Supply Chain Management Exam 1: Chapter 4
Why Hold Inventory?
1. To Meet Customer Demand 2. To Buffer Against Uncertainty in Demand and/or Supply (safety stock) 3. To Decouple Supply from Demand (strategic stock) 4. To Decouple Dependencies in the Supply Chain
companies in the service industry:
do not maintain inventory services since services are produced and consumed immediately upon demand; companies rather maintain facilitating goods because the help facilitate service provided
Hidden costs: too much inventory effects
financial resources are tied up, quality problems, no incentive for improvements
levels of inventory
internal: cycle stock, safety stock, strategic stock, obsolete inventory external: pipeline inventory; in transit
order costs
labor costs associated with placing an order for inventory and the cost of receiving the order
inventory as an asset v. liability
necessary to maintain operations and ensure that products are available when customers demand them; too much ties up capital; the more inventory, the more space and space costs money; pay for security, insurance, taxes; and finally it becomes a liability if it is unusable due to expiration, damage, etc.
inventory
quantities of goods and materials that are held in stock ; a company's largest assests ; includes raw materials, work-in-progress items, finished products; too much inventory is a significant liability
make-to-stock
supply chain where product is produced prior to recepit of a customer order; forecast and demand plan; significant amount of finished goods inventory can sometimes be maintained
make-to-order
the finished goods are not produced until a customer order is received; little to no finished good inventory is maintained
inventory metrics
units dollars weeks of supply (avg on hand inventory)/average weekly usage inventory turns-(costo of good sold)/avg inventory value
Pipeline Inventory
inventory that is out in the market being held by wholesalers, distributors, retailers, and customers; ownership of inventory has been transferred to the trading partners
inventory controls
linear barcode(can only be read horizontally), 2d barcode(stores info horizontal and vertically), radio frequency identification(do not require direct line of sight)
transportation
the item being ordered and transported may require specialized or dedicated transportation, impacting the quantity per order
goal of inventory management
to help a company be more profitable by lowering the cost of goods sold and/or by increasing sales by: reducing the amount of inventory held ensuring there is enough inventory to satisfy customer demand
fixed
(sunk costs) independent of the unit volume produced (building equip rent)
Bin System
Inventory system that uses either one or two bins to hold a quantity of the item being inventoried; 2nd bin is to hold enough until replacement comes
inventory investment
absolute inventory value: the value of the invetory at eithe rits cost or its market value inventory turnonver: the number of times that an inventory cycles during the year
obsolete inventory
inventory items that have met the obsolescence criteria established by the company; obsolete inventory will never be used or sold at full value
transportation freight-rate discounts
lower the per unit costs
Hidden Costs: having too little inventory
productino disruptions leading to additional costs, longer delivery replenishment lead times, reduced responsvieness, lost revenue
limited capital
teh model may generate an order quantity which the company does not have sufficient available funds to purchase at one time
Inventory Management
the function fo planning and controlling inventories
4 Main Categories of Inventory
1) Raw Materials 2)Work-in-Process (WIP) 3)Finished Goods 4)Maintenance, Repair and Operation supplies
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 predetermiend reoder point, a predetermined fixed order quantity is placed the time between orders varies from order to order
Economic order quantity (EOQ) Model
a fixed-order quantity model; a quantitiative deciision model based on the trade-off between annual inventory order costs and annual inventory crarying costs; when the sum of annul and carrying costs is minimized; constant demand, costs, purchase price
work-in-process
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; try to limit WIP!
"single-period" inventory model
a type of inventory system in which inventory is only ordered for a one-time stocking to maximize profits
base stock level system
a type of inventory system that issues an order whenever a withdrawal is made from inventory replenishment order=withdrawal quantity used for expensive items, a form of just-in-time
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 (i.e a reorder point) a replenishment order automatically is triggered adv: allows for real-time updates of inventory facilitates accurate accounting requires less safety stock dis: generally requires an automated system
indirect
cannot be traced directly to the unit produced
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
direct
directly traceable to unit produced
Individual Item Purchase Price Discounts
discounts for ordering large quantities
failure to manage inventory leads to :
dissatisfied customers, lost sales and revenue, higher costs
Maintenance, Repair, and Operating (MRO)
general operations and maintenance such as maintenance supplies, spare parts, and consumables used in manufacutring process and supporting operations
periodic review system
inventory levels are reviewed at a set frequency advantages: reduces the time spent analyzing inventory, less expensive to implement and operate than a continuous review system disadvantage: can be difficult to determine the best review/reordering intervals it can make inventory less accurate greater risk of inventory dropping well below the reorder point
order costs examples
preparation costs, transportation costs, receipt costs, material handling costs
When to order inventory?
the lowest inventory level at which a new order must be placed to avoid a stockout is known as the reorder point (ROP)
storage capacity
the model may generate an order quantity which the company does not have sufficients storage capacity to handle at one time
Maintenance, repair, and operating (MRO) supplies
these are materials that you need to run the manufacturing oepration and the business, but do not end up as part of the finsihed product i.e oil which is consumed, or cleaning supplies, office supplies
Finished Goods
those items on which all manufacturing operations, including final testing have been completed. These prodcuts are available for sale and/or shipment to the customer.
Safety Stock
"buffer stock" that is planned to protect companies against fluctuations in demand or supply
finished product inventory
allows a company to fill customer orders immediately
materials inventory
allows a company to support manufacturin operations and the production plan while avoiding delays
ABC System
classifies inventory based on the degree of importance 1. determine annual usage or sales of each item 2. determine % of toal usage each item represents 3.rank items from highest to lowest % 4.classify items into groups (highest, moderate, lowest value) A (80/20 rule) highest priority, Bs requirei closer management since they are more expensive, C has lowest value
carrying costs examples
cost of capital, taxes, insurance, obsolescence , and storage
inventory turnover ratio
cost of good sold/average inventory @ cost
fixed-time period system
inventory is checked in fixed time periods against a target inventory level if 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 Q=R-IP
RFID
materials management-goods counted and logged manufacturing-assembly instructions encoded on RFID tag disribution center-shipment leaving DC automatically updates ERP to trigger a replenishment order and notify customer for delivery retail store-no check out lines as scanner link RFID tagged goodds in shopping cart with buyers credit
multiple-item purchase price discounts
purchase of a combination of items from a supplier you may able to take advantage of a volume discount based on teh total volume across al the items purchased
raw materials
purchased items or extracted materials that are converted via the manufacturing process into components and products; comapnies by excess when they fear a potential shortage or upcoming price increase
obsolescence
the model may generate an order quantity which would create spoilage
unitization
the supplier may require the compapny to order an item in full pack, case, or pallet configurations
production lot size
the supplier may requirei the company to order an item in full production lot size
strategic stock
very specific purpose or future event, and for a defined period of time can hedge currency fluctuations, take advantage of price discount, pprotect against a short-term disruptive event, take advantage of business opp, seasonal demand, new product, transition protection
fundamental inventory set target questions:
when to review inventory? when to order inventory? how much inventory to order?
cycle stock
Inventory to satisfy demand in the immediate time period