Chapter 4 Inventory Management

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

EOQ quantity Discount COntinued

Due to the step-wise shape of the total inventory cost curve, the optimal order quantity lies on either one of the feasible EOQs or at the price break point.

Raw Material Strategies

Have the supplier hold and deliver to the operation just in time for production Buy and hold a large quantity as it is the lowest cost inventory Establish a VMI arrangement Storing excess raw material inventory if they fear there may be a potential shortage or they suspect that there is an upcoming price increase.

Obsolete Inventory

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

Inventory management System

Inventory management systems are methods to control this important asset: ABC System Bin System Base Stock Level System "Single-Period" Inventory Model

Barcodes

Barcode systems help businesses track products and stock levels for inventory management.

Continuous Review System Disadvantages

Disadvantage: Cost of implementation. Generally requires an automated system. The hardware and software necessary to run the system can be expensive to purchase, install, and maintain.

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.

Inventory Management

The goal of inventory management is to meet customer expectations while also meeting the company's financial targets: Enable Sales Increase profitability Improve Cash Flow

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.

Base Stock Level System

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

Order Costs

Order Costs are costs that are incurred each time an order is placed. Order preparation costs Order transportation costs Order receipt processing costs Material handling costs

Assumption of Physical Inventory

Order quantity & ROP models assume that the physical inventory is precisely known at every point in time Reality shows that stock records and actual quantity are different & requires review of inventory to determine discrepancies

Reorder Point With Safety Stock

ROP = Demand (D) during Lead Time (LT) = DxLT+SS

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.

3 Levels of Internal Inventory

Strategic, Safety and Cycle Stock

Radio Frequency Identification

Successor to the barcode for tracking individual unit of goods. RFID does not require direct line of sight to read a tag, and the information on the tag is updatable.

EOQ quantity Discount

The Quantity Discount Model or price-break model Relaxes the constant price assumption by allowing purchase quantity discounts.

Inventory Turnover

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

Obsolete Inventory (3)

There is a cost associated with the actual disposal of the inventory which must follow recycling and disposal regulations.

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. Finished goods are the highest value and the amount the company maintains is a strategic decision.

Total Cost Formula

Total Cost = Purchase Cost + Order Cost + Carrying Cost

WIP Value

WIP value is higher then Raw materials as it now includes labor cost. It is valued at a point in time as it is in a state of continuous transformation through the production process.

Main Category of Inventory 2

Work-in-process items (semi-produced but not complete),

EOQ

[√2 *(order cost) (Annual Demand Volume)]/[(Annual Carrying Cost %) (Unit Cost)

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. Linear bar codes do have some limitations: they are one-dimensional, can only be read horizontally, and can only hold a maximum of 85 characters.

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

Retail Store

no check out lines as scanners link RFID tagged goods in shopping cart with buyers credit card

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 Where the sum of the annual order costs & the annual inventory carrying costs is minimized.

A Items

A items are the most important in sales volume and are the highest priority.

Inventory Intro

A key decision in any product-based supply chain is how much inventory to keep on hand.

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.

Days / Weeks of Supply

(on-hand inventory) / (avg. daily / weekly usage)

Continuous Review System Advantages

Advantages: Allows for real-time updates of inventory, which can make it easier to know when to replenish.

Periodic Review System Advantages

Advantages: Reduces the time spent analyzing inventory. Less expensive than a Continuous Review System.

ABC System

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

External Inventory

Pipeline Inventory (inventory in transit; Inventory that is held/owned by suppliers)

Bin System

Inventory system that uses bins to hold a quantity of the item being inventoried. It is mainly used for small or low value items. (e.g. parts) Inventory is managed based on bins, not individual units. When the bin is near depletion, an order is placed for another bin quantity to refill or replace the inventory.

Main Category of Inventory 1

Raw materials used in production

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)

Obsolete Inventory (2)

Unusable inventory takes up space and costs money to store. So it may be better to absorb the loss as soon as an item has been deemed obsolete.

Manufacturing (RFID)

assembly instructions encoded on RFID tag provide information to computer controlled assembly devices

Indirect Costs

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

Variable Costs

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

Units

the number of units owned

Main Category of Inventory 3

finished products to provide customer service,

Companies in service industry cannot

Companies in the service industry cannot maintain inventory of services since services are produced and consumed immediately upon demand.

Companies in service industry can

Companies in the service industry do maintain inventory of "facilitating goods," which are those items that are used in the service being provided.

Periodic Review System Disadvantages

Disadvantages: Inaccurate inventory levels are not uncovered until the next review. Can be difficult to determine the reasons for the inaccuracy. It can make inventory accounting less accurate.

Inventory

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

Reorder Point Equation/Example

ROP = Demand (D) during Lead Time (LT) = DxLT Example: if demand = 600/month and order led time = 6 days D = (600 / 30 days) = 20/day ROP = DxLT = (20) x (6) = 120

Base Stock Level System Continued

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.

Obsolete Inventory (4)

Some companies donate this inventory to non-profit organizations, which not only helps the non-profit but also avoids disposal costs and may result in a tax benefit for the company.

Absolute Inventory Value

The value of the inventory at its cost.

Postponement Strategy in responsive supply chains

suggests maintaining an amount of almost completed WIP inventory near the point of consumption to enable quick response to customer orders for customized products

B Items

B items are of medium importance, often being relatively more expensive (per unit).

Inventory Calculation

Beginning Inventory + receipts - shipments +/- adjustments = Ending Inventory

Primary Function of Inventory

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

C Items

C items have the lowest priority

Carrying Costs

Carrying Costs are costs that are incurred for holding inventory in storage. Cost of capital - specified by senior management Taxes - on inventory held in warehouses Insurance - based on estimated risk or loss over time and facility characteristics Obsolescence - deterioration of product during storage, and shelf-life Storage - facility expense related to product holding rather than product handling

Physical Inventory Management

Computer systems keep the "Book Inventory" which needs to be verified with the physical existence of the inventory.

Inventory Turnover Ratio

Cost of Goods Sold (COGS)/Average Inventory

Raw Materials

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

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.

Inventory Control Tools

Many inventory control tools exist in today's market. Those that incorporate barcode tracking or RFID tagging generally offer the most flexibility and ease of use. Linear Barcode 2D Barcode Radio Frequency Identification (RFID)

Obsolete Inventory (1)

Obsolete inventory must be valued at the lower market value to correct the financial records. This will reduce the company's profit.

"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. Examples: Superbowl Championship gear, Christmas tree lots, and Newspaper stands.

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.)

Materials Management - (RFID)

goods tautomatically counted and logged as they enter the supply warehouse

Fixed Costs

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

Main Category of Inventory 4

maintenance, repair, and operating supplies needed to run a business

Distribution Center

shipment leaving DC automatically updates ERP to trigger a replenishment order and notify customer for delivery tracking

Linear (2D) Bar Codes

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.

Continuous Review System

Inventory levels are continuously reviewed. After each movement, the remaining physical inventory balance is verified vs. book inventory. More costly to conduct than a Periodic Review System, but it potentially requires less safety stock because inventory is constantly monitored, and replenishment actions are taken more quickly.

Periodic Review System

Inventory levels are reviewed at a set frequency, e.g., weekly, monthly At the time of review, all stock is counted and verified to book records. Since items are only reviewed periodically, there is a greater risk of physical inventory being out of sync with book inventory and, therefore, a greater need for safety stock.

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.