Module 5 Section A : Inventory Planning

Value

What constitutes ______ may vary. Commonly, items are classified by their "dollar usage," which multiplies the number of items used by their unit price. However, other criteria may affect an item's classification, such as Unit price of the item Criticality to processes or customers Potential for stockouts at the supplier or delays in order fulfillment Quality issues Length of lead time Short shelf life.

Active and Excess inventory The layout should provide room for active inventory and possibly some quantity of excess, due to purchasing lot sizes.

A company is determining how much floor space to reserve in the layout for point-of-use storage in order to eliminate centralized storage. Which inventory classifications would be the most useful for initial planning purposes?

Minimize Environmental Impacts

A fourth goal of inventory policy is to ______ -the goals of sustainability related to inventory can include use of less hazardous material, sourcing sustainability, minimizing waste and overproduction, minimizing discharge of pollutants, reducing energy and resource use, using eco-friendly packaging - these goals are at odds with cost minimization, can complicate operational efficiency, and can reduce customer service in terms of availability - customers may be willing to pay for more sustainable products

Value

____ goods are often centralized to minimize inventory carrying costs, can bear higher transportation costs such as for air, and have more expensive holding costs due to security needs. Goods that are at higher risk of theft in storage or transit may need security zones in warehouses and secure vehicles; in some cases, they and the vehicles are kept nondescript.

C-items

____: Will have the least complex controls and record keeping, high levels of safety stock, and ordered few times per year in large quantities. ex: nuts and bolts 5% of value, 50% of items

Raw Materials

____: components, or purchased subassemblies that have not yet undergone any processing by the purchaser. This inventory (e.g., sand, computer chips) exists at the manufacturer location as it awaits processing (e.g., the processing of sand into concrete mix, chips onto a circuit board).

Meet the targeted level of customer service Customer Service Level

One goal of inventory policy is to meet the _______. -provide exactly what the customer wants at the desired time and place and at the price the customer is willing to pay -the most profitable customer segments may receive the highest levels of service -mitigate customer service uncertainty often requires increasing the amount of inventory carried - safety stocks can be calculated to result in a particular ______ (95%)

Cycle Stock

One of the two main conceptual components of any item inventory, the _____ is the most active component. The _____ depletes gradually as customer orders are received and is replenished cyclically when supplier orders are received. The other conceptual component of the item inventory is the safety stock, which is a cushion of protection against uncertainty in the demand or in the replenishment lead time

Excess Inventory

Operating inventory unused by the end of the cycle becomes _____: Any inventory in the system that exceeds the minimum amount necessary to achieve the desired throughput rate at the constraint or that exceeds the minimum amount necessary to achieve the desired due date performance. Total inventory = productive inventory + protective inventory + excess inventory

Inventory Investment

Optimizes the organizations: ________: the dollars that are in all levels of inventory. The excess inventory does not accumulate between points in the value chain. Instead, it is converted into revenue. Inventory costs are minimized through more efficient ordering

Inventory Policy

Several goals drive a firm's _____ decisions: 1. Meet the targeted level of customer service 2. Maximize Manufacturing Operations Efficiency 3. Minimize Financial Inventory Investment 4. Minimize Environmental Impacts

MRO supplies (maintenance, repair, operating)

items used in general support of operations and maintenance, such as maintenance supplies, spare parts, and consumables used in the manufacturing process and support operations." These are materials such as fuel, spare parts, tools, and cleaning supplies. _____ is held at each stage in the supply chain. The amounts held may be affected by the cost of the items and their criticality. For example, an expensive machine part may be held as inventory if the machine is critical to production and the lead time required to obtain the part is long.

ABC Classification

The _____ states that effort and money can be saved through applying looser controls to the low-dollar-volume class items than to the high-dollar-volume class items. The bottom line of ________ is that an organization uses its resources most wisely by closely managing its most "valuable" inventory items, the "A" class.

Excess Inventory

From a master planning perspective, _____ is any inventory created in excess of the requirements within the demand time fence. _______ may exist because orders were canceled or because of a management override (e.g., anticipated increases in demand that did not occur).

Excess Inventory

From a material requirements planning or distribution network perspective, _____ may be the result of lot-size purchasing that exceeds operations' capacity or distribution requirements. To draw down e_____, management may slow or divert production and/or direct sales to sell finished goods at a discount.

Inactive Inventory

From an accounting perspective, inventory is an asset, but _____ that was intended for conversion or sale has very little chance of generating profit and continues accumulating costs. As an asset, therefore, these types of ______ should be valued at zero, and the cost of this should be written off against current profits

Operations

Goal of _____ is to reduce manufacturing cost - Customer service may suffer due to stockouts - Increased production efficiency - Increased inventory levels

Decoupled Inventory

Greater operating efficiency: A production sequence includes multiple operations that often have different output rates. Inventory can be accumulated between operations to accommodate these differences. In this way, an operation with a higher output rate will not be idle because it is waiting for materials. In addition, if an operation is interrupted for some reason (e.g., equipment failure), the _____ can be used to keep production in motion.

Customer Demand

In the sales and operations planning and master planning levels, inventory is used to satisfy ________: finished goods and spare parts.

Service Physical MRO

The hotel group, which owns several hotel chains, has ______ inventory in the form of guest rooms and meeting facilities and ____ inventory in the form of food and beverage services and ____ inventory (maintenance, in the form of cleaning and landscaping supplies and equipment, hotel vans, and linens)

Inventory Management

The purposes of _____ can include: Better customer service Greater operating efficiency Longer Production Runs Volume Purchases

Better customer service Greater operating efficiency Longer Production Runs Volume Purchases

The purposes of inventory management: 1. 2. 3. 4.

Active Inventory

The raw materials, work in process, and finished goods that will be used or sold within a given period. It contributes most to cycle time

Obsolete Inventory

Inactive inventory may eventually become ______: Inventory items that have met the obsolescence criteria established by the organization. For example, inventory that has been superseded by a new model or otherwise made obsolete. ____ will never be used or sold at full value. Disposing of the inventory may reduce a company's profit.

Sustainability

Inventory Management Aligns with organizational _____ objectives by avoiding excess inventory that may otherwise enter the waste stream if it becomes obsolete.

Customer Service

Inventory Management Supports the organization's and operations' performance objectives related to ______. Orders are filled promptly. There are few backorders, canceled orders, or missed sales.

Profitability

Inventory management enables the organization to maintain its goals related to _____.

Sourcing Risks

Inventory management professionals need to review the impact of _____ on inventory planning. ___ can have a strong impact on an organization's inventory planning, and, especially considering global sourcing, can include the full PESTEL range of risks: political, economic, social, technological, environmental, and legal.

A C A

It is important to remember that items classified as "____" are not necessarily expensive, nor are "____" items necessarily cheap. Rather, it is the cumulative cost of use that is being identified in these categories. Since highly perishable items or items with long lead times can be costly if not managed carefully, they are often classified as "__" items.

Inventory Level

Management must negotiate these goals to arrive at an ______ that provides a competitive level of service at operating and financial costs that support the organization's competitive position.

Inventory Management

Objectives of aggregate ______ 1. Minimize inventory investment 2. Meet targeted level of customer service 3. Maximize manufacturing efficiency

Speed Quality Dependability Flexibility Cost

To appeal to their customer segments, service industries must determine the right balance of competitive priorities: ______. Some of these industries have discovered that they can improve their performance with their targeted customer segments by the way they use inventory

WIP Inventory

______: goods that are in various stages of completion throughout the plant. ______ includes raw materials that have entered production and semifinished goods. _____ inventory may be stored at work centers or in central warehouses.

Variety

products that have many different SKU (stockkeeping unit) numbers, such as sizes of shirts, will generate large inventories unless inventory is centralized. Low-value staples with large ____ are instead ordered far in advance.

Operational Efficiency

A good example of ______ related to inventory management is inventory accuracy. More accurate inventory records improves planning and customer service but comes at a cost in terms of time and money spent on inventory counting (e.g., cycle counting) and/or technologies such as bar codes or inventory picking technology (e.g., pick-to-light, pick-to-voice).

Minimize Financial Inventory Investment Minimized

A third goal of inventory policy is to ______ - a firm's financial goals are most secure when inventory is ____ -low inventory levels, short lead times, and high turnover are required - this puts financial goals at odds with customer service and operating efficiency goals -carrying low inventory will increase the probability of stockouts - shorter, less-efficient production run

Anticipation Inventory

Additional inventory above basic pipeline stock to cover projected trends of increasing sales, planned sales promotion programs, seasonal fluctuations, plant shutdowns, and vacations. - refers to buffer inventory that is accumulated due to expected increases in demand or a reduction in supply. ex: manufacturer building inventory to support expected peaks in seasonal demand

Inventory Carrying Costs

All inventory that is carried has to be stored and secured, which creates ____ that steadily reduce the value of inventory.

Synchronized Production

An alternative to this is _____, where the process is designed to level output rate, thus making decoupled inventory unnecessary. E

Inventory Classification

An item's ______ may affect: 1. The frequency with which the item is counted to verify the accuracy of beginning inventory numbers 2. The frequency with which demand forecasts for the item are reviewed 3. Efforts to reengineer products or processes ("A" items that are expensive or used in higher volumes are more likely to be analyzed for opportunities to reduce waste.) 4. The amount of safety stock or safety lead time assigned to the item 5. Where the item is stored 6. How it is replenished. ("C" items may be controlled and replenished with less-technological processes, such as a visual review or two-bin systems.)

Distressed Goods

Another category of inventory are _______: products that are damaged or close to their expiration date and cannot be sold at their full price." Examples are boxes that have been damaged in the warehouse or inactive inventories of processed foods nearing their "sell by" dates. They may be heavily discounted or scrapped, leaving little or no profit margin.

Maximize Manufacturing Operations Efficieny

Another goal of inventory policy is _______: -one way to achieve this goal is to have long production runs with minimized changeovers -this lowers operating costs but may result in higher overall inventories and occasional stockouts (puts _____ in conflict with customer service) -materials management and purchasing will have incentives that encourage them to ensure that production flows smoothly

Inactive Inventory

As time passes, if the excess inventory is not used or sold and if demand is not forecast, it becomes _______: stock designated as in excess of consumption within a defined period; stocks of items that have not been used for a defined period. It includes materials that were intended to be converted into finished goods, finished goods that have not sold, and special inventory such as spare parts.

Production

At the material requirements planning level, inventory is needed to support ___. Another inventory type is inventory in the distribution network.

Semifinished goods

Depending on the type of manufacturing environment, ______ may be decoupled from the manufacturing process sequence to await customer ordering at different points in the process.

Aggregate Inventory Levels

Establishing policy related to _____ requires: 1. Balancing tradeoffs between the competing interests in an organization with regard to inventory 2. Reviewing the impact of sourcing risks on inventory planning decisions

Amount of Time

From the perspective of the supply chain and the internal value chain (within a manufacturer), the challenge is to minimize the _______ inventory spends waiting for the next step. The lean management philosophy examines internal processes to reduce queue or wait times and thereby reduce WIP inventory levels as well as manufacturing lead times.

Marketing

Goal of ____: increase revenue and satisfy customers - Customer service improves - Inventory investment is greater - Production efficiency may suffer

Requires special handling

Inventory that _______: 1. Bulk materials 2. odd sized/shaped goods 3. Temperature 4. Value 5. Variety 6. cross-contamination 7. hazardous goods

Shelf Life

Obsolete inventory includes product that must be disposed because it has exceeded its ______: the amount of time an item may be held in inventory before it becomes unusable

Inactive Obsolete

One of the key objectives of inventory management is to minimize the amount of inventory that becomes : 1. 2. The organization loses a portion or all of the amount invested in the inventory. In addition, it may incur disposal fees.

Sourcing Risks

Other ways to Manage ______: - invest in resiliency (the ability to quickly adapt to change) - determine the right amounts and types of insurance to carry -diversify their supplier base and geographically diversify their manufacturing operations -create backup plans for transportation disruptions

Stages of Inventory

The ______ over time 1. Operating 2. Excess 3. Inactive 4. Obsolete 5. Scrap

Hazardous Goods

These goods require special handling policies and supply/distribution networks that comply with all regulatory requirements. Hazardous goods are an important area for risk management and are addressed more elsewhere

Targeted Increase

When risks appear to be increasing in a given area, a best practice is to determine a ______ in just certain inventories or in just certain parts of the supply chain

Lot Size Inventory

_____ inventory is defined as materials, either purchased or manufactured, ordered in quantities greater than needed for immediate purposes for economic or other reasons.

Operating Expenses Net Earnings Assets

Writing off inventory increases _____, which decreases ______ on the profit and loss statement It also decreases ____, on the balance sheet

Inventory

____ can a create a buffer to insulate the organization from some of these risks but ___ itself is at risk of theft, damage, and obsolescence, so wise organizations rely on _____ to handle only some portion of their sourcing risk

Inventory Policy

____: a statement of a company's goals and approach to the management of inventories. ______ describes management's approach to controlling inventory on both an aggregate and an itemized level.

B-items

____: normal levels of control, inventory, safety stock, and record keeping ex: belts, filters 15% of value, 30% of items

Semifinished goods

____: products that have been stored in an incomplete state and are awaiting final operations that will adapt them to different uses or customer specifications

Rework

____: reprocessing to salvage a defective item or part.

Service Parts

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

A-items

_____ have the highest degree of control and this may equate to tight control of inventory levels, carefully calculated (low safety stock levels), frequent ordering in lower quantities, frequent counting for accuracy, more frequent review of forecasts for errors ex: circuit boards, vehicle transmissions 80% value, 20% of items

Better Customer Service

_____ internal and external customers receive ____ because supplies and goods are provided more dependably. Internal customers know they will have the quantity of materials or components they need to proceed; external customers can rely on a product's availability.

Inventory

_____ must be managed—planned and controlled—as both an opportunity and a risk. It must be managed to ensure its availability to supply customer demand and production needs while minimizing the costs and risks of acquiring and holding it. Management must provide appropriate visibility and accountability.

Inventory Management

_____ supports the priorities of having the necessary items in the correct amounts at the correct time while keeping the level within a target range to ensure that inventory cost goals are also met.

Sourcing Risks

_____: Politicians can impose tariffs, economies can go into recession or worse, social trends can put previously accepted practices into disfavor, new technologies can disrupt cost competitiveness or make inventories suddenly obsolete, lawsuits or contractual issues can destroy profitability, environmental activists can blame the organization for its supplier's actions, or transportation networks can be disrupted by disasters. Some events are a mix of many types such as labor unrest or strikes being political, economic, and social issues.

Types of Inventory

_____: Raw materials Work in process Finished goods inventory In transit Inventory Pipeline inventory MRO

Decoupling

_____: Creating independence between supply and use of material. Commonly denotes allocating inventory between operations so that fluctuations in the production rate of the supplying operation do not constrain the production or use rates of the next operation - occurs with end units in make to stock environments - occurs with components or assemblies in assemble to order environments - occurs with raw materials in make or engineer to order environments

Decoupling

_____: Creating independence between supply and use of material. Commonly denotes allocating inventory between operations so that fluctuations in the production rate of the supplying operation do not constrain the production or use rates of the rest of the operation

Temperature

_____: Frozen, refrigerated, and ambient ___ requirements create zones for warehousing, operations, and transportation (e.g., multi-____ or separate vehicles). Ambient-___ goods can often be stored or can travel in a refrigerated area; this uses space more efficiently but also wastes energy.

Safety Stock

_____: In general, a quantity of stock planned to be in inventory to protect against fluctuations in demand or supply. In the context of master production scheduling, the additional inventory and capacity planned as protection against forecast errors and short-term changes in the backlog. Overplanning can be used to create _____

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.

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.

Volume Purchases

_____: Operations are able to take advantage of buying in greater volumes than current demand requires. Bulk purchase discounts and savings related to fewer shipments may lower purchasing/transportation costs but increase inventory carrying costs. If the cost of direct materials is lower overall, this will reduce production costs and the cost of goods sold.

Bulk Materials

_____: Orders processed and sold in bulk have different storage, handling, and vehicle requirements. These can be liquids, grains, etc.

Odd Sized/Shaped Goods

_____: This type of segmentation will dictate how much space is required for the inventory and can result in special inventory handling and transportation requirements (e.g., specialty trucks). Large sheets of glass need to be handled and stored with minimal risk of breakage. Clothing may need to be transported on racks. Palletized versus non-palletized is a typical segmentation method. Bulky items like couches or beds may need an additional person for materials handling. It may be unprofitable to include an extra person for other materials handling in a delivery, so this would be a segment.

Aggregate Inventory Management

_____: focuses on "establishing the overall level (dollar value) of inventory desired and implementing controls to achieve this goal

Scrap

_____: material outside of specifications and possessing characteristics that make rework impractical. ______ may be an accepted part of an operation or may result from defective material or errors in processing (e.g., a hole drilled in the wrong location, a shirt sewn with some pieces wrong side out). It can include finished goods that have been recalled (e.g., tainted food) or damaged products that cannot be reworked and whose parts cannot be returned to inventory

Longer Production Runs

______ Having sufficient inventory allows a production line to run with less interruption and avoid having to switch over to other lines as much, reducing costly setups and lost production. It also increases capacity utilization.

Inventory

______ can also be classified according to the function it serves: 1. Safety Stock 2. Decoupling Inventory 3. Buffer Inventory 4. Lot Size 5. Hedge 6. Transporterm-7tation inventory 7. Anticipation Inventory

Distribution Inventory

______ inventories create time value by placing the product close to the customer.

Inventory

______ is essentially potential value, and it can look different from different vantage points—from its position in the supply chain, according to the purpose it serves the organization, or how it is transformed over time. One manufacturer's raw material may be another supplier's finished good

Lot Size Inventory

______ refers to the size of the order a purchaser places. The size of the order is determined in part by demand or to take advantage of volume discounts. _____ may have a minimum order quantity (MOQ), and this may be based on manufacturing and/or transportation economies of scale, such as a economic manufacturing _____ or a full truckload. - depletes gradually as orders consume the units and then jumps up higher in sawtooth fashion as new shipments are received, repeating cyclically

Inventory Management

______: 1. Optimizes the organization's inventory investment, "the dollars that are in all levels of inventory" 2. Excess inventory does not accumulate between points in the value chain. Instead, it is converted into revenue. Inventory costs are minimized through more efficient ordering. 3. Supports the organization's and operations' performance objectives related to customer service. Orders are filled promptly. There are few backorders, canceled orders, or missed sales. 4. Enables the organization to maintain its goals related to profitability. 5. Aligns with organizational sustainability objectives by avoiding excess inventory that may otherwise enter the waste stream if it becomes obsolete.

ABC Classification

______: The classification of a group of items in decreasing order of annual dollar volume (price multiplied by projected volume) or other criteria. This array is then split into three classes, called A, B, and C. The A group usually represents 20 percent by number of items and 80 percent by projected dollar volume. The next grouping, B, usually represents about 30 percent of the items and about 15 percent of the dollar volume. The C class contains 50% of items and represents about 5 percent of the dollar volume.

Service Industry

______: an organization that provides an intangible product (e.g., medical or legal advice) or it may be any organization not involved in "farming, mining, and manufacturing. This includes: Retail and wholesale trades Transportation (e.g., airplane or rail industry) Utilities Companies that provide information or conduct transactions (e.g., banks, insurers, government offices, educational institutions) Companies that provide business or personal services (e.g., hospitals and medical centers, IT consulting, hair salons, counseling, construction, cleaning).

Operating Inventory

______: includes cycle stock and safety stock. Cycle stock is the amount of inventory held to fill orders. It diminishes over the course of the cycle and then is replenished. Safety stock is additional inventory that is used to satisfy unexpected increases in demand. Cycle Stock Safety Stock

Fluctuation Inventory

______: inventory that is carried as a cushion to protect against forecast error

Service Industry Inventory

______: takes the form of goods that facilitate the delivery of the service to customers. For example, a customer who purchases a seat on an airline on a particular route is buying a service. To deliver that service, the airline needs computer systems to manage the reservation, fuel for the jet, equipment used to transfer luggage, maintenance and repair supplies for planes and equipment, food and beverages for the flight, cleaning supplies, even inflight entertainment.

Decoupling Inventory

______An amount of inventory is maintained between entities in a manufacturing or distribution network to create independence between processes or entities. The objective of _______is to disconnect the rate of use from the rate of supply of the item. Purpose: reduce supply lead times or supply lead time uncertainty - especially needed at constraint points (bottlenecks)

Buffer

_______: A quantity of materials awaiting further processing. It can refer to raw materials, semifinished stores or hold points, or a working backlog that is purposely maintained behind a work center. (2) In the theory of constraints, _____ can be time or material and support throughput and/or due date performance. _____ can be maintained at the constraint, convergent points (with a constraint point), divergent points, and shipping points.

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. _______ may be held as inventory at the supplier/manufacturer until they are dispatched to the next supplier/manufacturer or to distribution centers, distributors, or retailers. At some point, ownership of the______ is transferred between parties and the goods become the next party's inventory.

Pipeline Inventory

________: Inventory in the transportation network and the distribution system, including the flow through intermediate stocking points. The flow time through the ____ has a major effect on the amount of inventory required in the pipeline. Time factors involve order transmission, order processing, scheduling, shipping, transportation, receiving, stocking, review time, and so forth. S

Hedge Inventory

__________ A form of inventory buildup to buffer against some event that may not happen. ______ 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. - a way of locking in prices for something now to reduce uncertainty in case the price is too high later - inventory made or planned at higher levels than needed in the event that the mix or demand changes

Cross-Contamination

chemicals need to be segregated from foodstuffs, goods that can absorb smells need to be segregated from items that emit odors, and so on. Even some vegetables need to be segregated. Tomatoes, apples, and pears emit ethylene, and other vegetables like lettuce, broccoli, and watermelon will yellow or decay when kept near them for too long because they are ethylene-sensitive.

Inventory

converting ______ into sales (plus sales of services) accounts for most of an organization's future revenue. In this respect, _____ represents future value. However, it also represents present costs. And these costs include opportunity costs—the value that the money invested in _____ could have produced if it had been invested in other value-producing activities. Opportunity costs grow larger the longer it takes to turn over ______ (convert it back to cash).

Safety Stock

one function of inventory is to manage fluctuations in supply and demand - either consumer demand for the supply of finished goods or demand for materials or components by a succeeding process in manufacturing. Having ____ protects retailers from losing consumer sales because of stockouts, distributors from dissatisfying their retail customers, and manufacturers from losing revenue and customer goodwill as a result of production disruptions or planning errors that delay finishing and shipping goods.

Perishability

service industries cannot store much of their excess inventory and it is therefore subject to ______ in that the service time slot cannot be sold once that time passes. For example, a movie theater licenses films to show and must pay for that inventory whether or not an audience attends. A hospital must maintain its treatment areas and rooms even when there are no patients.