APICS CPIM Part 1, Module 5 (All)
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. When used, the MRP system, in offsetting for lead time, will plan both order release and order completion for earlier dates than it would otherwise.
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.
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.
days of supply
Inventory-on-hand metric converted from units to how long the units will last. For example, if there are 2,000 units on hand and the company is using 200 per day, then there are 10 days of supply.
Inputs to classifying ABC parts
Value Importance to the company Bottleneck materials Shelf Life Replenishment lead time inventory turnover
Average Cost (Weighted Average Cost)
average of all costs paid for or internally invested in inventory for COGS and balance sheet inventory valuation. It is basically an average of the oldest and newest costs
general and administrative expenses [G&A]
the category of expenses on an income statement that includes the costs of general managers, computer systems, research and development, etc.")
decoupling inventory
An amount of inventory maintained between entities in a manufacturing or distribution network to create independence between processes or entities. Disconnects rate of use with supply to allow some independence.
stockkeeping unit (SKU)
1) An inventory item. For example, a shirt in six colors and five sizes represents 30 different SKUs. 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 SKUs.
Job Costing
A cost accounting system in which costs are assigned to specific jobs.
hedge inventory
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 a company's strategic initiatives. Risk and consequences are unusually high, and top management approval is often required.
on-time schedule performance
A measure (percentage) of meeting the customer's originally negotiated delivery request date.
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
stockout percentage
A measure of the effectiveness with which a company responds to actual demand or requirements.
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.
liabilities
An accounting/financial term (balance sheet classification of accounts) representing debts or obligations owed by a company to creditors.
Owner's Equity Calculation
Assets - Liabilities
Parts of the balance sheet
Assets = Liabilities - Owners Equity
Cost of anticipation invetory
Avg anticipation inventory amount per time period x carrying cost
Inventory Turnover Calculation
COGS/Avg inventory (In Dollars)
The primary disadvantage of a pull system
Can cause bullwhip effect if the communication is not good.
Components of Carrying Cost
Captial Cost - Oppty cost of carrying Storage Cost - warehouse, handling, labor, utilities Risk Cost - perishable, obsolescence, loss, damage
opportunity cost
Cash tied up in one investment that if turned, could allow investment in another. The faster this investment is returned, the faster the cash can be invested in new inventory or other opportunities.
product cost
Cost allocated by some method to the products being produced. Initially recorded in asset (inventory) accounts, become an expense (cost of sales) when the product is sold.
fill rate
Customer service ratio, % of time units were shipped on time
The primary advantage of a pull system
DCs have autonomy and can order or not order based on their knowledge of local demand.
Factors in holding safety stock
Demand variability during lead time Targeted customer service level Order Frequency Duration of Lead Time
Variance
Difference between expected and actual costs
Methods to address variation in lead times
Firm plan an order (to ignore the stated lead time) Increase SS inventory (not good for temp LT changes, could create bullwhip)
Average Ordering Cost
Fixed Cost/Number of Orders + Variable Cost
Items in category A
Highest level of control Low Safety Stock More frequent ordering frequent counting for inventory higher physical security Frequent review of forecast error Close attention to order status & monitoring
Inventory ordering system
Inventory models for the replenishment of inventory. Independent demand inventory ordering models include fixed reorder cycle, fixed reorder quantity, optional replenishment, and hybrid models, among others. Dependent demand inventory ordering models include material requirements planning, kanban, and drum-buffer-rope.
Days of Supply Calculation
Inventory on Hand/Average Daily Usage
value added
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. Customer is willing to pay for this.
Safety stock
In general, a quantity of stock planned to be in inventory to protect against fluctuations in demand or supply.
Income statement calculation
Income = Revenue - Expenses
Pipeline Stock
Inventory in the transportation network and the distribution system, including the flow through intermediate stocking points.
Transportation inventory
Inventory in transit between locations
Transit locations
Inventory in transit between manufacturing and stocking locations
Fluctuation Inventory
Inventory that is carried as a cushion to protect against forecast error.
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 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).
Maintenance, repair, and operating (MRO) supplies
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.
Direct labor
Labor that is specifically applied to the good being manufactured or used in the performance of the service.
Items in category C
Least complex controls Minimal time spent on inventory accuracy Low carrying cost so higher days of supply High levels of safety stock order only a few times per year in large quantities
time-phased order point (TPOP)
MRP-like time planning logic technique for independent demand items, where gross requirements come from a forecast, not via explosion. Allows for lumpy withdrawals.
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.
Items in category B
Normal levels of control for all inventory items
Formula for safety stock if LT changes
Old Safety Stock in Units x Square root of New Lead Time/Old Lead Time If LT reduced = SS reduced If LT increased = SS increased
Cycle Stock
One part of the concept of inventory. Depletes gradually as customer orders are received and is replenished cyclically when supplier orders are received.
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.
Customer Service Level Calculation
Orders per period - allowed stockouts/Orders per period
decentralized inventory control
PULL & INDEPENDENT - inventory decision making exercised at each stocking location for SKUs [stockkeeping units] at that location.
centralized inventory control
PUSH - inventory decision making for all stockkeeping units exercised from one office or department for an entire company. Can be easily controlled. Communication has to be good to know what promos/seasonality could affect inventory levels.
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.
Factory Ordering Costs
Production Control Costs Setup Costs Lost Capacity Costs
Raw material
Purchased items or extracted materials that are converted via the manufacturing process into components and products.
Reasons to Hold Inventory
Safety stock Decoupling Buffers Anticipation inventory Lot-size inventory Transportation inventory Hedge inventory
stockout costs
The costs associated with a stockout. Those costs may include lost sales, backorder costs, expediting, and additional manufacturing and purchasing costs.
Types of operating expenses
Selling expenses such as salespersons' commissions or advertising General and administrative expenses such as executive and clerical wages and benefits Insurance Lease expenses such as for office space or vehicles.
Safety Stock Calculation
Standard Deviation (Service Level) x MAD in units
ABC classification
The classification of a group of items in decreasing order of annual dollar volume (price multiplied by projected volume) or other criteria.
carrying cost
The cost of holding inventory, usually defined as a percentage of the dollar value of inventory per unit of time (generally one year).
Overhead
The costs incurred in the operation of a business that cannot be directly related to the individual goods or services produced. These costs, such as light, heat, supervision, and maintenance, 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 materials dollars.
ordering costs
The costs that increase as the number of orders placed increases. Used in calculating order quantities. Includes costs related to the clerical work of preparing, releasing, monitoring, and receiving orders; the physical handling of goods; inspections; and setup costs, as applicable.
profit margin
The difference between the sales and cost of goods sold for an organization, sometimes expressed as a percentage of sales.
Gross Margin
The difference between total revenue and the cost of goods sold.
distribution requirements planning (DRP)
The function of determining the need to replenish inventory at branch warehouses. A time-phased order point approach is used where the planned orders at the branch warehouse level are "exploded" via MRP logic to become gross requirements of the supplying source. Can be an input to MPS.
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. Cash pays wages, interest and principal on debt, and accounts payable.
inventory turnover
The number of times that an inventory cycles, or "turns over," during the year.
Standard costs
The target costs of an operation, process, or product including direct material, direct labor, and overhead charges.
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.
inventory
Those stocks or items used to support production (raw materials and work-in-process items), supporting activities (maintenance, repair, and operating supplies), and 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.
Lost capacity cost
Whenever another order is placed, the setup time reduces the available run time for the work center. Opportunity cost related to capacity
inventory management
the branch of business management concerned with planning and controlling inventories
income statement
a financial statement showing the net income for a business over a given period of time.
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.
Safety Stock
a quantity of stock planned to be in inventory to protect against fluctuations in demand or supply
Pareto's law
a small percentage of a group accounts for the largest fraction of its impact or value.
velocity
a term used to indicate the relative speed of all transactions, collectively, within a supply chain community. A maximum velocity is most desirable because it indicates higher asset turnover for stockholders and faster order-to-delivery response for customers. Measures inventory turns and days of supply.
generally accepted accounting principles (GAAP)
accounting practices that conform to conventions, rules, and procedures that are generally accepted by the accounting profession.
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.
owners' 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.
capacity-related costs
costs generally related to increasing (or decreasing) capacity in the medium- to long-range time horizon. Is the result of a sustained shift in demand.
Setup costs
from the last good part of the prior operation to the first good part of the next operation, so it includes teardown costs. This cost is incurred per order.
Work in Process (WIP)
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.
Purchasing Ordering Costs
include the cost of the purchasing cycle for managing and expediting purchase orders. This will include the cost of each purchase order that is issued or, if contract buying is used, the cost of releasing orders against a contract, although the latter is much lower in cost per order.
seasonal inventory
inventory built up to smooth production in anticipation of a peak seasonal demand.
Aggregate inventory
long term inventory planning, grouped at category level
Manufacturing efficiency
managing the flow of materials into, through, and out of the production process. Includes strategies like decoupling, leveling production regardless of demand, long runs with few changeovers
order point system
orders will be for fixed amounts (possibly the economic order quantity), but the timing of when the order point occurs will vary. LUMPY DEMAND for stable items because of large fixed orders. The less order points, the lumpier the demand.
Item costs
purchase price plus other direct costs required to get the units to where they need to be, for example, the plant. Includes transportation, customs, insurance.
FIFO
the first unit put into inventory is the first unit removed from the ERP system's inventory records when a sale occurs. Oldest sold first. If prices go up, COGS will not be accurate (using a old price for COGS)
LIFO
the last unit put into inventory is the first removed from the ERP inventory records when there is a sale, and the newest items are sold first. If prices change, COGS will be relatively current. Will under or overvalue inventory if prices change.
Service Part
those modules, components, and elements that are planned to be used without modification to replace an original part
unit cost
total labor, material, and overhead cost for one unit of production (e.g., one part, one gallon, one pound).
Standard Cost Accounting
used for internal valuation purposes.