Supply Chain Chapter 4
Service Inventory
Activities carried out in advance of the customer's arrival
Continuous Review System
As soon as inventory falls below a pre-determined level, a replenishment order is triggered.
ABC System
Classifies inventory based on the degree of importance. A = Highest Value B = Moderate Value C = Least Valuable
Disadvantage of Continuous Review System
Cost of implementation (ie. generally requires an automated system)
ROP =
Demand during Lead Time
Safety stock covers variability in demand, but not supply. T or F?
False. It covers it in both.
The two common inventory ordering system categories are:
Fixed-Order Quantity System and Fixed-Time Period System
Work-in-Process
Goods in various stages of completion throughout the plant, spanning from raw material to fully processed material awaiting final inspection. Many companies view WIP as the "black hole" of inventory.
Cycle stock is inventory that a company builds to satisfy its' _____________________
Immediate demand
What is usually a company's largest asset?
Inventory
Fixed-Time Period System
Inventory is checked in fixed time periods against a target inventory level.
Single-Period Model
Inventory is only ordered for a one-time stocking. - Objective is to maximize profits
Fixed-Order Quantity System
Inventory is replenished with a set quantity every time it is ordered; the time interval between orders may vary.
Periodic Review System
Inventory levels are reviewed at a set frequency
Advantages of Continuous Review System
- Allows for real-time updates of inventory - Facilitates accurate accounting
A company may decide to carry strategic stock to:
- Hedge currency fluctuations - Take advantage of a price discount - Protect against a short-term disruptive event in supply - Take advantage of a business opportunity - For life cycle changes
Constraints on the Practical use of EOQ:
- Limited Capital - Storage Capacity - Transportation - Obsolescence - Production Lot Size - Unitization
Disadvantages of Periodic Review System
- May not provide accurate inventory - Can be difficult to determine reordering intervals - Can make accounting less accurate
Four main categories of inventory
- Raw Materials - Work-in-Process - Finished Goods - Maintenance, Repair and Operating (MRO) supplies
Advantages of Periodic Review System
- Reduces the time spent analyzing inventory - Less expensive than CRS
Common metrics for inventory
- Units - Dollars - Weeks of Supply - Inventory Turns
Base Stock Level System
Issues an order whenever a withdrawal is made from inventory. - Used primarily for expensive items - A form of just-in-time
Order costs
Labor costs associated with placing an order for inventory and the cost of receiving the order
The goal of inventory management is to help a company be more profitable by _____________________ and/or by ____________________
Lowering the COGS and/or increasing sales
Finished Goods
Products that are available for sale and/or shipment to the customer.
Raw Materials
Purchased items or extracted materials transformed into components or products
The lowest inventory level at which a new order must be placed to avoid a stockout is known as the _______________.
Reorder Point (ROP)
The Economic 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
Obsolete inventory
Stock that is expired, out-of-date or no longer needed.
The Bin system is mainly used for _________________ items.
The Bin system is mainly used for small or low value items.
Inventory Turnover
The number of times that an inventory cycles, or "turns over", during the year.
Inventory
The quantities of goods and materials that are held in stock
Absolute Inventory Value
The value of the inventory at either its cost or its market value.
Maintenance, repair, and operating (MRO)
Used in support of general operations and maintenance such as supplies and spare parts used in manufacturing process.
Bin System
Uses either one or two bins to hold a quantity of the item being inventoried.
RFID does not require ________________ to read a tag.
direct line of sight
Maintaining adequate _____________________ allows a company to fill customer orders immediately.
finished product inventory
Safety stock is a quantity of stock planned to be in inventory to protect against ______________________.
fluctuations in demand or supply
Maintaining adequate _____________________ allows a company to support manufacturing operations and the production plan while avoiding delays.
materials inventory
The order quantity for Fixed-Time Period System is the difference between the _________________ on the review day, and the pre-determined ___________________.
on-hand stock and target inventory level
Pipeline Inventory is inventory that is already ______________ being held by wholesalers, distributors, retailers, and even consumers.
out in the market
carrying costs
the cost of maintaining inventory in a company's warehouse
Too much inventory _______________ which could otherwise be used for purposes such as research and development, marketing and sales, stockholder dividends, salary increases, etc.
ties up capital
Inventory can become a liability if it becomes _____________ due to expiration, obsolescence, damage, or spoilage.
unusable
Two models for determining when to review inventory
1. Continuous Review System 2. Periodic Review System
Three levels of internal inventory
1. Cycle Stock 2. Safety Stock 3. Strategic Stock
Steps in ABC System
1. Determine annual usage or sales for each item. 2. Determine % of total usage. 3. Rank items from highest to lowest %. 4. Classify items into A, B, C.
The EOQ will be impacted by:
1. Discounts for ordering larger quantities 2. Discounts for combination of items 3. Transportation Freight-Rate Discounts
Effective inventory management balances two competing considerations
1. Reducing the amount of inventory hold in stock, while... 2. Ensuring there is enough to satisfy customer demand
Two main variables to calculate in a fixed-order quantity system
1. Reorder Point 2. Order Quantity
4 reasons to hold inventory
1. To meet customer demand 2. To buffer against uncertainty (safety shock) 3. To decouple supply from demand (strategic shock) 4. To decouple dependencies in supply chain
Three fundamental questions on establishing target inventory levels
1. When to review? 2. When to order? 3. How much to order?
