Chapter 7

safety stock

"buffer stock" 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

on hand

Both periodic review and perpetual review compare the ____ and on-order inventory to the item's reorder point. If the total is < reorder point, then a replenishment order is initiated

safety

Companies operating in a make-to-stock environment will generally maintain some amount of ______ stock whether based on a management decision, or based on a safety stock determination formula

k

Customer Service Level Target (safety factor). Derived from the normal distribution using the desired product availability or customer service level target (think of it as z in stats)

known

Dependent demand inventory requirements are a function of _____ events that are not random

dependent demand

Describes the internal demand for parts based on the demand of the final product in which the parts are used determined/calculated demand order quantities computed with MRP

pure

Every unit/dollar of inventory that you can reduce drops right to the bottom line as ____ savings

managerial

Final carrying cost percent used by a firm is a ___ policy

purchased

Frequently MRO items are expensed at the time they are _____, and there may be a separate function, group, or individual who plans and orders these MRO items, from those who plan and order production items

1

From analysis of historical demand data the safety stock required to ensure a stockout only __% of the time is possible

safety

Generally, no specific ____ stock is needed to support time-phased procurement programs (e.g., MRP)

higher

Generally, the _____ the service level target, the higher the amount of inventory you will need to assure the target is achieved

financial

Inventory carrying cost is an imputed cost. It doesn't appear in the _____ statement. Companies determine the cost of capital they want to use which is typically the return they expect on investments

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

cycle stock

Inventory that a company builds to satisfy its' immediate demand

joint, convolution

Planning for both demand and supply uncertainty requires combining two independent variables The ___ impact of the probability of both demand and supply variation must be determined Direct method is to combine standard deviations using a ____ formula

target

Probability theory enables the calculation of safety stock for a ____ service level

consumed, facilitate

Some MRO items are _____ during the process of converting raw materials into finished goods, e.g., oil for the manufacturing equipment. Other MRO items are used to ______ the manufacturing operation, e.g., cleaning supplies, spare parts, etc

actual, immediate

The amount of cycle stock that a company holds is dependent on ____ demand in the _____ time period, supply replenishment lead time and order quantities

independent demand

The demand for the final product. Has a demand pattern affected by trends, seasonal patterns, & general market conditions

normal

The most common probability distribution for demand is the _____ distribution, i.e., "bell curve"

pipeline inventory

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

maintenance, repair, and operating

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.

inventory

Total cost is driven by ____ planning decisions which establish when and how much to order

inventory management

_____ _____ models are generally classified as independent demand and dependent demand

dependent

_____ demand does not require forecasting because there is no uncertainty

service

_____ level is equal to 100% minus probability % of stockout e.g., level of 99% results in a stockout probability of 1%

cycle

_____ stock depletes gradually as customer orders are received, and is replenished cyclically when supply orders are received

dependent

______ demand does not require safety stock

vendor managed inventory

a modified QR that eliminates the need for replenishment orders arrangements transfer the responsibility for managing the inventory located at a customer's facility back to the vendor/manufacturer of that inventory

service level

a performance target specified by management and defines inventory performance objectives

quick response

a technology-driven cooperative effort between retailers and suppliers to improve inventory velocity while matching supply to consumer buying patterns

ABC

an _____ system classifies inventory based on the degree of importance

1.25 MAD

an approximation of the standard deviation of the forecast error, which is assumed to be normally distributed (i.e. "bell shaped curve"). This is to approximate up to 25% more than the Mean Absolute Deviation (forecast error). Anything beyond this would be considered "abnormal demand" and not covered by safety stock

equally, infinite, independent, consistent, quantity, cannot

assumptions of reactive (pull) inventory logic All customers, market areas, and products contribute ____ to profits ____ capacity exists at the production facility Infinite inventory availability at the supply location Supply cycle time can be predicted and cycle lengths are _____ Customer demand patterns are relatively stable and _____ Each distribution warehouse's timing and ____ of replenishment orders are determined independently of all other sites, including the supply source Supply cycle length ____ be correlated with demand

one, constant, fluctuate, instantaneous, discounts, carrying, stockout

assumptions of the EOQ model: The model must be calculated for ___ product at a time. The demand must be known and ___ throughout the year. The delivery replenishment lead time is known and does not ____. Replenishment is _____. 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 _____ or price breaks are factored into the model. ______ cost is known and constant. Order cost is known and constant. _____ are not allowed

weeks of supply, inventory turns

common metrics for inventory: units dollars (tied up in inventory) ____ ___ ____ (avg on hand inventory / avg weekly use) _____ ____ (COGS / avg inventory value) inventory carrying cost (discuss with EOQ)

perpetual review

continuously monitors inventory levels to determine inventory replenishment needs

fill rate

customer service level is measured as _______

inventory control

defines how often inventory levels are reviewed to determine when and how much to order

reorder point

defines when a replenishment order is initiated

replenishment programs

designed to streamline the flow of goods within the supply chain Intent is to reduce reliance on forecasting and position inventory using actual demand on a just-in-time basis

time buckets

discrete increments of time used to facilitate planning activities

profile replenishment

extends QR and VMI by giving suppliers the right to anticipate future requirements according to their knowledge of a product category (JIT II)

stocks inventory, replenishment, customer

for VMI, the vendor/manufacturer: ___ ____ Places ______ orders Arranges the display Typically owns inventory until purchased Is required to work closely with _____

predictable, purchase requirements

for dependent demand, no safety stock assumes: Procurement replenishment is _____ and constant Vendors and suppliers maintain adequate inventories to satisfy 100% of ___ ____

don't

in the real world, the EOQ assumptions _____ hold true over time

ordering costs

incurred each time an order is placed

current, obsolete

individual items within each category of inventory can be ______ or _______

taxes

inventory carrying cost component ______ on inventory held in warehouses

insurance

inventory carrying cost component based on estimated risk or loss over time and facility characteristics

obsolescence

inventory carrying cost component deterioration of product during storage, and shelf-life

storage

inventory carrying cost component facility expense related to product holding rather than product handling

cost of capital

inventory carrying cost component specified by senior management

requirements planning

inventory deployment planning approach integrates across the supply chain taking into consideration unique requirements consists of MRP and DRP

fair share allocation

inventory deployment planning approach provides each distribution facility with an equitable distribution of available inventory limited ability to manage multistage inventories

pull

inventory management policy "make to order" Producing stock in response to actual demand Responds to actual customer demand to pull the product through the distribution channel

push

inventory management policy "make to stock" Producing stock on the basis of anticipated demand. Proactively allocates inventory on the basis of forecasted demand and product availability

segmentation strategy

inventory management practice definition specifies all aspects of inventory management process for each segment of inventory e.g., service objectives, forecasting method, management technique, and review cycle

product/market classification

inventory management practice groups products, markets, or customers with similar characteristics to facilitate inventory management e.g., classify by sales, profit contribution, inventory value, usage rate or item category

policies and parameters

inventory management practice must be defined at a detailed level e.g., data requirements, software applications, performance objectives, and decision guidelines

customers, manufacturers, service, value,

inventory policy considers: Who are your key ______/stakeholders? _____ (internal/external), Wholesalers, Distributors, Retailers, Consumers Level of _____ required (does it differ by customer) What is important to them? What _____ do they create? What risks do they take? Inventory positioning / ABC classification How do the inventory decisions you make impact service levels to your customers, "total costs" to serve?

demand uncertainty

involves the variation in sales during the lead time necessary to replenish inventory

supply uncertainty

involves variation in the time and/or quantity necessary to replenish inventory also called performance cycle uncertainty

MAD

is a measurement of the size of the average absolute forecast error over a given period of time normally calculated based on the past 12 months actual sales -vs- the lead-time offset forecast for those months

performance cycle

measure of service level the elapsed time between release of a purchase order by the buyer to the receipt of shipment

case fill rate

measure of service level the percent of cases ordered that are shipped as requested

order fill

measure of service level the percent of customer orders filled completely as requested

line fill rate

measure of service level the percent of order lines (items) that were filled completely as requested

periodic review

monitors inventory status of an item at regular intervals such as weekly or monthly

full

obsolete inventory will never be sold at ____ value

safety time

ordering an item earlier than necessary based on the lead time, to ensure timely arrival

preparation, transportation, receipt, material handling

ordering costs involve these 4 costs

likelihood, demand, service

planning safety stock requires 3 steps: Determine the _____ of a stockout using a probability distribution, i.e., forecast accuracy/error Estimate the _____ during a potential stockout period Establish the desired level of stockout protection, i.e., the desired ____ level

transportation

practical consideration of EOQ; constraint The item being ordered and transported may require specialized or dedicated transportation, impacting the quantity per order

limited capital

practical consideration of EOQ; constraint The model may generate an order quantity which the company does not have sufficient available funds to purchase at one time

storage capacity

practical consideration of EOQ; constraint The model may generate an order quantity which the company does not have sufficient storage capacity to handle at one time

obsolescence

practical consideration of EOQ; constraint The model may generate an order quantity which would create spoilage or obsolescence

unitization

practical consideration of EOQ; constraint The supplier may require the company to order an item in full pack, case, or pallet configurations

production lot size

practical consideration of EOQ; constraint The supplier may require the company to order an item in full production lot sizes

individual item purchase price discounts

practical consideration of EOQ; volume economies of scale 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

multiple item purchase price discounts

practical consideration of EOQ; volume economies of scale 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 rate discounts

practical consideration of EOQ; volume economies of scale Ordering a larger quantity may mean that you can take advantage of this which will lower the per unit costs

limited capital, storage capacity, transportation, obsolescence, production lot size, unitization

practical considerations of EOQ; constraints (6)

individual item purchase price discounts, multiple item purchase price discounts, transportation freight rate discounts

practical considerations of EOQ; volume economics of scale (3)

bill of materials

relationship between independent and dependent demand is shown in the ______

under

safety stock is only need for the ____-forecast error!!

obsolete inventory

stock that is expired, damaged, or no longer needed Some companies may donate this inventory to a non-profit organization if it has any remaining value, which not only helps the non-profit but also avoids disposal costs and may result in a tax benefit for the company

anticipation stock, build stock, seasonal stock

strategic stock is also called (3)

carrying cost

the expense associated with maintaining inventory

fill rate

the magnitude of a backorder or stockout. Can be case fill rate, line fill rate, etc

inventory control

the managerial procedure for implementing an inventory policy

strategic stock

the stock to decouple demand from supply additional inventory beyond cycle and safety stock, generally used for a very specific purpose or future event, and for a defined period of time

lead time

the time necessary to fully replenish inventory including all manufacturing, assembly, packaging, quality control, etc., activities must also consider how long it will take to respond once a stockout occurs expressed in months

economic order quantity

this model is generally used as a baseline for further modification before determining the actual quantity to order

MRP

this requirements planning is driven by a production schedule

DRP

this requirements planning is driven by supply chain demand

product/market classification, segmentation strategy, policies and parameters

what are 3 inventory management practices

performance cycle, order fill, case fill rate, line rill rate

what are common measures of service level (4)

purchasing cost, ordering cost, holding cost

what are the 3 components of total cost

quick response, vendor managed inventory, profile replenishment

what are the 3 inventory replenishment programs

strategic stock, safety stock, cycle stock

what are the 3 levels of internal inventory

raw materials, work in process, finished goods, MRO

what are the 4 main categories of inventory

cost of capital, taxes, insurance, obsolescence, storage

what are the 5 inventory carrying cost components

fair share allocation, requirements planning

what are the two inventory deployment planning approaches (to coordinate inventory requirements across multiple locations in the supply chain)

demand and supply

what are the two types of uncertainty we are trying to account for with safety stock?

review period in days

what is used in the periodic review calculation of reorder point that is not used in the perpetual review?

scale, speculative, economical, seasonal

why do you decouple supply from demand? Achieve economies of ____ in purchasing; take advantage of volume price breaks/discounts ______ buying in anticipation of a price increase _____ order size, lot size, production output ______ products/demand

demand, uncertainty, decouple, dependencies

why hold inventory? to meet customer _____ to buffer against _____ in demand/supply to ______ supply from demand to decouple ______ in the supply chain

fluctuations, discount, opportunity, seasonal

why might a company decide to carry strategic stock? hedge currency _____ take advantage of a price ______ protect against a short-term disruptive event in supply take advantage of a business _____ for life cycle changes: _____ demand, new product launch, transition protection

periodic review, perpetual review

2 types of inventory control using reactive approaches

safety time, expected plan error, set safety stocks directly

3 approaches to introduce safety stock into dependent demand situations if necessary: 1. Put ___ ___ into the requirements plan e.g., order a component earlier than needed to assure timely arrival 2. Increase the replenishment order by a quantity specified by some estimate of ____ ____ ____, i.e., over-planning / top-level demand 3. Utilize statistical techniques to ____ ____ ____ ___ for a component rather than to the item of top-level demand

greater

A one-tailed normal distribution is used because only demand that is ____ than the forecast can create a stockout

economic order quantity

A quantitative decision model based on the trade-off between the annual ordering costs and the annual inventory holding costs the sum of the annual ordering costs and the annual inventory holding cost is minimized