Supply Chain Chapter 4

Other Types of Inventory Systems

- ABC System - Bin System - Base Stock Level System - "Single-Period" Inventory Model

2D Bar Codes

are a graphical image that stores information both horizontally and vertically.

Safety stock

buffer stock, inventory that is above and beyond what is actually needed to meet anticipated demand

Indirect

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

ABC system

classifies inventory based on the degree of importance

Inventory Turnover Ratio

cost of goods sold/average inventory @ cost

carrying costs

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

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

Direct

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

Hidden Costs of Inventory

having too much or too little inventory on hand can sometimes build hidden costs that create a risk for a company

Order costs

incurred each time an order is placed Order preparation costs Order transportation costs Order receipt processing costs Material handling costs

carrying costs

incurred for holding inventory Cost of capital- specified by senior management. Taxes- on inventory held in warehouses. Insurance- based on estimated risk or loss over time and facility characteristics. Obsolescence- deterioration of product during storage, and shelf-life. Storage- facility expense related to product holding rather than product handling.

fixed costs

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

Cycle stock

inventory a company builds to satisfy its immediate demand

Pipeline inventory

inventory in transit. inventory held/owned by suppliers, or by wholesalers, distributors, retailers, and customers

Obsolete Inventoy

inventory items that have met the obsolescence criteria established by the company. Obsolete inventory is stock that is expired, damaged, or no longer needed. It will never b used or sold at full value.

Periodic Review System

inventory levels are reviewed at a set frequency

Maintenance, Repair, and operating (MRO)

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

order cost

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

Types of external inventory

pipeline inventory and obsolete inventory

Raw Materials

purchased items or extracted material that are converted via the manufacturing process into components and products

Inventory

quantities of goods and materials that are held in stock. includes all of the raw materials and work in process items used to support production, all of the finished products needed to provide customer service and all of the other materials and supplies needed to run a business

Having too much inventory can result in effects like:

1. Financial resources tied up in inventory. 2. Underlying problems being hidden rather than being exposed and solved, including quality problems not being immediately identified. 3. No incentive for process. improvements.

Two models for determining when to review inventory:

1. Periodic Review System 2. Continuous Review System

Having too little inventory can result in effects like:

1. Production disruptions creating the need for expediting and additional costs. 2. Longer delivery replenishment lead times. 3. Reduced responsiveness. 4. Lost revenue

Functions of 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

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.

Linear (1D) Bar Codes

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

The Economic Order Quantity (EOQ) is the optimal order size because it minimizes the annual total inventory cost. A. True B. False

A. True

The four broad categories of inventory are raw materials, work-in-process, MRO, and finished goods A. True B. False

A. True

The top 2 primary functions of inventory are (1) To meet customer demand, and (2)To buffer against uncertainty in demand and/or supply . A. True B. False

A. True

Types of inventory systems

ABC system BIN system Base stock level system single period inventory model

Advantages of continuous review system:

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.

Continuous Review System

An inventory system used to manage independent demand inventory. The inventory level for an item is constantly monitored, and when the reorder point is reached, an order is released.

Barcodes

Barcode systems help businesses track products and stock levels for inventory management.

Inventory costs which are independent of the output quantity are called? a. Indirect Costs b. Variable Costs c. Fixed Costs d. Carrying Costs

C. Fixed Costs

A type of inventory system that issues an order whenever a withdrawal is made from inventory is known as? a. ABC System b. Bin System c. Base Stock Level System d. Single Period Inventory Model

C. base stock level system

Disadvantages of continuous review system:

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.

Three levels of internal inventory

Cycle stock, safety stock, and strategic stock

Which of the following is NOT an example of an ordering cost for products purchased from a supplier? a. The cost of transmitting the order b. The cost of receiving the product c. The cost associated with processing the invoice d. The opportunity cost of not ordering from a least cost supplier e. The cost of handling the product

D. the opportunity cost of not ordering from a least cost supplier

The primary purpose of the basic economic order quantity model is a. To calculate the reorder point, so that replenishments take place at the proper time b. To minimize the sum of carrying cost and holding cost c. To maximize the customer service level d. To minimize the sum of ordering cost and holding cost

D. to minimize the sum of ordering cost and holding cost

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.

Bin System

Inventory system that uses either one or two bins to hold a quantity of the item being inventoried. used for small or low value items

Inventort 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.

Disadvantages of periodic review system:

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

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

Four Main categories of inventory

Raw materials, work-in-progress, finished goods, maintenance, repair, and operating supplies

Advantages of periodic review system:

Reduces the time spent analyzing inventory. Less expensive than a Continuous Review System.

Radio Frequency Identification (RFID)

Successor to the barcode for tracking individual unit of goods. RFID does not require direct line of sight to read a tag and information on the tag is updatable.

Volume Economics of Scale Impact EOQ

The EOQ calculation will be impacted by volume economies of scale.

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 capacity

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.

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.

Maintenance, Repair & Operating (MRO) 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.

barcode reader

Used to scan barcodes on products at the points of sale or when taking inventory.

single period model

Used when we are making a one-time purchase of an item

Work-in-Process (WIP)

a good or goods in various stages of completion throughout the plant, spanning from raw material that has been released for initial processing up to fully processed material awaiting final inspection and acceptance as finished goods.

Economic Order Quantity (EOQ) Model

a quantitative decision model based on the trade off between annual inventory carrying costs and annual order costs

Base Stock Level System

a type of inventory system that issues an order whenever a withdrawal is made from inventory. used for expensive items

Service Inventory

activities carried out in advance of the customers arrival

Strategic stock

additional inventory beyond cycle and safety stock, generally used for a very specific purpose or future event or defined period of time

ABC system steps

Determine annual usage or sales for each item. Determine % of total usage or sales that each item represents. Rank items from highest to lowest %. Classify items into groups: A. Highest Value B: Moderate Value C: Least valuable

Costs related to inventory

Direct/Indirect Fixed/Variable Order/Carrying

Individual Item 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.

The Economic Order Quantity (EOQ) Model

EOQ is a fixed-order quantity model. A quantitative decision model based on the trade-off between annual inventory order costs and annual inventory carrying costs.

The two common inventory ordering system categories:

Fixed-Time Period System Fixed-Order Quantity System

Inventory Management

the function of planning and controlling inventories. goal is to help a company be more profitable by lowering the cost of goods sold and/or by increasing sales

Absolute Inventory Value (inventory investment)

the value of the inventory at either its cost or its market value.

Finished Goods

those items on which all manufacturing operations, including final testing, have been completed. These produces are available for sale and/or shipment to the customer

Common metrics for inventory

units- the number of units available. dollars- The amount of dollars tied up in inventory. weeks of supply- , inventory turns

Reorder Point (ROP)

when the quantity on hand of an item drops to this amount, the item is reordered The lowest inventory level at which a new prefer must be placed to avoid a stockout is known as the reorder point (ROP)