inventory management and logistics quiz

Economic Order Quantity (EOQ)

A calculated order quantity which balances (and minimizes the sum of) annual setup labor costs and annual inventory carrying costs. Computed as square root (2*annual demand*setup cost)/(inventory carrying cost%*unit cost).

Inventory Carrying Cost (also called Cost of Having)

A cost, computed as a percent age of inventory value held, which represents the cost of interest on borrowed money, storage and tracking costs, obsolescence, insurance, taxes, etc. Depending on the factors included, the carrying costs typically range from 20 - 35 % per year.

Merge in Transit

A method of bringing together portions of a product, from multiple suppliers, to be delivered to a customer as one delivery rather than several separate deliveries of components. An example would be a PC, which is in fact produced as components (keyboard, mouse, cabinet, screen, memory cards,...) by many suppliers, but merged and delivered to the customer as one delivery. The merge points are where this union of the separate components takes place before delivery to the customer.

Inventory Turns (also called turnover)

A metric which is computed by dividing annual cost of goods sold by inventory$ on hand at a particular point in time or an average inventory during some period of time. The higher the inventory turn metric, the faster a company is moving materials through its processes. The numerator (cost of goods sold) comes from the income statement, and the denominator (inventory on hand) comes from the balance sheet. Remember that the numerator is an annual cost of goods sold, which may require that you sum the last 4 quarterly statements.

Flow-Through Distribution (Cross Docking)

A process in which items from multiple locations are brought into a central facility (often called a cross-dock), are re-sorted by delivery destination, and shipped out the same day. This eliminates warehousing, reduces inventories, and speeds order lead time.Pioneered by Wal-mart.

Two-bin inventory system

A simple, visual inventory reorder system in which inventory is held in 2 containers. When the first container is emptied, an order is issued for re-supply. During the time waiting for the re-supply order to arrive, inventory is consumed from the second container. The second container has enough inventory to meet demand during the resupply lead time. When the supply order arrives, both containers are filled.

Container

A standard 40' or 20' long metal box which serves as a shipping container.

TL (Truck Load)

A type of trucking in which the shipper pays for the entire truck load, whether full or not, which pickups the goods at the shipper's location and transports directly to the consignee's location.

Min-Max Model

A variation of the fixed time period model. In this case, when I evaluate the inventory status at each time interval, I only order more if the inventory is less than some minimum level. This minimum inventory level, in theory, is established large enough to cover demand until the next time interval. The advantage of the min-max model is that I avoid small, unnecessary orders if the inventory level is larger than the minimum required.

Decoupling Inventory

Allows 2 processes to operate independently of each other without affecting each other. A distribution center with textbooks decouples the printer, which prints very large batches of books with long lead times, from the bookstore where a customer wants 1 book with minimal lead time.

LTL (less than truckload)

An approach to trucking used then the shipper's load is generally less than about a fourth of a truck load. The LTL trucker will pickup the shipper's goods to be shipped and then consolidate or "make-bulk" with other shipments until the truck is full enough to economically make the trip to somewhere near the destinations of the various shipments on board, then "break bulk" and separate the loads out to the various destinations.

Safety Stock

An extra amount of inventory carried to protect against shortages caused by greater than expected demand versus supply during a period of time.

Fixed Time Period Model

An order to resupply inventory is triggered by a fixed period of time in between counting the inventory and ordering enough to get the inventory back up to some desired maximum level. If you are managing several different inventoried items, and wish to resupply all of them at the same time, then the fixed time period model would make sense. If I live on a ranch 100 miles from a grocery store in town, then I might make weekly trips into town to the grocery store and purchase enough of various food items to bring their inventory level back up to some desired level. Another possible reason for use of a fixed time period model is if the supplier replenishment occurs in fixed time increments - weekly, for example. Another reason to use this model is when it is not reasonable to continuously monitor inventory levels. To compute the optimal fixed time interval between orders, you compute the EOQ, then divide the EOQ by the total annual demand. This ratio, which will be a fraction of a year, can then be converted to a number of days. For example, if an EOQ = 40 and my total annual demand is 200, then EOQ/annual demand = 40/200 = .2 years. If there are 360 days in a year, then .2*360 = 72 days between orders. If we assume 250 working days per year, then .2*250 = 50 working days between orders.

Fixed Order Quantity Model

An order to resupply inventory is triggered by the inventory level reaching a reorder point, and the same order quantity is ordered each time. The size of this fixed amount to order is determined by an EOQ analysis. Use of this model assumes that it is possible to continuously (also called perpetual) monitor the inventory level.

4PL

Fourth party logistics provider - a company which acts as a logistics integrator/consultant to plan and implement a company's overall logistics systems, both physical and information flows.

Reorder Point

Inventory amount estimated to meet forecasted demand during the lead time required to replenish the inventory. When on hand inventory reaches the reorder point, then it is time to order more. If your business is experiencing stock outs, then you should possibly increase the reorder point.

Free on Board (FOB)

The designation of the location at which ownership of a shipment transfers from the shipper to the consignee.

Outbound Logistics

The management of physical goo ds movement and information to downstream distributors and customers.

Reverse Logistics

The management of physical goods movement and information being returned from customers, and the disposition of those items back into storage, repairs, return to the manufacturers, and/or disposal or recycling.

Inbound Logistics

The management of physical goods movement and information from upstream suppliers.

Cycle Counting

The periodic random check of actual parts in inventory crib versus what the information system says is in inventory. Any differences in quantity or storage location are corrected in the computer system. "A" parts are checked more often than "B" or "C" items. Cycle counting also avoids having to count all the inventory at one time, since it is continually updated.

Make Bulk

The process of grouping several small shipments into a larger, combined shipment to obtain lower cost transportation. For example, a trucking company might pickup loads from several customers to fill a truck going from Dallas to the New York City area.

Break Bulk

The process of receiving large quantities of items into a distribution center and shipping out smaller quantities. For example, a Nike distribution center might receive entire container loads of Logistics and Order Fulfillment shoes from Asia, but ship out boxes of only a few pairs of shoes to retail stores or individual customers.

Backhaul

The return trip of a vehicle back to its original point of origin, hopefully with a payload.

3PL

Third party logistics provider a company who performs logistics processes for other companies, both physical goods and information/financial flows.

Wholesale

a distributor who supplies items to retail stores.

Stock Keeping Unit (SKU)

a tracking number for items which reflects not only what an item is but also the form, quantity, and possibly the location in which the product is packaged and stored

Shippers' Agents and Brokers/Freight Forwarders

are middle men who arrange for carrier(s) to transport loads for a shipper. These firms own little, if any, equipment.

Piggyback

carrying a shipping container or truck trailer on a train flatcar.

Freight Bill

contains much of the bill of lading information, plus the amount of the invoice from the carrier to either the shipper or consignee for the cost of the transportation provided.

Dependent Demand

demand for an assembly, part, or raw material that is derived from demand of a parent component in the bill of material (BOM). Demand for tires and engines is directly dependent on the demand for cars in a factory.

Independent Demand

demand for an item that is unrelated to demand for other items. Most retail items would fall in this category.

Bill of Lading/Manifest

document which lists the contents of a shipment.

In-transit Inventory (Also called "pipeline" inventory)

inventory in the process of being shipped on a truck, train, ship, etc.

Cycle Inventory

inventory on hand as a result of a decision to make or buy an item in a large batch quantity greater than the immediate demand. The inventory on hand will thus "cycle" up and down over time.

Dead Inventory

inventory on hand that has no known or forecasted use. It is "dead" with respect to anybody wanting it. It should be identified and physically removed and its value taken out of the inventory accounts. For example, if you own a bookstore, you should periodically identify books that have not sold in a long period of time, and have a "sidewalk" sale and get rid of them or give them to charity. Otherwise, your store will slowly become a collection of unwanted books.

Anticipation Inventory

inventory produced ahead of time in expectation of some future peak demand, such as textbooks at the start of a semester, or toys for Christmas.

Single Period Inventory

inventory situations where demand occurs one time, and you are either stuck with excess inventory or else you have stockouts if demand was greater than supply. The decision is how many items to order. Examples would be news media such as the daily newspaper, t-shirts for a one-time sporting event, etc. This class of problems is sometimes known as the "newsboy" or "news vendor" problem.

Put

place items into storage racks in a warehouse.

Order Fulfillment

removing items from storage and shipping to the customer upon demand.

Pick

removing items from storage racks in a warehouse to prepare them for shipment

Buffer Stock

same idea as safety stock - an amount of inventory held because of uncertainty in supply or in demand or both.

Carrier

the company which performs the transportation of goods from the shipper to the consignee.

Shipper

the person or company sending a shipment.

Consignee

the person or company who is to receive a shipment

Distribution

the process of receiving items from manufacturers, putting them into storage, picking the items from storage, packing and shipping to customers upon demand. Use of a distributor makes life simpler for retail stores or individual customers by reducing the number of suppliers to interact with, allows you to buy small quantities and receive the items relatively quickly, etc.

Landed Cost

the total cost of a product plus all logistics-related costs (transportation, distribution, tariffs, insurance,...) to get the product to a certain point. Important metric in comparing U.S. based suppliers versus offshore.

Put-to-Light

the use of lights to guide the employee to place the items into the correct rack location in the warehouse.

Pick-to-Light

the use of lights to guide the picker to the correct stock location in the warehouse.

Postponement (also called Value Added Logistics or Channel Assembly)

using distribution centers located close to customers to add details to products to meet specific customer options to thereby avoid producing and storing many possible variations of products. The assembly of optional features into the product is thus "postponed" as long as possible and only common components produced and stored ahead of demand. Is a compromise between make-to-stock and assemble-to-order.

Intermodal

using more than one mode of transportation such as ship, train and truck, often by use of a shipping container.