Chapter 4 part 2

Fixed cost

(aka Sunk Costs) - independent of the unit volume produced (e.g., buildings, equipment, rent, allocated overhead costs, etc.)

A barcode reader

(or barcode scanner) is 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

Economic Order Quantity (EOQ) Model

-A quantitative decision model based on the trade-off between annual inventory carrying costs and annual order costs. -is 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 Order Costs: costs that are incurred each time an order is placed Carrying Costs: are costs that are incurred for holding inventory in storage Total cost= purchase cost + order cost + carrying cost

2 models for determining When to Review:

-Continuous Review System -Periodic Review System

Volume Economies of Scale

-Individual Item Purchase Price Discounts -Multiple-Item Purchase Price Discounts -Transportation Freight-Rate Discounts

Assumption of the EOQ Model

-The model must be calculated for one product at a time. -The demand must be known and constant throughout the year. -The delivery replenishment lead time is known and does not fluctuate. -Replenishment is instantaneous. There is no delay in the replenishment of the stock, and the order is delivered in the quantity that was demanded, i.e. in one whole delivery. -The purchase price (i.e., unit cost) is constant and no discounts or price breaks are factored into the model. -Carrying cost is known and constant. -Order cost is known and constant. -Stockouts are not allowed -don't hold true in the real world, supply chain managers must make adjustments to the basic EOQ

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, a predetermined fixed order quantity is placed The time between orders (i.e., order period) varies from order to order.

ABC System

A method to determine which inventories should be counted and managed more closely than others Groups inventory as A, B, or C based on a set criterion A items are given the highest priority. "80/20 rule" Generally, A items account for approximately 20% of the total number of items, but about 80% of the total inventory cost. B & C items account for the other 80% of the total number of items, but only 20% of total inventory cost. B items require closer management since they are relatively more expensive (per unit), require more effort to purchase / make, & may be more prone to obsolescence. C items have the lowest value, and hence the lowest priority

Inventory Turnover Ration

COGS/Average Inventory at cost

Linear 1D Bar Codes

Codes are "a series of alternating bars and spaces printed or stamped on parts, containers, labels, or other media, representing encoded information that can be read by electronic readers. Linear bar codes do have some limitations: they are one-dimensional, can only be read horizontally, and can only hold a maximum of 85 characters.

Individual Purchase Price Discounts

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

Inventory Policy

Establishing target inventory levels for all products and materials Address 3 fundamental questions: 1. When to review? 2. When to order? 3. How much to order?

Hidden Costs of Inventory Having too much:

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 .

Fixed-Order Quantity System (continued)

If the review determines that an order should be placed, then the order for a pre-defined quantity for that item is placed. Two main variables to calculate: Reorder Point (ROP) Order Quantity (Q) Assumptions: A constant demand (d) rate, i.e., not erratic, seasonal, etc. Inventory position (IP) is reduced (i.e., consumed/used) by a rate of (d). Replenishment order placed when reorder point (ROP) is reached. When inventory is received, (IP) increases by the order quantity (Q). (Q) computed using the economic order quantity (EOQ) model. Lead time (L), i.e., the time between placing an order and receiving delivery of the order, is known and constant. Inventory position (IP) is reviewed on continual basis.

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- Time Period System

Inventory is checked in fixed time periods against a target inventory level. 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.

Continuous Review System

Inventory levels are continuously reviewed. As soon as inventory falls below a pre-determined level (i.e., a reorder point), a replenishment order is triggered. More costly to conduct than a Periodic Review System, but it potentially requires less safety stock because inventory is constantly monitored, and replenishment actions are taken more quickly. Advantages: Allows for real-time updates of inventory, which can make it easier to know when to replenish. Facilitates accurate accounting, since the inventory system can generate real-time costs of goods sold. Disadvantage: Cost of implementation. Generally requires an automated system. The hardware and software necessary to run the system can be expensive to purchase, install, and maintain.

Periodic Review System

Inventory levels are reviewed at a set frequency, e.g., weekly, monthly At the time of review, if the stock levels are below the pre-determined level (i.e., a reorder point), an order for replenishment is placed, otherwise no action is taken until the next cycle. Since items are only reviewed periodically, there is a greater risk of inventory dropping well below the reorder point between reviews and, therefore, a greater potential need for safety stock. Advantages: Reduces the time spent analyzing inventory. Less expensive than a Continuous Review System. Disadvantages: May not provide accurate inventory counts for businesses with high sales. Can be difficult to determine the best review/reordering intervals. It also can make inventory accounting less accurate.

Bin System

Inventory system that uses either one or two bins to hold a quantity of the item being inventoried. It is mainly used for small or low value items. When the inventory in the first bin has been depleted, an order is placed to refill or replace the inventory. The second bin is set up to hold enough inventory to cover demand during the replenishment lead time so as to last until the replacement order arrives.

Inventory Control Tools

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

Transportation Freight-Rate Discounts

Ordering a larger quantity may mean that you can take advantage of Transportation Freight-Rate Discounts which will lower the per unit costs.

Hidden Costs of Inventory Having too little:

Production disruptions. Longer delivery replenishment lead times. Reduced responsiveness. Lost revenue

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.

Transportation

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

Limited Capital

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

Storage Capital

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

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.

Fixed-Time Period System (continued)

The order quantity is the difference between the on-hand stock on the review day, and the pre-determined target inventory level. where: Q = order quantity R = target inventory level IP = inventory position The order quantity in this system will differ from one order to another depending on the on-hand quantity on the day of the review. A target inventory level (R) is established Inventory levels are checked/reviewed in fixed time periods (T) If (IP) < (R) then (Q) is ordered and (R) is restored when each new order is received.

Unitization

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

Production Lot Size

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

Absolute Inventory Value

The value of the inventory at either its cost or its market value. Generally found on the balance sheet.

"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 withdrawl is made from inventory Replenishment order quantity is equal to the quantity withdrawn from inventory. This will maintain the inventory at a base stock level. Used primarily for very expensive items, e.g., airplane engine A form of just-in-time.

2D Bar Codes

are a graphical image that stores information both horizontally and vertically. 2D Barcodes can store over 7,000 characters, allowing transmission of almost two paragraphs of information.

Manufacturing

assembly instructions encoded on RFID tag provide information to computer controlled assembly devices

Indirect cost

cannot be traced directly to the unit produced (e.g., overhead; MRO items, buildings, equipment, etc.)

ABC system (steps)

classified inventory based on the degree of importance Steps: 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: A: Highest Value B: Moderate Value C: Least Valuable

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.

Variable cost

dependent on the unit volume produced vary with output level (e.g., materials, labor, utility power, etc.)

Direct cost

directly traceable to unit produced (e.g., materials, labor, etc.)

Materials Management

goods automatically counted and logged as they enter the supply warehouse

Order cost

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

Retail Store

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

Distribution Center

shipment leaving DC automatically updates ERP to trigger a replenishment order and notify customer for delivery tracking

Barcodes

systems help businesses track products and stock levels for inventory management

Reorder Point (ROP)

the lowest inventory level at which a new order must be placed to avoid a stockout set at a level that provides enough inventory so demand is covered during the lead time (L) needed to replenish inventory