Week 8

Inventory represents

between 20 and 60 percent of all assets on an organization's books

General and Administrative expenses

the category of expenses on an income statement that includes the costs of general managers, computer systems, research and development, etc.)

Production control costs

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

Stockout costs

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

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 content of master production scheduling, the additional inventory and capacity planned as protection against forecast errors and short-term changes in the backlog. Overall-planning can be used to create safety stock

Stockout percentage

A measure of the effectiveness with which a company responds to actual demand or requirements. The stockout percentage can be a comparison of total orders containing a stockout to total orders, or of line items incurring stockout to total line items orders during a period

Risk pooling

A method often associated with the management of inventory risk. Manufacturers and retailers that experience high variability in demand for their products can pool together common inventory components associated with a broad family of products to buffer the overall burden of having to deploy inventory for each discrete product

Anticipation inventory

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

Liabilities

An accounting/financial term (balance sheet classification of accounts) representing debts or obligations owned by a company to creditors. Liabilities may have a short-term time horizon, such as accounts payable, or a longer-term obligation, such as mortgage payable or bonds payable

Transit inventory

Inventory in transit between manufacturing and stocking locations

Fluctuation inventory

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

Transportation inventory

Inventory that is in transit between locaitons

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 purposed

Inventory buffer

Inventory used to protect the throughput of an operation or the schedule against the negative effects caused by delays in delivery, quantity problems, delivery of an incorrect quantity, and so on

Distribution inventory

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

Assets =

Liabilities + owners equity

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

Raw materials

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

Type of Inventory

Raw material, Work in process, Finished goods inventory, distribution inventory, maintenance, repair and operating supplies

Storage costs

Storage costs reflect the fact that warehouses cost money - for land, building, the material-handling equipment, the labor, and the overhead, such as utilities. Expressed as a percentage

Overhead

The costs incurred in the operation of a business that can not be directly related to the individual goods or services produced. These costs, such as light, supervision, and maintenance, and are grouped in several pools (e.g. department overhead, factory overhead, general overhead) and distributed to units of goods or services by some standard allocation method such as direct labor hours, direct labor dollars, or direct material dollars

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

Service parts

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

income statement

a financial statement showing the net income for a business over a period of time

Balance sheet

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

Hedge Inventory

a form of inventory buildup to buffer against some event that may not happen. Hedge inventory planning involved speculation related to potential labor strikes, price increases, unsettled governments, and events that could severely impair a company's strategic initiatives. risk and consequences are usually high, and top management approval is often required

Work in Process (WIP)

a good or goods in various stages of completion throughout the plant, including all materials from raw material that has been released for initial processing up to completely processed material awaiting final inspection and acceptance as finished goods inventory. Many accounting systems also include the value of semi-finished stock and components in this category

On-time schedule performance

a measure (percentage) of meeting the customers 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 customer 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 receipts 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 acknowledge date was met by shipping complete product quantities

Carrying costs

also called holding costs - The cost of holding inventory, usually defined as a percentage of the dollar value of inventory per unit of time (generally one year) Carrying cost depends mainly on the cost of capital invested as well as costs of maintaining the inventory such as taxes and insurance, obsolescence, spoilage, and space occupied. Such costs vary from 10 percent to 35 percent annually, depending on type of industry. Carrying cost is ultimately a policy variable reflecting the opportunity cost of alternative uses of funds invested in inventory

Capital costs

also costs cost of capital finance professionals may use the term weighted average cost of capital or WACC, but it is not defined here ) reflects the opportunity cost of carrying inventory. If money was borrowed to finance the inventory, the capital cost is the direct costs of the loan

Cost of goods sold

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

Owner's equity

an accounting/financial term (balance sheet classification of accounts) representing the residual claim by the company's owners or shareholders, or both, to the company's assets less its liabilities (owners equity can be in the negative)

Decoupling inventory

an amount of inventory maintained 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.

Item costs

are the purchases price plus other direct costs required to get the units to where they need to be

Owners equity =

assets - liabilities

Capacity-related costs

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

Seasonal inventory

inventory built up to smooth production in anticipation of a peak seasonal demand

Pipeline stock

inventory in the transportation network and the distribution system, including the flow through intermediate stocking points. The flow time through the pipeline has a major effect on the the amount of inventory required in the pipeline. Time factors involve order transmission, order processing, scheduling, shipping, transportation, receiving, stocking, review time, and so forth

Risk costs

inventory might be perishable, in which case it could spoil, but even nonperishable inventory can suffer from deterioration such as damaged from rot or evaporation. Obsolescence is another risk. Product damage in transportation, pilferage or theft.

Maintenance, repair, and operating (MRO) supplies

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

Direct labor

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

Direct materials

materials that becomes a part of the final product in measurable quantities

Cycle stock

one of the two main conceptual components of any item inventory, the cycle stock is the most active component. They cycle stock depletes gradually as customer orders are received and is replenished cyclically when supplier orders are received. The other conceptual component of the item inventory is the safety stock, which is a cushion of protection against uncertainty in the demand or in the replenishment lead time

1st deduction

revenue - cost of goods sold

Income =

revenue - expenses

Setup costs

setup goes from the last good part of their prior operation to the first good part of the next operation, so it includes teardown costs. This cost is incurred per order (run time is calculated per unit)

Inventory management

the branch of business management concerned with planning and controlling inventories

Ordering costs

the costs that increase as the number of orders placed increases. Used in calculating quantities. Including costs, related to the clerical work of preparing, releasing, monitoring, and receiving orders, the physical handling of goods; inspections, and setup costs, as applicable

Gross margin

the differences between total revenue and the cost of goods sold

Inventory

those stocks or items used to support production (raw materials and work-in-process items), supporting activities (maintenance, repair, and operating suppliers), and the customer service (finished goods and spare parts). Demand for inventory may be dependent or independent. Inventory functions are anticipation. hedge, cycle (lot size), fluctuation (safety buffer, or reserve), transportation (pipeline), and service parts

Fixed overhead

traditional, 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

Assets

what the company owns. current assets are those assets that are cash or can be converted into cash quickly - accounts receivable, fixed assets are assets that would take longer to sell like - property, plant, and equipment

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, This especially problematic for bottleneck work centers that need as much of their capacity as possible for run time. Each order that requires setup time at a bottleneck will reduce sales and profit