Business Logistics Chapter 7 - Inventory Management
- strategic stock - safety stock - cycle stock
3 levels of internal inventory held by companies
Economic Order Quantity
A quantitative decision model based on the trade-off between the annual ordering costs and the annual carrying costs
safety stock
A quantity of stock planned to be in inventory to protect against fluctuations in demand or supply
Distribution Requirements Planning
A time-phased finished good inventory replenishment plan in a distribution network. - The function of determining the need to replenish inventory at branch warehouses
strategic stock
Additional inventory beyond cycle and safety stock, generally used for a very specific purpose or future event, and for a defined period of time
Days of supply formula
Average Inventory / Monthly Demand x 30
80,20
B and C items account for the other ___% of the total number of items, but only ___% of total inventory cost
- Performance cycle - Order fill - Case Fill Rate - Line Fill Rate
Common measures of service level include:
Inventory turnover formula
Cost of Goods Sold / Average Inventory
depletes gradually, replenished cyclically
Cycle stock _____________ as customer orders are received, and is ____________________ when supply orders are received.
Review Frequency
Defines how often inventory levels are reviewed
Reorder Point
Defines when a replenishment order is initiated
independent
Forecasted demand = ____________ demand
- Raw Materials - Work-in-Process (WIP) - Finished Goods - Maintenance, Repair and Operating supplies
Four main categories of inventory:
20,80
Generally, A items account for approximately ___% of the total number of items, but about ___% of the total inventory cost.
20-30
Generally, carrying costs equal approximately _________% of a company's inventory value
higher
Generally, the higher the service level target, the __________ the amount of inventory you will need to assure the target is achieved
Finished goods
Goods that are completely ready for sale
Dependent demand
Internal demand for parts and materials based on the demand for the final product in which the parts and materials are used - Ex: automobile engine
Inventory days of supply formula
Inventory On Hand / Average Daily Usage
imputed, doesn't
Inventory carrying cost is an__________ cost. It ____________ appear in the financial statement.
Obsolete inventory
Inventory items that have met the obsolescence criteria established by the company
Fill rate formula
(1 - ((Total Items - Shipped Items) / Total Items)) x 100
Benefits of a Segmentation Strategy
- End of Life Management - Supplier Negotiation - Inventory Optimization - Strategic Pricing - Resource Allocation - Customer Service Levels
Pipeline Inventory
- Inventory in transit. - Inventory held / owned by suppliers, or by wholesalers, distributors, retailers, and customers.
Constraints on the use of EOQ
- Limited capital - Storage capacity - Transportation - Obsolescence - Production lot size - unitization
Finished product inventory
Maintaining adequate __________________________allows a company to fill customer orders immediately
Materials inventory
Maintaining adequate _________________allows a company to support manufacturing operations and the production plan while avoiding delays.
Inventory carrying cost
Measures how much it costs a company to store inventory over a given period of time
3-4
Product leaders in the market have an inventory turnover of _________ times per year
Reorder point of a periodic review
ROP = (D X (T + P/2)) + SS where: ROP = Reorder Point D = Average Daily Demand T = Average Lead Time in Days P = Review Period in Days SS = Safety Stock
reorder point of a perpetual review
ROP = (D X T) + SS where: ROP = Reorder Point D = Average Daily Demand T = Average Lead Time in Days SS = Safety Stock
ABC Classification
Segmentation Strategy that classifies inventory based the degree of importance
100, stockout
Service level is equal to _____% minus the probability % of a __________
Obsolete Inventory
Stock that is expired, out-of-date or no longer needed
Pipeline inventory
The 1 type of external inventory
actual demand, lead time
The amount of cycle stock that a company holds is dependent on _______________ in the immediate time period, supply replenishment _____________ and order quantities.
managerial policy, 24
The carrying cost percent used by a firm is a _______________. It is typically around ___%
Independent demand
The demand for the final product. Demand pattern affected by trends, seasonal patterns, & market conditions - Ex: automobile
Ordering Costs, Inventory Carrying Cost, Total Cost
The intersection of the Annual _______________ and the Annual __________________________ will yield the lowest Annual _____________
Limited capital
The model may generate an order quantity which the company does not have sufficient available funds to purchase at one time
Storage capacity
The model may generate an order quantity which the company does not have sufficient storage capacity to handle at one time
Days of Supply
The most common KPI used by managers in measuring the efficiency in supply chain
Inventory days of supply
The number of days it would take to run out of supply if it was not replenished
Inventory turnover
The number of times that a company's inventory cycles per year
Pipeline inventory
The ownership of this inventory has been transferred to the trading partners but may still influence decisions the company makes regarding how they manage and control their internal inventory, and how much safety stock and/or strategic stock to hold
Fill rate
The percentage of a customer's order that is filled on the first shipment. This can be represented as the percentage of items, SKUs or order value that is included with the first shipment.
Perfect Order Measurement
The percentage of orders that are error-free.
Unitization
The supplier may require the company to order an item in full pack, case, or pallet configurations
Inventory accuracy
The variance between perpetual inventory and physical inventory
Maintenance, Repair & Operating supplies
These are materials that you need to run the manufacturing operation and the business but do not end up as part of the finished product
safety stock
What type of stock is used to Buffer Against Uncertainty in Demand and/or Supply
Strategic stock
What type of stock is used to Decouple Supply from Demand and to Decouple Dependencies in the Supply Chain
cycle stock
What type of stock is used to meet customer demand?
Dependent
_____________ demand does not require forecasting because there is no uncertainty
Vendor Managed Inventory
a modified QR that eliminates the need for replenishment orders
Quick response
a technology-driven cooperative effort between retailers and suppliers to improve inventory velocity while matching supply to consumer buying patterns
ABC Classification
allows different inventory management techniques to be applied to different segments of the inventory in order to increase revenue and decrease costs.
Work in process goods
any raw material that is in any stage of production process, even if it's a finished good that hasn't gone through quality check yet
- add safety time - increase replenishment order - utilize statistical techniques to set safety stocks directly for a component
approaches to introduce safety stock into dependent demand situations
Ordering Costs
are incurred each time an order is placed
dependent
calculated demand = _____________ demand
Policies and Parameters
defined at the detail level - Ex: data requirements, software applications, performance objectives, and decision guidelines
Perfect order
delivered complete, on time, at the right location, in perfect condition, with complete and accurate documentation
Replenishment programs
designed to streamline the flow of goods within the supply chain
Fair share allocation
determines a fair share % of the available supply which is then allocated to each competing demand. - Provides each distribution facility with an equitable distribution of available inventory
Profile replenishment
extends QR and VMI by giving suppliers the right to anticipate future requirements according to their knowledge of a product category (JIT II)
Maintenance, Repair and Operating supplies
goods that are not directly related to product creation.
Product/Market Classification
groups products, markets, or customers with similar characteristics together to facilitate inventory management - Ex: classify by sales, profit contribution, inventory value, usage rate or item category. ABC Classification System
Supply uncertainty
how long will it take to replenish inventory with our customers?
Requirements planning
integrates across the supply chain taking into consideration unique requirements
Cycle stock
inventory that a company builds to satisfy its immediate demand
Safety stock
inventory that is above and beyond what is actually needed to meet anticipated demand
Periodic review
monitor inventory status of an item at regular intervals such as weekly or monthly
Perpetual review
monitor inventory status of an item continuously
External inventory
no longer own this inventory (sold to wholesaler, distributor, retailer, end consumer)
Safety Time
ordering an item earlier than necessary based on the lead time, to ensure timely arrival
Service Level
performance target specified by management and defines inventory performance objectives
Segmentation Strategy
specifies all aspects of inventory management for each segment of inventory - Ex: service objectives, forecasting method, management technique, and review cycle by segment
Performance cycle
the elapsed time between release of a purchase order by the buyer to the receipt of shipment
Inventory Carrying Cost
the expense associated with maintaining inventory
Case fill rate
the percent of cases ordered that are shipped as requested
Order fill rate
the percent of customer orders filled completely as requested
Line fill rate
the percent of order lines (items) that were filled completely as requested
Intent of replenishment programs
to reduce reliance on forecasting and position inventory using actual demand on a just-in-time basis
Demand Uncertainty
when and how much product will our customers order?
Steps to plan safety stock
1. Determine the likelihood of a stockout using a probability distribution, i.e., forecast accuracy/error 2. Estimate the demand during a potential stockout period 3. Establish the desired level of stockout protection, i.e., the desired service level
Why hold Inventory?
1. To Meet Customer Demand 2. To Buffer Against Uncertainty in Demand and/or Supply 3. To Decouple Supply from Demand 4. To Decouple Dependencies in the Supply Chain