APICS CPIM Part 1, Module 5 (All)

safety lead time

An element of time added to normal lead time to protect against fluctuations in lead time so that an order can be completed before its real need date. When used, the MRP system, in offsetting for lead time, will plan both order release and order completion for earlier dates than it would otherwise.

wall-to-wall inventory

An inventory management technique in which material enters a plant and is processed through the plant into finished goods without ever having entered a formal stock area.

Fixed Overhead

Traditionally, all manufacturing costs—other than direct labor and direct materials—that continue even if products are not produced. Although fixed overhead is necessary to produce the product, it cannot be directly traced to the final product.

days of supply

Inventory-on-hand metric converted from units to how long the units will last. For example, if there are 2,000 units on hand and the company is using 200 per day, then there are 10 days of supply.

Inputs to classifying ABC parts

Value Importance to the company Bottleneck materials Shelf Life Replenishment lead time inventory turnover

Average Cost (Weighted Average Cost)

average of all costs paid for or internally invested in inventory for COGS and balance sheet inventory valuation. It is basically an average of the oldest and newest costs

general and administrative expenses [G&A]

the category of expenses on an income statement that includes the costs of general managers, computer systems, research and development, etc.")

decoupling inventory

An amount of inventory maintained between entities in a manufacturing or distribution network to create independence between processes or entities. Disconnects rate of use with supply to allow some independence.

stockkeeping unit (SKU)

1) An inventory item. For example, a shirt in six colors and five sizes represents 30 different SKUs. 2) In a distribution system, an item at a particular geographic location. For example, one product stocked at the plant and at six different distribution centers would represent seven SKUs.

Job Costing

A cost accounting system in which costs are assigned to specific jobs.

hedge inventory

A form of inventory buildup to buffer against some event that may not happen. Hedge inventory planning involves speculation related to potential labor strikes, price increases, unsettled governments, and events that could severely impair a company's strategic initiatives. Risk and consequences are unusually high, and top management approval is often required.

on-time schedule performance

A measure (percentage) of meeting the customer's originally negotiated delivery request date.

level of service

A measure (usually expressed as a percentage) of satisfying demand through inventory or by the current production schedule in time to satisfy the customers' requested delivery dates and quantities

stockout percentage

A measure of the effectiveness with which a company responds to actual demand or requirements.

Cost of goods sold (COGS)

An accounting classification useful for determining the amount of direct materials, direct labor, and allocated overhead associated with the products sold during a given period of time.

liabilities

An accounting/financial term (balance sheet classification of accounts) representing debts or obligations owed by a company to creditors.

Owner's Equity Calculation

Assets - Liabilities

Parts of the balance sheet

Assets = Liabilities - Owners Equity

Cost of anticipation invetory

Avg anticipation inventory amount per time period x carrying cost

Inventory Turnover Calculation

COGS/Avg inventory (In Dollars)

The primary disadvantage of a pull system

Can cause bullwhip effect if the communication is not good.

Components of Carrying Cost

Captial Cost - Oppty cost of carrying Storage Cost - warehouse, handling, labor, utilities Risk Cost - perishable, obsolescence, loss, damage

opportunity cost

Cash tied up in one investment that if turned, could allow investment in another. The faster this investment is returned, the faster the cash can be invested in new inventory or other opportunities.

product cost

Cost allocated by some method to the products being produced. Initially recorded in asset (inventory) accounts, become an expense (cost of sales) when the product is sold.

fill rate

Customer service ratio, % of time units were shipped on time

The primary advantage of a pull system

DCs have autonomy and can order or not order based on their knowledge of local demand.

Factors in holding safety stock

Demand variability during lead time Targeted customer service level Order Frequency Duration of Lead Time

Variance

Difference between expected and actual costs

Methods to address variation in lead times

Firm plan an order (to ignore the stated lead time) Increase SS inventory (not good for temp LT changes, could create bullwhip)

Average Ordering Cost

Fixed Cost/Number of Orders + Variable Cost

Items in category A

Highest level of control Low Safety Stock More frequent ordering frequent counting for inventory higher physical security Frequent review of forecast error Close attention to order status & monitoring

Inventory ordering system

Inventory models for the replenishment of inventory. Independent demand inventory ordering models include fixed reorder cycle, fixed reorder quantity, optional replenishment, and hybrid models, among others. Dependent demand inventory ordering models include material requirements planning, kanban, and drum-buffer-rope.

Days of Supply Calculation

Inventory on Hand/Average Daily Usage

value added

In accounting, the addition of direct labor, direct material, and allocated overhead assigned at an operation. It is the cost roll-up as a part goes through a manufacturing process to finished inventory. Customer is willing to pay for this.

Safety stock

In general, a quantity of stock planned to be in inventory to protect against fluctuations in demand or supply.

Income statement calculation

Income = Revenue - Expenses

Pipeline Stock

Inventory in the transportation network and the distribution system, including the flow through intermediate stocking points.

Transportation inventory

Inventory in transit between locations

Transit locations

Inventory in transit between manufacturing and stocking locations

Fluctuation Inventory

Inventory that is carried as a cushion to protect against forecast error.

Lot-size inventory

Inventory that results whenever quantity price discounts, shipping costs, setup costs, or similar considerations make it more economical to purchase or produce in larger lots than are needed for immediate purposes.

Inventory Buffer

Inventory used to protect the throughput of an operation or the schedule against the negative effects caused by delays in delivery, quality problems, delivery of an incorrect quantity, and so on.

Distribution Inventory

Inventory, usually spare parts and finished goods, located in the distribution system (e.g., in warehouses or in transit between warehouses and the consumer).

Maintenance, repair, and operating (MRO) supplies

Items used in support of general operations and maintenance such as maintenance supplies, spare parts, and consumables used in the manufacturing process and supporting operations.

Direct labor

Labor that is specifically applied to the good being manufactured or used in the performance of the service.

Items in category C

Least complex controls Minimal time spent on inventory accuracy Low carrying cost so higher days of supply High levels of safety stock order only a few times per year in large quantities

time-phased order point (TPOP)

MRP-like time planning logic technique for independent demand items, where gross requirements come from a forecast, not via explosion. Allows for lumpy withdrawals.

In-Transit Inventory

Material moving between two or more locations, usually separated geographically; for example, finished goods being shipped from a plant to a distribution center.

Direct Material

Material that becomes a part of the final product in measurable quantities.

Items in category B

Normal levels of control for all inventory items

Formula for safety stock if LT changes

Old Safety Stock in Units x Square root of New Lead Time/Old Lead Time If LT reduced = SS reduced If LT increased = SS increased

Cycle Stock

One part of the concept of inventory. Depletes gradually as customer orders are received and is replenished cyclically when supplier orders are received.

average inventory

One-half the average lot size plus the safety stock, when demand and lot sizes are expected to be relatively uniform over time.

Customer Service Level Calculation

Orders per period - allowed stockouts/Orders per period

decentralized inventory control

PULL & INDEPENDENT - inventory decision making exercised at each stocking location for SKUs [stockkeeping units] at that location.

centralized inventory control

PUSH - inventory decision making for all stockkeeping units exercised from one office or department for an entire company. Can be easily controlled. Communication has to be good to know what promos/seasonality could affect inventory levels.

Production control costs

The cost of issuing, closing, scheduling, loading, dispatching, moving, and expediting open orders. These costs are made up of the costs for labor, supplies, and operating expenses for the operations.

Factory Ordering Costs

Production Control Costs Setup Costs Lost Capacity Costs

Raw material

Purchased items or extracted materials that are converted via the manufacturing process into components and products.

Reasons to Hold Inventory

Safety stock Decoupling Buffers Anticipation inventory Lot-size inventory Transportation inventory Hedge inventory

stockout costs

The costs associated with a stockout. Those costs may include lost sales, backorder costs, expediting, and additional manufacturing and purchasing costs.

Types of operating expenses

Selling expenses such as salespersons' commissions or advertising General and administrative expenses such as executive and clerical wages and benefits Insurance Lease expenses such as for office space or vehicles.

Safety Stock Calculation

Standard Deviation (Service Level) x MAD in units

ABC classification

The classification of a group of items in decreasing order of annual dollar volume (price multiplied by projected volume) or other criteria.

carrying cost

The cost of holding inventory, usually defined as a percentage of the dollar value of inventory per unit of time (generally one year).

Overhead

The costs incurred in the operation of a business that cannot be directly related to the individual goods or services produced. These costs, such as light, heat, supervision, and maintenance, are grouped in several pools (e.g., department overhead, factory overhead, general overhead) and distributed to units of goods or services by some standard allocation method such as direct labor hours, direct labor dollars, or direct materials dollars.

ordering costs

The costs that increase as the number of orders placed increases. Used in calculating order quantities. Includes costs related to the clerical work of preparing, releasing, monitoring, and receiving orders; the physical handling of goods; inspections; and setup costs, as applicable.

profit margin

The difference between the sales and cost of goods sold for an organization, sometimes expressed as a percentage of sales.

Gross Margin

The difference between total revenue and the cost of goods sold.

distribution requirements planning (DRP)

The function of determining the need to replenish inventory at branch warehouses. A time-phased order point approach is used where the planned orders at the branch warehouse level are "exploded" via MRP logic to become gross requirements of the supplying source. Can be an input to MPS.

Order point system

The inventory method that places an order for a lot whenever the quantity on hand is reduced to a predetermined level known as the order point.

cash flow

The net flow of dollars into or out of the proposed project. The algebraic sum, in any time period, of all cash receipts, expenses, and investments. Cash pays wages, interest and principal on debt, and accounts payable.

inventory turnover

The number of times that an inventory cycles, or "turns over," during the year.

Standard costs

The target costs of an operation, process, or product including direct material, direct labor, and overhead charges.

Finished goods inventory

Those items on which all manufacturing operations, including final test, have been completed. These products are available for shipment to the customer as either end items or repair parts.

inventory

Those stocks or items used to support production (raw materials and work-in-process items), supporting activities (maintenance, repair, and operating supplies), and customer service (finished goods and spare parts). Demand for inventory may be dependent or independent. Inventory functions are anticipation, hedge, cycle (lot size), fluctuation (safety, buffer, or reserve), transportation (pipeline), and service parts.

Lost capacity cost

Whenever another order is placed, the setup time reduces the available run time for the work center. Opportunity cost related to capacity

inventory management

the branch of business management concerned with planning and controlling inventories

income statement

a financial statement showing the net income for a business over a given period of time.

Balance Sheet

a financial statement showing the resources owned, the debts owed, and the owner's share of a company at a given point in time.

Safety Stock

a quantity of stock planned to be in inventory to protect against fluctuations in demand or supply

Pareto's law

a small percentage of a group accounts for the largest fraction of its impact or value.

velocity

a term used to indicate the relative speed of all transactions, collectively, within a supply chain community. A maximum velocity is most desirable because it indicates higher asset turnover for stockholders and faster order-to-delivery response for customers. Measures inventory turns and days of supply.

generally accepted accounting principles (GAAP)

accounting practices that conform to conventions, rules, and procedures that are generally accepted by the accounting profession.

anticipation inventories

additional inventory above basic pipeline stock to cover projected trends of increasing sales, planned sales promotion programs, seasonal fluctuations, plant shutdowns, and vacations.

owners' equity

an accounting/financial term (balance sheet classification of accounts) representing the residual claim by the company's owners or shareholders, or both, to the company's assets less its liabilities.

capacity-related costs

costs generally related to increasing (or decreasing) capacity in the medium- to long-range time horizon. Is the result of a sustained shift in demand.

Setup costs

from the last good part of the prior operation to the first good part of the next operation, so it includes teardown costs. This cost is incurred per order.

Work in Process (WIP)

good or goods in various stages of completion throughout the plant, including all material from raw material that has been released for initial processing up to completely processed material awaiting final inspection and acceptance as finished goods inventory.

Purchasing Ordering Costs

include the cost of the purchasing cycle for managing and expediting purchase orders. This will include the cost of each purchase order that is issued or, if contract buying is used, the cost of releasing orders against a contract, although the latter is much lower in cost per order.

seasonal inventory

inventory built up to smooth production in anticipation of a peak seasonal demand.

Aggregate inventory

long term inventory planning, grouped at category level

Manufacturing efficiency

managing the flow of materials into, through, and out of the production process. Includes strategies like decoupling, leveling production regardless of demand, long runs with few changeovers

order point system

orders will be for fixed amounts (possibly the economic order quantity), but the timing of when the order point occurs will vary. LUMPY DEMAND for stable items because of large fixed orders. The less order points, the lumpier the demand.

Item costs

purchase price plus other direct costs required to get the units to where they need to be, for example, the plant. Includes transportation, customs, insurance.

FIFO

the first unit put into inventory is the first unit removed from the ERP system's inventory records when a sale occurs. Oldest sold first. If prices go up, COGS will not be accurate (using a old price for COGS)

LIFO

the last unit put into inventory is the first removed from the ERP inventory records when there is a sale, and the newest items are sold first. If prices change, COGS will be relatively current. Will under or overvalue inventory if prices change.

Service Part

those modules, components, and elements that are planned to be used without modification to replace an original part

unit cost

total labor, material, and overhead cost for one unit of production (e.g., one part, one gallon, one pound).

Standard Cost Accounting

used for internal valuation purposes.