Supply Chain Chapter 7: Managing Inventories

bullship effect

A small disturbance generated by a customer produces successively larger disturbances at each upstream stage in the supply chain

Inventory

A supply of items held by a firm to meet demand

Demand during lead time

The amount of demand that occurs while awaiting receipt of an inventory replenishment order

Product Cost

The amount paid to suppliers for products that are purchased

Pareto's Law

The rule that a small percentage of items account for a large percentage of sales, profit or importance to a company

Total Acquisition Cost (TAC)

The sum of all relevant inventory costs incurred each year

Square root rule

a method of estimating the impact of changing the number of locations on the quantity of inventory needed

EOQ assumptions

-No quantity discounts -No lot size restrictions -No partial deliveries -No variability -No product Interactions

Companies with high Inventory turnover rates benefit:

-increased sales volume due to having rapid flow of new or fresh items -Less risk of obsolescence or need to mark down or discount prices -Decreased expenses related to holding inventory -Lower asset investment and increased asset productivity

Dangers of inventory rate that is TOO high

-possible lowered sales volume due to running out of needed items -increased COGS due to inability to produce or purchase in quantity -Increased purchasing, ordering, and receiving time, effort and cost

Determine the Order Quantity when Quantity Discounts Available

1. Identify the price breaks offered by the supplier 2. Calculate the EOQ at each price break, starting with the lowest price possible 3. Evaluate feasibility of eachEOQ

The roles of inventory

1. balancing supply and demand -producing or shipping inventories in batches enables firms to take advantage of economies of scale -allows for seasonal use 2. buffering uncertainty demand or supply -managers rarely know with absolute certainty the demand 3. Enabling economies of buying -Supply locations and demand locations rarely the same 4. enabling geographic specialization

Order Interval

A fixed time period that passes between inventory reviews

Service Level

A measure of how well the objective of meeting customer demand is met

Collaborative Forecasting and replenishment

A method by which supply chain partners periodically share forecasts, demand plans, and resource plans in order to reduce uncertainty and risk in meeting customer demand

Uncertainty Period

A period of time when an unknown amount of inventory is on hand

Cycle Counting

A process where each item is physically counted on a routine schedule

Seasonal Stock

Additional inventories produced in advance of seasonal peak demands

Setup Cost

Administrative expenses and the expenses of rearranging a work center to produce an item -similar to order cost but inventory is produced internally

Stockout

An event that occurs when no inventory is available and there is demand for that item. when companies experience stockout of raw materials considerable potential cost implications because everything must be halted

Saw-Tooth Diagram

An illustration of the pattern of ordering and inventory levels

Stockout (or shortage) Cost

Cost incurred when inventory is not available to meet demand A company may never know the amount of stockout cost because it may never know actual amount of demand -One potential stockout costs is the cost of a loss sale

Buffer (or safety) Stock

Extra inventory held to guard against uncertainty in demand or supply

Continuous Review Model

Inventory is constantly monitored to decide when a replenishment order needs to be placed 1. How much should be ordered when an order is placed? 2. When should an order be placed?

Independent Demand Inventory Systems

Inventory management systems used when the demand for an item is beyond the control of the organization case for customer demands of ends-items and repair parts

two-bin system

Inventory of an item is stored in two different locations

Work in process Inventory

Inventory that is in the production process

Transit Inventory

Items being transported from one location to another

Raw materials and component parts

Items that are bought from suppliers to use in the production of a product

Finished Goods Inventory

Items that are ready to sell to customers

MRO Inventory

Maintenance, repair, and operating supplies

Periodic Review Model

Management system built around checking and ordering inventory at some regular interval

Dependent Demand Inventory Demand System

Management systems used when the demand for an item is derived from the demand for some other item Example: John Deere. production schedule based on forecast

Carrying(or holding) Cost

Several expenses that are incurred due to the fact that inventory is held Encompass the following expenses: -Opportunity cost, including the cost of capital -Cost of owning and maintaining storage space -Taxes -Insurance -Costs of obsolescence, loss and disposal -Costs of materials handing, tracking and management

Service Level policy

Specification of the amount of risk incurring a stockout that a firm is willing to incur

Order Cost

The expenses incurred in placing and receiving orders from suppliers order transmittal, order receiving, and accounts payable processing

Reorder Point (ROP)

The minimum level of inventory that triggers the need to order more

Production Order Quantity

The most economic quantity to order when units become available at the rate at which they are produced

Days of Supply

The number of days of business operations that can be supported with the inventory on hand = current inventory / expected rate of daily demand

Economic Order Quantity EOQ

The order quantity that minimizes the sum of annual inventory carrying costs and annual ordering costs

Cycle Stock

The portion of average inventory determined as order Q divided by 2

Cycle Stock

The portion of average inventory determined as order quantity divided by 2

ABC Analysis

The ranking of all items of inventory according to importance

Inventory Turnover

The ratio between average inventory and the level of sales = COGS/ average inventory @ cost -most common = Net sales / avg inventory at selling price -used mostly in retail = Unit sales / avg inventory in units -more accurate in situations where both the cost of an item and its selling price vary significantly during a year example: gasoline

Vendor Managed Inventory

The vendor is responsible for managing the inventory located at a customer's facility

Single period inventory model

model used to determine the order size for a one-time purchase

Total system inventory

the sum of the inventory held across across all of the locations in a company

Ultimate objective Inventory Management System (2 types)

to minimize all inventory costs while meeting the organization's targeted service (product availability)