Supply Chain Chapter 7: Managing Inventories
bullship effect
A small disturbance generated by a customer produces successively larger disturbances at each upstream stage in the supply chain
Inventory
A supply of items held by a firm to meet demand
Demand during lead time
The amount of demand that occurs while awaiting receipt of an inventory replenishment order
Product Cost
The amount paid to suppliers for products that are purchased
Pareto's Law
The rule that a small percentage of items account for a large percentage of sales, profit or importance to a company
Total Acquisition Cost (TAC)
The sum of all relevant inventory costs incurred each year
Square root rule
a method of estimating the impact of changing the number of locations on the quantity of inventory needed
EOQ assumptions
-No quantity discounts -No lot size restrictions -No partial deliveries -No variability -No product Interactions
Companies with high Inventory turnover rates benefit:
-increased sales volume due to having rapid flow of new or fresh items -Less risk of obsolescence or need to mark down or discount prices -Decreased expenses related to holding inventory -Lower asset investment and increased asset productivity
Dangers of inventory rate that is TOO high
-possible lowered sales volume due to running out of needed items -increased COGS due to inability to produce or purchase in quantity -Increased purchasing, ordering, and receiving time, effort and cost
Determine the Order Quantity when Quantity Discounts Available
1. Identify the price breaks offered by the supplier 2. Calculate the EOQ at each price break, starting with the lowest price possible 3. Evaluate feasibility of eachEOQ
The roles of inventory
1. balancing supply and demand -producing or shipping inventories in batches enables firms to take advantage of economies of scale -allows for seasonal use 2. buffering uncertainty demand or supply -managers rarely know with absolute certainty the demand 3. Enabling economies of buying -Supply locations and demand locations rarely the same 4. enabling geographic specialization
Order Interval
A fixed time period that passes between inventory reviews
Service Level
A measure of how well the objective of meeting customer demand is met
Collaborative Forecasting and replenishment
A method by which supply chain partners periodically share forecasts, demand plans, and resource plans in order to reduce uncertainty and risk in meeting customer demand
Uncertainty Period
A period of time when an unknown amount of inventory is on hand
Cycle Counting
A process where each item is physically counted on a routine schedule
Seasonal Stock
Additional inventories produced in advance of seasonal peak demands
Setup Cost
Administrative expenses and the expenses of rearranging a work center to produce an item -similar to order cost but inventory is produced internally
Stockout
An event that occurs when no inventory is available and there is demand for that item. when companies experience stockout of raw materials considerable potential cost implications because everything must be halted
Saw-Tooth Diagram
An illustration of the pattern of ordering and inventory levels
Stockout (or shortage) Cost
Cost incurred when inventory is not available to meet demand A company may never know the amount of stockout cost because it may never know actual amount of demand -One potential stockout costs is the cost of a loss sale
Buffer (or safety) Stock
Extra inventory held to guard against uncertainty in demand or supply
Continuous Review Model
Inventory is constantly monitored to decide when a replenishment order needs to be placed 1. How much should be ordered when an order is placed? 2. When should an order be placed?
Independent Demand Inventory Systems
Inventory management systems used when the demand for an item is beyond the control of the organization case for customer demands of ends-items and repair parts
two-bin system
Inventory of an item is stored in two different locations
Work in process Inventory
Inventory that is in the production process
Transit Inventory
Items being transported from one location to another
Raw materials and component parts
Items that are bought from suppliers to use in the production of a product
Finished Goods Inventory
Items that are ready to sell to customers
MRO Inventory
Maintenance, repair, and operating supplies
Periodic Review Model
Management system built around checking and ordering inventory at some regular interval
Dependent Demand Inventory Demand System
Management systems used when the demand for an item is derived from the demand for some other item Example: John Deere. production schedule based on forecast
Carrying(or holding) Cost
Several expenses that are incurred due to the fact that inventory is held Encompass the following expenses: -Opportunity cost, including the cost of capital -Cost of owning and maintaining storage space -Taxes -Insurance -Costs of obsolescence, loss and disposal -Costs of materials handing, tracking and management
Service Level policy
Specification of the amount of risk incurring a stockout that a firm is willing to incur
Order Cost
The expenses incurred in placing and receiving orders from suppliers order transmittal, order receiving, and accounts payable processing
Reorder Point (ROP)
The minimum level of inventory that triggers the need to order more
Production Order Quantity
The most economic quantity to order when units become available at the rate at which they are produced
Days of Supply
The number of days of business operations that can be supported with the inventory on hand = current inventory / expected rate of daily demand
Economic Order Quantity EOQ
The order quantity that minimizes the sum of annual inventory carrying costs and annual ordering costs
Cycle Stock
The portion of average inventory determined as order Q divided by 2
Cycle Stock
The portion of average inventory determined as order quantity divided by 2
ABC Analysis
The ranking of all items of inventory according to importance
Inventory Turnover
The ratio between average inventory and the level of sales = COGS/ average inventory @ cost -most common = Net sales / avg inventory at selling price -used mostly in retail = Unit sales / avg inventory in units -more accurate in situations where both the cost of an item and its selling price vary significantly during a year example: gasoline
Vendor Managed Inventory
The vendor is responsible for managing the inventory located at a customer's facility
Single period inventory model
model used to determine the order size for a one-time purchase
Total system inventory
the sum of the inventory held across across all of the locations in a company
Ultimate objective Inventory Management System (2 types)
to minimize all inventory costs while meeting the organization's targeted service (product availability)