inventory control, the fixed quantity that should be ordered each time the available stock (on-hand plus on-order) falls to or below the reorder point. 2) In a variable reorder quantity system, the amount ordered from time period to time period will vary. Synonym: replenishment order quantity.

value added

1) In accounting, the addition of direct labor, direct material, and allocated overhead assigned at an operation. It is the cost roll-up as a part goes through a manufacturing process to finished inventory. 2) In current manufacturing terms, the actual increase of utility from the viewpoint of the customer as a part is transformed from raw material to finished inventory. It is the contribution made by an operation or a plant to the final usefulness and value of a product, as seen by the customer. The objective is to eliminate all non-value-added activities in producing and providing a good or service.

Safety Stock

1) In general, a quantity of stock planned to be in inventory to protect against fluctuations in demand or supply. 2) In the context of master production scheduling, the additional inventory and capacity planned as protection against forecast errors and short-term changes in the backlog. Overplanning can be used to create safety stock. Synonym: buffer stock, reserve stock. See: hedge, inventory buffer.

days of supply

1) Inventory-on-hand metric converted from units to how long the units will last. 2) A financial measure of the value of all inventory in the supply chain divided by the average daily cost of goods sold rate.

physical inventory

1) The actual inventory itself. 2) The determination of inventory quantity by actual count. Physical inventories can be taken on a continuous, periodic, or annual basis. Synonym: annual inventory count, annual physical inventory. See: periodic inventory.

Traceability

1) The attribute allowing the ongoing location of a shipment to be determined. 2) The registering and tracking of parts, processes, and materials used in production, by lot or serial number.

Variance

1) The difference between the expected value and actual. 2) In statistics, a measurement of dispersion of data.

profit margin

1. The difference between the sales and the cost of goods sold for an organization. 2. In traditional accounting, the product profit margin is the product selling price minus the direct material, direct labor, and allocated overhead for the product.

Velocity

1. The rate of change of an item with respect to time. 2. In supply chain management, a term used to indicate the relative speed of all transactions, collectively, within a supply chain community.

fixed order quantity

A lot-sizing technique in MRP or inventory management that will always cause planned or actual orders to be generated for a predetermined fixed quantity, or multiples thereof, if net requirements for the period exceed the fixed order quantity.

lot-for-lot (L4L)

A lot-sizing technique that generates planned orders in quantities equal to the net requirements in each period.

Inventory Adjustment

A change made to an inventory record to correct the balance, to bring it in line with actual physical inventory balances. The adjustment either increases or decreases the item record on-hand balance.

prepetual inventory record

A computer record or manual document on which each inventory transaction is posted so that a current record of the inventory is maintained.

Pareto's Law

A concept developed by Vilfredo Pareto, an Italian economist, that states that a small percentage of a group accounts for the largest fraction of the impact, value, and so on. In an ABC classification, for example, 20 percent of the inventory items may constitute 80 percent of the inventory value. See: ABC classification, 80-20.

Balance Sheet

A financial statement showing the resources owned, the debts owed, and the owner's share of a company at a given point in time.

Income Statement

A financial statement that reports a company's revenues and expenses and resulting net income or net loss for a specific period of time.

fixed reorder cycle inventory model

A form of independent demand management model in which an order is placed every n time units.

Work in Progress (WIP)

A good or goods in various stages of completion throughout the plant, including all material from raw material that has been released for initial processing up to completely processed material awaiting final inspection and acceptance as finished goods inventory.

Economic Order Quantity (EOQ)

A type of fixed order quantity model that determines the amount of an item to be purchased or manufactured at one time. The intent is to minimize the combined costs of acquiring and carrying inventory.

on-time schedule performance

A measure (percentage) of meeting the customer's originally negotiated delivery request date. Performance can be expressed as a percentage based on the number of orders, line items, or dollar value shipped on time.

level of service

A measure (usually expressed as a percentage) of satisfying demand through inventory or by the current production schedule in time to satisfy the customers' requested delivery dates and quantities. In a make-to-stock environment, level of service is sometimes calculated as the percentage of orders picked complete from stock upon receipt of the customer order, the percentage of line items picked complete, or the percentage of total dollar demand picked complete. In make-to-order and design-to-order environments, level of service is the percentage of times the customer-requested or acknowledged date was met by shipping complete product quantities. Synonym: measure of service, service level. See: cycle service level.

Record Accuracy

A measure of the conformity of recorded values in a bookkeeping system to the actual values; for example, the on-hand balance of an item maintained in a computer record relative to the actual on-hand balance of the items in the stockroom.

Periodic Replenishment

A method of aggregating requirements to place deliveries of varying quantities at evenly spaced time intervals, rather than variably spaced deliveries of equal quantities.

Backflush

A method of inventory bookkeeping where the book (computer) inventory of components is automatically reduced by the computer after completion of activity on the component's upper-level parent item based on what should have been used as specified on the bill of material and allocation records. This approach has the disadvantage of a built-in differential between the book record and what is physically in stock. Synonym: explode-to-deduct, post-deduct inventory transaction processing. See: pre-deduct inventory transaction processing

periodic inventory

A physical inventory taken at some recurring interval (e.g., monthly, quarterly, or annual physical inventory).

sawtooth diagram

A quantity-versus-time graphic representation of the order point/order quantity inventory system showing inventory being received and then used up and reordered.

order point

A set inventory level where, if the total stock on hand plus on order falls to or below that point, action is taken to replenish the stock. The order point is normally calculated as forecasted usage during the replenishment lead time plus safety stock. Synonym: reorder point, statistical order point, trigger level. See: fixed reorder quantity inventory model.

Lot control

A set of procedures (e.g., assigning unique batch numbers and tracking each batch) used to maintain lot integrity from raw materials, from the supplier through manufacturing to consumers.

two-bin inventory system

A type of fixed-order system in which inventory is carried in two bins. A replenishment quantity is ordered when the first bin (working) is empty. During the replenishment lead time, material is used from the second bin. When the material is received, the second bin (which contains a quantity to cover demand during lead time plus some safety stock) is refilled and the excess is put into the working bin. At this time, stock is drawn from the first bin until it is again exhausted. This term is also used loosely to describe any fixed-order system even when physical "bins" do not exist. Synonym: bin reserve system. See: visual review system.

mix-max system

A type of order point replenishment system where the minimum (min) is the order point, and the maximum (max) is the "order up to" inventory level.

Hedge Inventory

According to APICS, a "form of inventory buildup to buffer against some event that may not happen. Hedge inventory planning involves speculation related to potential labor strikes, price increases, unsettled governments, and events that could severely impair the company's strategic initiatives."

Anticipation Inventories

Additional inventory above basic pipeline stock to cover projected trends of increasing sales, planned sales promotion programs, seasonal fluctuations, plant shutdowns, and vacations.

capital costs

Also called the cost of capital reflects the opportunity cost of carrying inventory.

Liabilities

Amounts owed to creditors

Cost of Goods Sold (COGS)

An accounting classification useful for determining the amount of direct materials, direct labor, and allocated overhead associated with the products sold during a given period of time.

decoupling inventory

An amount of inventory kept between entities in a manufacturing or distribution network to create independence between processes or entities. The objective of decoupling inventory is to disconnect the rate of use from the rate of supply of the item. See: buffer.

product cost

Cost allocated by some method to the products being produced. Initially recorded in asset (inventory) accounts, product costs become an expense (cost of sales) when the product is sold.

production control costs

Cost of issuing, closing, scheduling, loading, dispatching, moving and expediting open orders.These costs are made up of the cost for labor, supplies, and operating expenses for the operation.

capacity-related costs

Costs generally related to increasing (or decreasing) capacity in the medium-to-long-range time horizon.

Inventory Ordering System

Inventory models for the replenishment of inventory. Independent demand inventory ordering models include but are not limited to fixed reorder cycle, fixed reorder quantity, optional replenishment, and hybrid models. Dependent demand inventory ordering models include material requirements planning, kanban, and drum-buffer-rope.

seasonal inventory

Inventory built up to smooth production in anticipation of peak seasonal demand

pipeline stock

Inventory in the transportation network and the distribution system, including the flow-thru intermediate stocking points; flow time thru the pipeline has major effect on amount of inventory required in pipeline; time factors involve order transmission, order processing, scheduling, shipping, transportation, receiving, stocking, review time, etc

transit inventory

Inventory in transit between manufacturing and stocking locations. See: transportation inventory.

risk cost

Inventory might be perishable, in which case it could spoil, but even nonperishable inventory can suffer from deterioration such as damage from rot or evaporation.

Fluctuation Inventory

Inventory that is carried as a cushion to protect against forecast error

transportation inventory

Inventory that is in transit between locations

lot-size inventory

Inventory that results whenever quantity price discounts, shipping costs, setup costs, or similar considerations make it more economical to purchase or produce in larger lots than are needed for immediate purposes.

Inventory buffer

Inventory used to protect the throughput of an operation or the schedule against the negative effects caused by delays in delivery, quality problems, delivery of incorrect quantity, and so on. Synonym: inventory cushion. See: fluctuation inventory, safety stock.

distribution inventory

Inventory, usually spare parts and finished goods, located in the distribution system (e.g., in warehouses, in transit between warehouses and the consumer)

Direct Labor

Labor that is specifically applied to the good being manufactured or used in the performance of the service.

Period Order Quantity

Lot-sizing technique under which the lot size is equal to the net requirements for a given # of periods; # of periods to order is variable with each order size equaling the holding cost and the ordering cost for the interval

cycle stock

One of the two main conceptual components of any item inventory, it is the most active component; it depletes gradually as customer orders are received and is replenished cyclically when supplier orders are received

in-transit inventory

Material moving between two or more locations, usually separated geographically; for example, finished goods being shipped from a plant to a distribution center.

Direct material

Material that becomes a part of the final product in measurable quantities.

stockout percentage

Measure of effectiveness where a company responds to actual demand or requirements

Average Inventory

One-half the average lot size plus the safety stock, when demand and lot sizes are expected to be relatively uniform over time. The average can be calculated as an average of several inventory observations taken over several historical time periods; e.g., 12-month ending inventories may be averaged. When demand and lot sizes are not uniform, the stock level versus time can be graphed to determine the average.

raw material

Purchased items or extracted materials that are converted via the manufacturing process into components and products.

setup costs

Setup goes from the last good part of the prior operation to the first good part of the next operation.

Visual Review System

Simple inventory control system where inventory reordering is based on actually looking at amount of inventory OH; used for low-value items

lot size

The amount of a particular item that is ordered from the plant or a supplier or issued as a standard quantity to the production process.

general and administrative expenses

The category of expenses on an income statement that includes the costs of general managers, computer systems, research and development, insurance, lease expenses such as for office space or vehicles.

ABC Classification

The classification of a group of items in decreasing order of annual dollar volume (price multiplied by projected volume) or other criteria. This array is then split into three classes, called A, B, and C. The A group usually represents 10 percent to 20 percent by number of items and 50 percent to 70 percent by projected dollar volume. The next grouping, B, usually represents about 20 percent of the items and about 20 percent of the dollar volume. The C class contains 60 percent to 70 percent of the items and represents about 10 percent to 30 percent of the dollar volume. The ABC principle states that effort and money can be saved through applying looser controls to the low-dollar-volume class items than will be applied to high-dollar-volume class items.

overhead

The cost incurred in the operation of a business that cannot be directly related to the individual goods or services provided.

carrying costs

The cost of holding inventory defined as a percentage of the dollar value of inventory per unit of time.

ordering costs

The costs that increase as the number of orders placed increases. Used in calculating order quantities.

Gross Margin

The difference between total revenue and the cost of goods sold.

Order Point System

The inventory method that places an order for a lot whenever the quantity on hand is reduced to a predetermined level known as the order point.

cash flow

The net flow of dollars into or out of the proposed project. The algebraic sum, in any time period, of all cash receipts, expenses, and investments. Also called cash proceeds or cash generated.

Inventory Turnover

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

standard costs

The target costs of an operation, process, or product including direct material, direct labor, and overhead charges.

replenishment lead time

The total period of time that elapses from the moment it is determined that a product should be reordered until the product is back on the shelf available for use.

finished goods inventory

Those items on which all manufacturing operations, including final test, have been completed. These products are available for shipment to the customer as either end items or repair parts. Synonym: finished products inventory. See: goods.

service parts

Those modules, components, and elements that are planned to be used without modification to replace an original part.

inventory

Those stocks or items used to support production, supporting activities and customer service. Demand for inventory may be dependent or independent.

unit cost

Total labor, material, and overhead cost for one unit of production (e.g., one part, one gallon, one pound).

Inventory Accuracy

When the on-hand quantity is within an allowed tolerance of the recorded balance. This important metric usually is measured as the percent of items with inventory levels that fall within tolerance. Target values usually are 95 percent to 99 percent, depending on the value of the item.

Lost Capacity Cost

Whenever another order is placed, the setup time reduces the available run time for the work center, so it is an opportunity cost related to capacity.

Job Costing

a costing system that accumulates, tracks, and assigns costs for each job produced by a company

Generally Accepted Accounting Principles (GAAP)

accounting practices that conform to conventions, rules, and procedures that are generally accepted by the accounting profession.

inventory control

activities to ensure that goods are always available to meet customers' demands

total costs

considering all cost impacts, rather than just one cost impact, on customer service improvement.

shrinkage

reduction of actual quantities of items in stock, in process, or in transit. The loss may be caused by scrap, theft, deterioration, evaporation and so forth.

storage cost

storage cost reflects the fact that the warehouses cost money-for the land, the building, the material-handling equipment , the labor and the overhead, such as utilities.

Owner's Equity

the amount of the business that belongs to the owners minus any liabilities owed by the business

point of sale (POS)

the relief of inventory and computation of sales data at the time and place of sale, generally through the use of bar coding or magnetic media and equipment.