Intro to Supply Chain -- Ch.4 Inventory Management

The Economic Order Quantity (EOQ) Model

A quantitative decision model based on the trade-off between annual inventory carrying costs and annual order costs. EOQ is a fixed-order quantity model The EOQ model seeks to determine an optimal order quantity

Safety Stock

Safety stock, aka "buffer stock," is 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. Safety stock can be maintained at every point in the supply chain and is impacted by the ability of supply chain partners to communicate effectively.

Strategic Stock - To Decouple Supply from Demand:

Supply pattern is different from demand pattern: Achieve economies of scale in production or procurement Take advantage of volume price breaks and discounts Speculative buying in anticipation of a price increase Seasonal product demand requirements

Cycle Stock

The main Finished Goods Inventory that a company maintains to sell. Cycle stock depletes as customer orders are filled and is replenished when product is produced or supply orders are received. The amount of cycle stock that a company holds is dependent on forecasted demand, supply replenishment lead time and financial constraints.

Inventory Turnover -

The number of times that an inventory "turns over," during the year. The more turns, the better !!

Absolute Inventory Value -

The value of the inventory at its cost. Generally found on the balance sheet.

Variable Costs -

dependent on the unit volume produced vary with output level (e.g., materials, labor, etc.)

Order / Setup Costs

direct costs associated with placing an order for inventory or setting up production machines.

A barcode reader

(or barcode scanner) is an electronic device that can read barcodes and transmit the data to a computer. These might be handheld cordless devices, corded devices that attach directly to a PC's USB port, or computers with integrated laser scanners

ABC stands for

A items are the most important in sales volume and are the highest priority. B items are of medium importance, often being relatively more expensive (per unit). C items have the lowest priority

Strategic Stock

Additional inventory beyond cycle and safety stock, generally used for a very specific purpose or future event maintained for a defined period of time. A company may carry strategic stock to: take advantage of a price discount take advantage production economies balance production and demand volume mismatch support key customers or strategic projects

Fixed-Order Quantity System:

An order for a pre-defined quantity for that item is used from order to order. When the inventory position drops to a predetermined reorder point, a predetermined fixed order quantity is placed The time between orders (i.e., order period) varies from order to order.

The primary functions of inventory are to:

Buffer uncertainty in the marketplace & Decouple dependencies in the supply chain (safety stock)

Raw Materials

Crude or processed material that can be converted by a manufacturing process into a new and useful product

Pipeline Inventory

Inventory in the sales channel (transportation network and 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 still influences decisions on production and internal inventory balances. Requires information sharing between channel partners

Fixed-Time Period System:

Inventory is checked in fixed time periods against a target inventory level. If the inventory is less than target, a quantity necessary to bring inventory back up to the target level is ordered. The amount of inventory ordered will potentially vary from period to period based on the remaining inventory at each time interval checked.

Obsolete Inventory

Inventory items that is expired, damaged, or no longer able to be sold at full value.

Continuous Review System

Inventory levels are continuously reviewed. After each movement, the remaining physical inventory balance is verified vs. book inventory.

Maintenance, Repair and Operating (MRO)

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.

Work-in-Process (WIP)

Material in various stages of completion, spanning from raw material that has been released for initial processing through fully processed material awaiting final inspection and acceptance as finished goods.

Total Cost =

Purchase Cost + Order Cost + Carrying Cost

Finished Goods

Those items on which all manufacturing operations, including final testing, have been completed. These products are available for sale and/or shipment to the customer.

Cycle Stock -

To Meet Customer Demand: Immediately fill customer orders Deploy the product / material near where it will be used

Safety Stock - To Buffer Against Uncertainty and Decouple Dependencies in the Supply Chain

Uncertainty in demand: sales or usage above expectations Uncertainty in supply: shortages, delays, disruptions Separating operational dependencies

Single-Period" Inventory Model

a type of inventory system in which inventory is only ordered for a one-time stocking.

Base Stock Level System

a type of inventory system that issues an order whenever a withdrawal is made from inventory.

Linear (1D) Bar Codes

are "a series of alternating bars and spaces printed or stamped on parts, containers, labels, or other media, representing encoded information that can be read by electronic readers.

2D Bar Codes

are a graphical image that stores information both horizontally and vertically. 2D Barcodes can store over 7,000 characters, allowing transmission of almost two paragraphs of information.

Order Costs

are costs that are incurred each time an order is placed.

Carrying Costs

are costs that are incurred for holding inventory in storage.

Indirect Costs -

cannot be traced directly to the unit produced (e.g., overhead; etc.)

An ABC system

classifies inventory based on the degree of importance to the company: Determines which inventories should be counted & managed more closely than others Groups inventory as A, B, & C Items

Holding / Carrying Costs -

costs for physically holding inventory, maintaining the infrastructure needed to store the inventory, secure and insure it over time.

Direct Costs -

directly traceable to unit produced (e.g., materials, labor, etc.)

Failing to manage inventory adequately can lead to significant issues and inefficiencies throughout the supply chain

including dissatisfied customers, lost sales and revenues, poor cash flow and higher costs.

Fixed Costs -

independent of the unit volume produced (e.g., buildings, equipment, security, etc.)

Inventory is often one of the company's

largest assets

Companies in the service industry cannot

maintain inventory of services since services are produced and consumed immediately upon demand.

The goal of inventory management is to

meet customer expectations while also meeting the company's financial targets.

There are four main categories of inventory:

raw materials used in production, work-in-process items (semi-produced but not complete), finished products to provide customer service, maintenance, repair, and operating supplies needed to run a business

Maintaining adequate materials inventory allows a company to

support manufacturing operations and the production plans.

Inventory is

the goods and materials that are held in stock for sales, service, production and maintenance.