Chapter 7 Logistics
service level is equal to
100% minus the probability % of stockout
80/20 rule
A items account for approximately 20% of the total number of items, but 80% of the total inventory cost. B and C items account for the other 80% of inventory, but only the remaining 20% of cost.
inventory optimization
ABC analysis allows inventory planners to organize high priority items aligned to customer requirement. inventory levels can be set to satisfy to high demand items while also carrying low stock for undesirable items
customer service levels
ABC analysis allows planners to set customer service levels based on the product classification, which improves the overall supply chain performance by carrying less safety stock.
strategic pricing
ABC analysis helps in setting the prices strategically for products which bring more value to the company
resource allocation
a continuous process requiring periodic tracking of class A items. if class A item is no longer desired, the item can be moved to a lower classification
service level
a performance target specified by management and defines inventory performance objectives
what are the 3 approaches to introduce to safety stock into dependent demand situations if necessary
add safety time, increase the replenishment order, and utilize statistical techniques
how are inventory carrying cost components expressed?
as a percentage of inventory value
how do companies know how much safety stock to have?
by a management decision or a formula
ABC classification segmentation strategy
classifies inventory based on the degree of importance. first, you determine annual usage or sales for each item, determine the % of the total that each item represents, and then rank items from highest to lowest %.
6 benefits of a segmentation strategy such as ABC
end of life management, supplier negotiation, inventory optimization, strategic pricing, resource allocation, and customer service levels
two planning approaches to coordinate inventory requirements across multiple locations in the supply chain:
fair share allocation and requirements planning
"A" items in the ABC classification strategy
given the highest priority. the 80/20 rule applies
product/market classification
groups products, markets, or customers with similar characteristics together to facilitate inventory management ex: classify by sales, profit, usage
C items
have the lowest value and hence the lowest priority.
review frequency
how often inventory levels are reviewed
why is pipeline inventory important in knowing how much safety/strategic stock to hold?
if there is not a lot of pipeline inventory, this can be an issue and drive customers to competitors. it is very important in determining how much inventory to keep.
requirements planning
integrates across the supply chain taking into consideration unique requirements, MRP and DRP
dependent demand
internal demand for parts and materials based on the demand for the final product. this is calculated with no need for safety stock.
strategic stock
inventory in addition to cycle and safety stock, generally used for a very specific purpose and for a defined period of time. there are only CERTAIN times that you will need to have this.
cycle stock
inventory that a company has to satisfy its immediate demand. it continuously goes up and down as orders come in and go. it is dependent on demand and how you replenish your supplies with outside suppliers
how do you calculate EOQ on a graph?
it is the intersection of the annual ordering costs and the annual inventory carrying costs. this yields the lowest annual total cost.
who are your 5 key customers?
manufacturers (internal and external), wholesalers, distributors, retailers, and consumers
maintenance, repair, and operating supplies
materials that you need to run the manufacturing operation and the business, but do not end up as part of the finished product
obsolescence constraint on the use of EOQ
model may generate an order quantity which would create spoilage
periodic review
monitor inventory status of an item at regular intervals such as weekly or monthly
what is total cost equal to
purchase cost + ordering cost + holding cost
4 main categories of inventory
raw materials, work in process, finished goods, and MRO supplies
B items
require closer management since they are more expensive per unit and require more effort to purchase and make.
inventory to buffer against uncertainty in demand and/or supply
safety stock, this is to make up for uncertainty in demand or supply forecasts
segmentation strategy
specifies all aspects of inventory management for each segment of inventory. forecasting method, management technique, etc. for the product classifications
obsolete inventory
stock that is expired, out of date, or no longer needed
inventory to decouple dependencies in the supply chain
strategic stock, this is for separating operations in a process and to make smooth production during peak needs
policies and paramters
these are defined at the detail level for the segmentation strategies and segmentation groups, such as software, guidelines, and objectives
4 reasons to hold inventory
to meet customer demand, to buffer against uncertainty in demand and/or supply to decouple supply from demand, and to decouple dependencies in the supply chain
vendor managed inventory
transfers the responsibility for managing the inventory located at a customer's facility back to the vendor/manufacturer of that inventory
why may deciding whether or not to get rid of obsolete inventory be a difficult decision?
unusable inventory takes up space and costs money, but there may also be a cost associated with the actual disposal of the inventory.
end of life management
with the ABC analysis, inventory planners can forecast the declining demand and manage the stock levels accordingly; reducing inventory levels to minimize carrying costs and avoid obsolescence
what is the typical carrying cost percent used by a firm?
24%
safety stock
"buffer stock". it is inventory that is above and beyond what is ACTUALLY needed to meet anticipated demand. `
economic order quantity
a quantitative decision model based on the trade-off between the annual ordering costs and the annual carrying costs
convolution formula
combining standard deviations (demand and supply uncertainty) to consider variations in making effective inventory planning decisions
5 components of inventory carrying cost
cost of capital, taxes, insurance, obsolescence, and storage
individual items in an inventory category can be either
current or obsolete
inventory to meet customer demand
cycle stock, this is to immediately fill customer orders and move the product/material closer to the customers and where it will be used
reorder point
defines when a replenishment order is inititated
3 steps for planning safety stock:
determine the likelihood of a stockout using a forecast, estimate the demand during a potential stockout period, and establish the desired level of stockout protection, ex: the desired service level
fair share allocation
determines a fair share % of the available supply which is then allocated to each competing demand
why may a company want to have strategic stock?
hedge currency fluctuations, take advantage of a price discount, protect against a short term disruption in supply, take advantage of business opportunity, and for life cycle changes such as seasons
pipeline inventory
inventory that has already been sold and that is in transit. there has been a transfer of ownership. this is not recorded, because you do not own it anymore
where does MRO supplies go?
it is immediately expensed, because it is not physically going into the inventory, only the production of it
perpetual (continuous) review
monitor inventory status of an item continuously
why is a one-tailed normal distribution used for calculating safety stock?
only demand that is greater than the forecast can create a stockout
4 aspects of ordering costs
order preparation costs, order transportation costs, order receipt processing costs, and material handling costs
safety time
ordering an item earlier than necessary based on the lead time, to ensure timely arrival
inventory to decouple supply from demand
strategic stock, this means to separate the amount of supply needed for the demand. each reason why supply might be different than demand has a strategy behind it
unitization constraint on the use of EOQ
supplier may require the company to order an item in full pack, case, or pallet configurations
production lot size constraint on the use of EOQ
supplier may require the company to order an item in full production lot sizes
supplier negotiation
the company can prioritize and focus on negotiating with suppliers of the class A category items since they represent most of the money spent.
independent demand
the demand for the final product. demand pattern affected by trends, seasons, and market conditions. this is the forecasted demand with a potential need for safety stock
performance cycle
the elapsed time between release of a purchase order by the buyer to the receipt of shipment
transportation constraint on the use of EOQ
the item being ordered and transported may require specialized or dedicated transportation, impacting the quantity per order
limited capital constraint on the use of EOQ
the model may generate an order quantity which the company does not have sufficient funds to purchase at one time
storage capacity constraint on the use of EOQ
the model may generate an order quantity which the company does not have sufficient storage capacity to handle at one time
order fill rate
the percent of cases ordered that are shipped as requested
order fill
the percent of customer orders filled completely as requested
line fill rate
the percent of order lines (items) that were filled completely as requested
perfect order measurement
the percentage of orders that are error-free