chapter 4 supply chain management

ABC System

classifies inventory based on important A is the highest value B is moderate value C is low value A method to determine which inventories should be counted & managed more closely than others

order costs

incurred each time an order is placed: order transportation, preparation, receipt processing costs and material handling costs

Barcodes

help businesses track products and stock levels for inventory management Linear (1D) Bar 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. 2D Bar Codes are a graphical image that stores information both horizontally and vertically.

Economic order quantity model (EOQ model)

A quantitative decision model based on the trade-off between annual inventory carrying costs and annual order costs. EOQ is a fixed-order quantity model The EOQ model seeks to determine an optimal order quantity where the sum of the annual order costs and the annual inventory carrying costs are minimized

cost related inventory

Direct Costs - directly traceable to unit produced (e.g., materials, labor, etc.) Indirect Costs - cannot be traced directly to the unit produced (e.g., overhead; MRO items, buildings, equipment, etc.) Fixed Costs (aka Sunk Costs) - independent of the unit volume produced (e.g., buildings, equipment, rent, allocated overhead costs, etc.) Variable Costs - dependent on the unit volume produced vary with output level (e.g., materials, labor, utility power, etc.) Order Costs - labor costs associated with placing an order for inventory and the cost of receiving the order. 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.

Practical considerations of EOQ ( volume economies of scale)

Individual item discounts- If the volume discount is sufficient to offset the added cost from carrying additional inventory, then ordering a larger volume may be desirable. multiple item 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. Transportation freight discounts- Ordering a larger quantity may mean that you can take advantage of Transportation Freight-Rate Discounts which will lower the per unit costs.

Fixed time period system

Inventory levels are checked/reviewed in fixed time periods

Inventory control tools

Linear barcode 2D barcode Radio frequency identification (RFID)

Safety stock policy

Long production lead time necessitates de-coupling Provides maximum flexibility by centrally locating safety stock Influenced by batch / lot / campaign size to cover for variability in both demand and supply

Maintenance, Repair, and Operating (MRO)

Materials that you need to run the manufacturing operation and the business but do not end up as part of the finished product. EX: spare parts, oil, coffee for break room

obsolete inventory

Obsolete inventory is stock that is expired, damaged, or no longer needed.

Raw materials

Purchased items or extracted materials converted via the manufacturing process into components and products. There are strategies around the question of how much raw material a company should hold in inventory. Buy from a supplier and have it delivered to the operation just in time for when it is needed Buy and hold a larger quantity for strategic reasons Companies might be willing to increase costs by storing excess raw material inventory if they fear there may be a potential shortage of the material or if they suspect that there is an upcoming price increase and want to buy at the current lower price.

safety stock

Safety stock, also known as "buffer stock," is inventory that is above and beyond what is actually needed to meet anticipated demand. A quantity of stock planned to be in inventory to protect against fluctuations in demand or supply. Companies operating in a make-to-stock environment will generally maintain some amount of safety stock whether based on a management decision, or based on a safety stock determination formula (additional stock to prevent any fluctuations in demand of inventory)

What is the right amount of inventory?

The answer to that question is, "It depends." It depends on the supply chain strategy and set-up, the type of product(s), customers' expectations, customer service objectives, product shelf life, etc.

Assumptions of EOQ model

order and carrying costs are constant constant known demand purchase price is constant and replenishment is instantaneous HOWEVER, ASSUMPTIONS DO NOT HOLD TRUE, SUPPLY CHAIN MANAGERS MUST MAKE ADJUSTMENTS TO EOQ

Bin system

Inventory system that uses either one or two bins to hold a quantity of the item being inventoried. 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 Management

The goal of inventory management is to help a company be more profitable by lowering the cost of goods sold and/or by increasing sales. In an effort to achieve this stated goal, effective inventory management balances two competing considerations: Reducing the amount of inventory held in stock, while . . . Ensuring there is enough inventory to satisfy customer demand.

Finished Goods

These products are available for sale and/or shipment to the customer. The amount of finished goods inventory that a company decides to maintain is a strategic decision: Companies can operate a "Make-to-Order" supply chain where the finished goods are not produced until a customer order is received, and the raw materials may not even be ordered from the supplier(s) in advance. Little to no finished goods inventory is maintained. Companies can operate a "Make-to-Stock" supply chain where product is produced prior to receipt of a customer order. A forecast and demand plan are created and the finished goods are produced and held in inventory until a customer order is received. Significant amounts of finished goods inventory can sometimes be maintained.

Why hold inventory

To Meet Customer Demand (cycle stock): To Buffer Against Uncertainty in Demand and/or Supply (safety stock): To Decouple Supply from Demand (strategic stock): To Decouple Dependencies in the Supply Chain

Base stock level system

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

carrying costs

incurred for holding inventory cost of capital, taxes, insurance, obsolescence, and storage

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. 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: seasonal demand, new product launch, transition protection Also called anticipation stock, build stock, or seasonal stock

Service inventory

Companies in the service industry do not maintain inventory of services since services are basically produced and consumed immediately upon demand. Companies can however, maintain inventory of "facilitating goods," which are those items that are used to help facilitate the service being provided.

How much to order

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. 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.

hidden costs of inventory

Having too much inventory can result in effects like: 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 . Having too little inventory can result in effects like: Production disruptions. Longer delivery replenishment lead times. Reduced responsiveness.

pipeline inventory

Inventory in the transportation network and the distribution system. Inventory that is already out in the market being held by wholesalers, distributors, retailers, and even consumers. 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.

Inventory introduction

Inventory is one of the company's largest assets, so careful management of that asset is an essential business requirement. Maintaining adequate finished product inventory allows a company to fill customer orders immediately Maintaining adequate materials inventory allows a company to support manufacturing operations and the production plan while avoiding delays.

EOQ Constraints

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. Transportation: The item being ordered and transported may require specialized or dedicated transportation, impacting the quantity per order. Obsolescence: The model may generate an order quantity which would create spoilage or obsolescence. Production Lot Size: The supplier may require the company to order an item in full production lot sizes. Unitization: The supplier may require the company to order an item in full pack, case, or pallet configurations.

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 the information on the tag is updatable.

When to order

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

Inventory Asset/liability

Too much inventory ties up capital which could be used for research and development, marketing and sales, stockholder dividends, salary increases, etc. The more inventory a company holds, the more space is needed, and space costs money. In addition to storage costs, a company may also have to pay for security, insurance, taxes, etc. to hold inventory. Inventory can become a liability if it becomes unusable due to expiration, obsolescence, damage, or spoilage.

Work in Process

goods that span from raw material that has been released for initial processing up to fully processed material awaiting final inspection and acceptance as finished goods. Due to the range of potential stages of completion, and the fact that materials in WIP may be in a state of continuous transformation, many companies view WIP as the "black hole" of inventory as they may not have very good or very timely visibility into this part of their inventory. Best practice generally suggests minimizing the amount of WIP inventory in the manufacturing area since too much WIP may clutter up the physical space and impede the process flow.

Single period model

inventory is only ordered for 1 time stocking Goal is to maximize profits Ex: christmas tree lots, newstands

inventory investment

Absolute Inventory Value The value of the inventory at either its cost or its market value. Generally found on the balance sheet. Inventory Turnover The number of times that an inventory cycles, or "turns over," during the year.

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 requires less safety stock because inventory is constantly monitored, and replenishment actions are taken more quickly.

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.

Cycle stock

Inventory that a company builds to satisfy its' immediate demand. Cycle stock depletes gradually as customer orders are received, and is replenished cyclically when supply orders are received. The amount of cycle stock that a company holds is dependent on actual demand in the immediate time period, supply replenishment lead time and order quantities. (the inventory for the company)