chapter 7 logistics

Service Level

A performance target specified by management and defines inventory performance objectives Measures of Service Level Include Performance Cycle: The elapsed time between release of a purchase order by the buyer and to the receipt of shipment Order Fill: The percent of customer orders filled completely as requested Case Fill Rate: The percent of cases ordered that are shipped as requested Line Fill Rates: The percent of order lines that were filled completely as requested

Which of the following inventory types is characterized as "inventory bought to hedge a currency exchange or to take advantage of a discount"? A.Cycle stock B.Safety stock C.Strategic stock D.Pipeline inventory

C

Volume Economies of Scale

Individual item Purchase Price Discounts: Discounts for ordering larger quantities Multiple Item Purchase Price Discounts: If you purchase a combination of items Transportation Freight-Rate Discounts: Lower the per unit cost

Inventory Accuracy

The variance between perpetual inventory and physical inventory

Functions of Inventory

To meet customer demand (Cycle Stock) To buffer against uncertainty in demand and/or in supply(Safety Stock) To decouple supply from demand(Strategic Stock) To decouple dependencies in the supply chain(Strategic stock)

Vendor Managed Inventory (VMI)

VMI arrangements transfer the responsible for managing the inventory located at a customers facility back to the vendor/manufacturer of that inventory

Product/Market Classification

groups products, markets, or customers with similar characteristics to facilitate inventory management

Distribution Requirements Planning (DRP)

A time phased finished goods replenishment plan in a distribution network. The function of determining the need to replenish inventory at branch warehouses

Three Steps to Plan for Safety Stock

Determine the likelihood of a stockout using a probability distribution Estimate the demand during a potential stockout period Establish the desired level of stockout protection

Constraints on the Practical Use of EOQ

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

Inventory Carrying Cost Policy

The carrying cost percent used by a firm is a managerial policy. It is typically around 24%

Inventory Carrying Costs

The expense associated with maintaining inventory Cost Components: 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

Inventory Ordering cost components include the cost of Material Handling

True

The desired level of customer service (for example, case fill rate or order fill rate) can have a direct impact on the amount of safety stock that is carried for a particular product.

True

Calculating Safety Stock

(Maximum daily usage x Maximum replenishment lead time)-(Average daily usage x Average replenishment lead time)

Which of the following terms is commonly used to describe the point where annual ordering costs and annual inventory carrying costs are equal? A.Economic Order Quantity (EOQ) B.Quantity Discounts C.Normal Distribution Curve D.Reorder Point

A

Economic Order Quantity

A quantitative decision model based on the trade off between the annual ordering costs and the annual carrying costs

Safety Stock in Dependent Demand Situations

Add safety time into the requirements plan Increase the replenishment order by a quantity specified by some estimate of expected plan error Utilize the statistical techniques to set safety stock directly for a component rather than to the item of top-level demand

Ordering Costs

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

Which one of the following is NOT a valid reason to hold inventory? A.Decouple dependencies in the supply chain B.Efficient utilization of warehouse space C.Buffering against uncertainty in demand or supply D.Decouple supply from demand

B

Three levels of internal inventory

Cycle strategic and safety

Which Inventory Metric measures how much it costs a company to store inventory over a given period of time? A.Inventory Turnover B.Inventory Days of Supply C.Inventory Accuracy D.Inventory Carrying Cost

D

Policies and Parameters

Defined at the detail level

Companies using a make-to-order manufacturing strategy typically maintain safety stock for independent demand items.

False

Safety Time is defined as discrete increments of time used to facilitate planning activities.

False

While demand uncertainty can be mitigated by maintaining safety stock, supply uncertainty can only be mitigated by maintaining flexibility and responsiveness.

False

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

Four Main Categories of Inventory

Raw Materials Work in Process Finished Goods Maintenance repair and operating supplies Individual items can be current or obsolete

Collaborative Inventory Replenishment Programs

Replenishment Programs are designed to streamline the flow of goods within the supply chain Quick Response: A technology-Driven cooperative effort between retailers and suppliers to improve inventory velocity while matching supply to consumer buying patterns Vendor Management Inventory (VMI): A Modified QR that eliminates the need for replenishment orders Profile Replenishment (PR): Extends QR and VMI by giving suppliers the right to anticipate future requirements according to their knowledge of a product category (JIT 2)

Calculating Safety Stock 2

k x sqroot(lead time x dc) x (1.25 x MAD)

Calculating EOQ

sqrroot 2*Order Cost*actual demand volume/Annual carrying cost%*Unit cost

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.

Inventory Carrying Costs metrics

Measures how much it costs a company to store inventory over a given period of time Inventory carrying rate x average inventory value

Periodic Review

Monitor inventory status of an item at regular intervals such as weekly or monthly ROP=D*(T+P/2)+SS D=Average daily demand T=Average lead time days P=Review Period in days ss=Safety stock

Fill Rate

The percentage of customers order that are is filled on the first shipment. This can be represented as the percentage of items, sku's or order value that is included with the first shipment. (1-total ((total items-shipped items)/total items))x100

Perfect Order Measurement

The percentage of orders that are error-free. A perfect order is delivered complete, on time, at the right location, in perfect condition, with complete and accurate documentation (Total orders-error orders)/ Total Orders x 100

Dependent Demand

the internal demand for parts based on the demand of the final product in which the parts are used Calculated demand Generally no need for safety Stock Ex Automobile engine

Fair Share Allocation

DS=AQ + Sum inventory for each warehouse/ sum of daily demand for each warehouse DS=Common days supply for warehouse inventories AQ=Inventory units to be allocated from plant warehouse

Safety Stock to Plan for Uncertainty

Demand Uncertainty: When and how much product will our customers order Supply Uncertainty: How long will it take to replenish inventory with our customers

Dependent Demand Items

Dependent demand inventory requirements are a function of known events that are not random Dependent demand does not require forecasting because there is no uncertainty

Benefits of Segmentation Strategy

End of life management Supplier negotiation Inventory Optimization Strategic Pricing Resource Allocation Customer Service Levels

Inventory Deployment Planning Approaches

Fair Share Allocation: Determines a fair share % of the available supply which is then allocated to each competing demand Requirements Planning: Integrates across the supply chain taking into consideration unique requirements using MRP DRP

"Days of Supply" is the term used to describe the level of inventory which triggers an action to replenish the inventory for an item. It is typically calculated as the demand during the replenishment lead time plus safety stock

False

Obsolete Inventory

Inventory items that have met the obsolescence criteria established by the organization. For example, inventory that has been superseded by a new model or otherwise made obsolescent. Obsolete inventory will never be used or sold at full value. Disposing of the inventory may reduce a company's profit.

Cycle Stock

Inventory that a company builds to satisfy its' immediate demand.

Safety 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

Perpetual Review

Monitor inventory status of an item continuously ROP=(D*T)+SS D=Average daily demand T=Average lead times in days

External Inventory

Pipeline inventory Inventory in transit inventory held by distributors wholesalers and suppliers

Segmentation Strategies

Specifies all aspects of inventory management for each segment of inventory

Inventory

The decision is how much inventory to keep on hand One of the largest assets 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

Independent Demand

The demand for the final product Demand pattern affected by trends, seasonal patterns, and market conditions Forecasted demand potential need for safety stock Ex Automobile

Practical Use of EOQ

The experienced supply chain practitioner will check each application of EOQ to be sure that it is valid for the practical situation at hand EOQ is generally used as a baseline

Assumptions of the EOQ Model

The model must be calculated for one product at a time. The demand must be known and constant throughout the year. The delivery replenishment lead time is known and does not fluctuate. Replenishment is instantaneous. 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 discounts or price breaks are factored into the model. Carrying cost is known and constant. Order cost is known and constant. Stockouts are not allowed

Days of supply (DOS)

The most common KPI used by managers in measuring the efficiency in supply chain Average inventory/monthly demand x 30

Inventory Days of Supply

The number of days it would take to run out of supply if it was not replenished Inventory on hand/average daily usage

Inventory Turnover

The number of times that a company's inventory cycles per year Cost of goods sold/Average Inventory Every unit/dollar of inventory that a company can reduce drop rights to the bottom line as pure savings

Maintenance Repair and operating supplies (MRO)

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

ABC Classification

This allows different inventory management techniques to be applied to different segments of the inventory in order to increase revenue and decrease costs A items are given highest priority 80/20 rule B and C items account for the other 80 percent