Supply Chain: Chapter 4: Inventory Management

External Inventory:

(Pipeline Inventory) - Inventory in transit - Inventory held by suppliers or wholesalers

RFID

(Radio Frequency Identification) Automates the supply chain Succeeds the barcode for tracking individual items

The EOQ Model:

(The Economic Order Quantity Model) A quantitative decision model based on the trade-off between annual inventory carrying costs and annual order costs Seeks to determine the optimal order quantity

Measuring Inventory Performance:

Units: number of units available Dollars: amount of dollars tied up in inventory Weeks of Supply: average on hand inventory/average weekly usage Inventory Turns: costs of goods sold/ average inventory

Inventory Stock Levels (3)

(Internal Inventory) 1. Strategic Stock 2. Safety Stock 3. Cycle Stock All used to help: - Meet customer demand - Buffer against uncertainty in demand and supply - Decouple supply from demand

Categories of Inventory (4):

1. Raw materials 2. Work-in-Process (WIP) 3. Finished Goods 4. Maintenance, repair and operating (MRO) supplies

Total Cost:

= Purchase cost + Order Costs + Carrying Costs

Inventory Investment:

Absolute Inventory Value: value of inventory at either its cost or market value Inventory Turnover: # of times inventory cycles Inventory Turnover Ratio: (costs of goods sold) / (Average Inventory @ cost)

Order Costs:

Costs that are incurred each time and order is placed Ex: preparation, transportation, handeling costs

Carrying Costs:

Costs that are incurred for holding inventory Ex: cost of capital, taxes, insurance, storage

Safety Stock Policy:

- Provides maximum flexibility by centrally locating safety stock - Long term stability in bulk storage - Maintained closest to end consumer

Costs Related to Inventory (6)

1. Direct Costs: directly traceable to unit produced - Ex: Materials 2. Indirect Costs: cannot be directly traced back to unit produced - Ex: equipment 3. Fixed Costs: independent of the unit volume produced - Ex: rent 4. Variable Costs: dependent of the unit volume produced and varies w/ output level - Ex: labor 5. Order Costs: labor costs associated with placing and order for inventory 6. Carrying Costs: costs for physically having inventory on site

ABC System:

Classifies inventory based on the degree of importance Method used to determine which inventories should be counted and managed more closely A Items: highest priority B Items: medium priority, require closer management C Items: lowest priority

Hidden Costs of Inventory:

Having too MUCH inventory: - Resources tied up in inventory - No incentive for process improvements Having too LITTLE inventory: - Lost revenue - Production disruptions - Reduced responsiveness

Introduction:

Key is any product based supply chain is how much inventory to keep on hand Maintaining adequate finish product inventory allows a company to support manufacturing operations and the production plan while avoiding delays

Inventory in the Service Industry:

Service Inventory: activities carried out in advance of the customers arrival Companies can maintain inventory of facilitating goods (items used to help facilitate the service being provided Example: restaurants prepping food