Supply Chain Chapter 4

Indirect Cost

Cannot be traced directly to the unit produced. -exp: MRO items, buildings, equipment

Other types of inventory systems

-ABC system -Bin system -Base Stock Level System -"Single Period" Inventory model

Having too much inventory causes:

-financial resources tied up in inventory -underlying problems being hidden rather than being exposed and solved, including quality problems not being immediately identified. -no incentive for process improvements

Types of volume economies of scale

-individual item purchase price discounts -multiple-item purchase price discounts -transportation freight-rate discounts

Types of inventory control tools

-linear barcode -2D barcode -radio frequency identification (RFID)

Service Industry

Activities carried out in advance of the customer's arrival.

Barcode Reader (barcode scanner)

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.

ABC System

Classifies inventory based on the degree of importance. -a method to determine which inventories should be counted and managed more closely than others. -80/20 rule: accounts for 20% of the total number of items, and about 80% of total inventory cost -A: highest value -B: moderate value -C: lease valuable

Order Costs

Costs that are incurred each time an order is placed.

Carrying Costs

Costs that are incurred for holding inventory in storage.

Individual item purchase price discounts

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

Inventory Control Tools

Many exist in today's markets. -Those that incorporate barcode tracking or RFID tagging generally offer the most flexibility and ease of use.

Retail Store

No check out lines as scanners link RFID tagged goods in shopping cart with buyers credit card.

Raw Materials

Purchased items or extracted materials that are converted via the manufacturing process into components and products. -every company that produces a product generally start with some type of this.

Limited Capital

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

Unitization

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

Holding some inventory may be necessary to:

maintain operations and ensure that products are available when customers demand them

Finished product inventory

maintaining this allows a company to fill customer orders immediately.

Weeks of Supply

(avg on-hand inventory) / (weekly usage)

Inventory Turns

(cost of goods sold) / (avg inventory level)

Dollars

The amount of dollars tied up in inventory.

Having too little inventory causes:

-Production disruptions -longer delivery replenishment lead times. -reduced responsiveness -lost revenue

Failing to manage inventory adequately can lead to...

-significant issues and inefficiencies throughout the supply chain, including dissatisfied customers, lost sales and revenue, and higher costs.

Functions of inventory

1. To meet customer demand 2. To buffer against uncertainty in demand and/or supply 3. To decouple (separate) supply from demand 4. To decouple (separate) dependencies in the supply chain

2D Bar Codes

A graphical image that stores information both horizontally and vertically. -can store over 7,000 characters, allowing transmission of almost 2 paragraphs of info

Strategic Stock

Additional inventory beyond cycle and safety stock, generally used by a very specific purpose or future event, and for a defined period of time. -also called anticipation stock, build stock, or seasonal stock

Manufacturing

Assembly instructions enclosed on RFID tag provide information to computer controlled assembly devices.

Carrying Cost

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.

Inventory Policy

Establishing target inventory levels for all products and materials.

Materials Management

Goods automatically counted and logged as they enter the supply warehouse.

Internal inventory

Held by companies to.... -meet customer demand -buffer against uncertainty in demand or supply -decouple supply from demand -decouple dependencies in the supply chain

Multiple-Item Purchase Price Discounts

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.

Fixed Cost

Independent of the unit volume produced. -exp: buildings, equipment, rent

Periodic Review System

Inventory levels are reviewed at a set frequency. -at the time of review, if the stock levels are below the pre[determined level, an order for replenishment is placed, otherwise nom action is taken until the next cycle. -greater potential need for safety stock, less costly

Bin System

Inventory system that uses either one or two bins to hold a quantity of the item being inventoried. -mainly used for small or low value items

Cycle Stock

Inventory that a company builds to satisfy its immediate demand. -depletes gradually as customer orders are received, and is replenished cyclically when supply orders are received.

Safety Stock

Inventory that is above and beyond what is actually needed to meet anticipated demand. -a quality of stock planned to be in inventory to protect against fluctuations in demand or supply. -also known as buffer stock

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

Order Cost

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

Transportation Freight-Rate Discounts

Ordering a larger quantity may mean that you can take advantage of this which will lower the per unit costs.

Radio Frequency Identification (RFID)

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

Barcodes

Systems that help businesses track products and stock levels for inventory management.

Transportation

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

Reorder Point (ROP)

The lowest inventory level at which a new order must be placed to avoid a stockout. =demand during lead time (dL)

Storage Capacity

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

Absolute Inventory Value

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

Maintenance, Repair and Operating (MRO) Supplies

These are materials that you need to produce and maintenance, but do not end up as part of the finished product.

Finished Goods

Those items on which all manufacturing operations, including final testing, have been completed. -Thes products are available for sale and/or shipment to the customer. -worth much more than raw materials or WIP since all the material, labor, and overhead costs are fully applied. -use make-to-order or make-to-stock

Facilitating Goods

Those items that are used to help facilitate the service being provided. -exp: in a restaurant- pre made food, the tableware, utensils

External inventory

held by downstream supply chain trading partners.

Inventory can become a liability if:

it becomes unusable due to expiration, obsolescence, damage, or spoilage.

Safety Stock Policy

safety stock to cover for variability, in both demand and supply.

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, ect.

The goal of inventory management:

to help a company be more profitable by lowering the costs of goods sold and/or by increasing the sales.

Inventory turnover rate

= cost of goods sold / average inventory @ cost

Three levels of internal inventory

1. strategic stock 2. safety stock 3. cycle stock

Total cost

= purchase cost + order cost + carrying cost

Fixed-Order Quantity System

A continuous inventory review system in which the same order quantity is used from order to order. -when the inventory position drops to a predetermined reorder point, predetermined fixed order quantity is placed. -the time between orders varies from order to order. -Two variables: ROP and Order quantity (Q)

Work-In-Process (WIP)

A good or goods in various stages of competition 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. -Many companies view this as the "Black hole" of inventory as they may not have very good or very timely visibility into this part of their inventory.

The Economic Order Quantity Model (EEQ)

A quantitative decision model based on the trade-off between annual inventory carrying costs and annual order costs. -a fixed-order quantity model -seeks to determine an optimal order quantity where the sum of the annual order costs and the annual inventory carrying costs is minimized.

Linear (1D) Bar Codes

A series of alternating bars and spaces printed or stamped on parts, containers, labels, or other media, representing enclosed information that can be read by electronic readers. -limitations: one-dimensional, can only be read horizontally, can only hold a maximum of 85 characters

Single-Period Inventory Model

A type of inventory system in which inventory is only ordered for a one-time stocking. -objective is to maximize profits.

Base Stock Level System

A type of inventory system that issues an order whenever a withdrawal is made from inventory. -replenishment order quantity is equal to the quantity withdrawn from inventory.

Inventory Investment

Common measures include absolute inventory value and inventory turnover

Variable Cost

Dependent on the unit volume produced vary with output level. -exp: materials, labor, utility power

Direct Cost

Directly traceable to unit produced. -exp: materiais, labor, etc

Pipeline inventory

Inventory in the transportation network and the distribution system. -Inventory that is already out in the market being held by suppliers, or by wholesalers, distributors, retailers and customers. -Inventory in-transit -external inventory

Fixed-Time Period System

Inventory is checked in fixed time periods against a target inventory level. -the order quantity is the difference between the on-hand stock on the review day, and the pre-determined target inventory level. - Q= R - IP (R is the target inventory level, IP is inventory position) -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.

Obsolete inventory

Inventory items that have met the obsolescence criteria established by the company. -Stock that is expired, out-of-date or no longer needed. -internal inventory

Continuous Review system

Inventory levels are continuously reviewed. -as soon as inventory falls below a pre-determined level (a reorder point) a replenishment order is triggered. -more costly, but requires less safety stock

2 Models for determining when to review for inventory policy are:

-continuous review system -periodic review system

4 Main Categories of Inventory

-raw materials -work-in-process (WIP) -finished goods -maintenance, repair and operating (MRO) supplies

Materials Inventory

Maintaining this allows a company to support manufacturing operations and the production plan while avoiding delays.

Make-to-stock

Product is 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 be maintained.

Distribution Center

Shipment leaving this automatically updates ERP to trigger a replenishment order and notify customer for delivery tracking.

Make-to-order

The finished goods are not produced until a customer order is received, and the raw materials may not even be ordered from the suppliers in advance. -little to no finished goods inventory is maintained.

Inventory Management

The function of planning and controlling inventories. -balances the two considerations: 1. reduces the amount of inventory held in stock & 2. ensuring there is enough inventory to satisfy customer demand

Obsolescence

The model may generate an order quantity which would create spoilage or obsolescence.

Inventory Turnover

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

Units

The number of units available

Inventory

The quantities of goods and materials that are held in stock. -can be one of the largest and most important assets of an organization -too much can also be a significant liability

Production Lot Size

The supplier may require the company to order an item in full production lot size.

Inventory policy addresses what 3 questions

1. When to review? 2. When to order? 3. How much to order?

Steps of the ABC system

1. determine annual usage or sales for each item 2. determine % of total usage or sales that each item represents. 3. rank items from highest to lowest % 4. classify items into groups