Supply Chain Chapter 4

fixed costs

(aka Sunk Costs) - independent of the unit volume produced (e.g., buildings, equipment, rent, allocated overhead costs, etc.)

4 categories of inventory

-raw materials -work in process -finished goods -maintenance, repair and operating (MRO) supplies

why hold inventory?

1. meet customer demand (cycle stock) 2. buffer against uncertainty in supply/demand (safety stock) 3. decouple supply from demand (strategic stock) 4. decouple dependencies in supply chain (sep ops in process, smoothing, strategic)

work in process

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

Economic Order Quantity (EOQ) Model

A quantitative decision model based on the trade-off between annual inventory ordering costs and annual inventory carrying costs.

service inventory

Activities carried out in advance of the customer's arrival

Strategic Stock

Additional inventory beyond cycle and safety stock, generally used for a very specific purpose or future event, and for a defined period of time.

continuous review system

As the name implies, inventory levels are continuously reviewed. As soon as inventory falls below a pre-determined level (i.e., a reorder point), a replenishment order automatically is triggered.

inventory turnover ratio

COGS/Average Inventory at cost

having too much inventory results in...

Financial resources tied up in inventory. ▪ Underlying problems being hidden rather than being exposed and solved, including quality problems not being immediately identified. ▪ No incentive for process improvements .

pipeline inventory

Inventory in the transportation network and the distribution system. Inventory that is already out in the market being held by wholesalers, distributors, retailers, and even consumers

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 have met the obsolescence criteria established by the company. Obsolete inventory is stock that is expired, damaged, or no longer needed. Obsolete inventory will never be used or sold at full value.

periodic review system

Inventory levels are reviewed at a set frequency, e.g., weekly, monthly

Bin system

Inventory system that uses either one or two bins to hold a quantity of the item being inventoried. ▪ It is mainly used for small or low value items. ▪ When the inventory in the first bin has been depleted, an order is placed to refill or replace the inventory. ▪ The second bin is set up to hold enough inventory to cover demand during the replenishment lead time so as to last until the replacement order arrives.

maintenance, repair, and operating (MRO) products

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.

constraints on use of EOQ

Limited Capital: The model may generate an order quantity which the company does not have sufficient available funds to purchase at one time. Storage Capacity: The model may generate an order quantity which the company does not have sufficient storage capacity to handle at one time. Transportation: The item being ordered and transported may require specialized or dedicated transportation, impacting the quantity per order. Obsolescence: The model may generate an order quantity which would create spoilage or obsolescence. Production Lot Size: The supplier may require the company to order an item in full production lot sizes. Unitization: The supplier may require the company to order an item in full pack, case, or pallet configurations.

having too little inventory results in...

Production disruptions creating the need for expediting and additional costs. ▪ Longer delivery replenishment lead times. ▪ Reduced responsiveness. ▪ Lost revenue

raw materials

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

fixed-time period system formula

Q=R-IP Q:quantity R:target inventory level IP:inventory position

Radio Frequency Identification (RFID)

Successor to the barcode for tracking individual unit of goods.

reorder point

The lowest inventory level at which a new order must be placed to avoid a stockout is known as the Reorder Point (ROP)

assumptions of EOQ

The model must be calculated for one product at a time. ▪ The demand must be constant throughout the year. ▪ The delivery replenishment lead time does not fluctuate. ▪ Replenishment is instantaneous. ▪ The purchase price (i.e., unit cost) is constant and no discounts or price breaks are factored into the model. ▪ Carrying cost is known and constant. ▪ Order cost is known and constant

inventory turnover

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

absolute inventory value

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

MRO supplies

These are materials that you need to run the manufacturing operation and the business, but do not end up as part of the finished product

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

fixed-order quantity system

Two main variables to calculate: - Reorder Point (ROP) - Order Quantity (Q) A continuous inventory review system in which the same order quantity 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.

common metrics for inventory

Units - the number of units available Dollars - the amount of dollars tied up in inventory Weeks of Supply - (avg. on-hand inventory) / (avg. weekly usage) Inventory Turns - (cost of good sold) / (avg. inventory value)

single-period inventory model

a type of inventory system in which inventory is only ordered for a one-time stocking. - The objective is to maximize profits.

Base level stock system

a type of inventory system that issues an order whenever a withdrawal is made from inventory. Replenishment order quantity is equal to the quantity withdrawn from inventory. This will maintain the inventory at a base stock level. Used primarily for very expensive items, e.g., airplane engine A form of just-in-time

Safety Stock

also known as "buffer stock," is inventory that is above and beyond what is actually needed to meet anticipated demand.

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.

indirect costs

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

ABC system

classifies inventory based the degree of importance or Consumption: 1. Determine annual usage (consumption) or sales for each item. 2. Determine % of total usage or sales that each item represents. 3. Rank items from highest to lowest %. 4. Classify items into groups: A: Highest Value (80%) B: Moderate Value (15%) C: Least Valuable (5%)

carrying costs

costs for physically having inventory on-site and for maintaining the infrastructure needed to store the inventory and to secure and insure it over time.

ROP

demand during time lead (d*L)

variable costs

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

direct costs

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

barcode reader

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

order costs

labor costs associated with placing an order for inventory and the cost of receiving the order

inventory

quantity of goods and materials that are held in stock

EOQ formula

square root of (2 x order cost x annual demand volume)/ (annual carrying cost % x unit cost)

Pareto Principle

states that for many outcomes, roughly 80% of consequences come from 20% of causes.

cycle stock

the amount of inventory needed to meet expected demand

goal of inventory management

to help a company be more profitable by lowering the cost of goods sold and/or by increasing sales.

number of days supply

total inventory in units/average sales or consumption per day