Chapter 7 Business Logistics & Transportation

Which of the following terms is commonly used to describe the point where annual ordering costs and annual inventory carrying costs are equal?

Economic Order Quantity (EOQ)

While demand uncertainty can be mitigated by maintaining safety stock, supply uncertainty can only be mitigated by maintaining flexibility and responsiveness.

FALSE

Which Inventory Metric measures how much it costs a company to store inventory over a given period of time?

Inventory Carrying Cost

Which of the following inventory types is characterized as "inventory bought to hedge a currency exchange or to take advantage of a discount"?

Strategic stock

The desired level of customer service (for example, case fill rate or order fill rate) can have a direct impact on the amount of safety stock that is carried for a particular product.

TRUE

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 (anticipation stock, build stock, or seasonal stock)

Policies and Parameters

defined at the detail level (data requirements, software applications, performance objectives, and decision guidelines)

Review Frequency

defines how often invnetory levels are reviewed

dependent demand items

dependent demand does not require forecasting because there is no uncertainty - generally, no specific safety stock is needed to support time-phased procurement programs

Product/Market Classification

groups products, markets, or customers with similar characteristics together to facilitate inventory management

requirements planning

integrates across the supply chain taking into consideration unique requirements 1) materials requirements planning (MRP) - driven by the master prodcution schedule 2) distribution requirements planning (DRP) - driven by customer demand

dependent demand

internal demand for parts and materials based on the demand for the final product in which the parts and materials are used ex: automobile engine no need for safety stock

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 customers

obsolete inevntory

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

cycle stock

inventory that a company builds to satisfy its' immediate demand depletes gradually as customer orders are recieved, and is replenished cyclically when supply orders are recieved

vendor managed inventory (VMI)

is a modified QR that eliminates the need for replenishment orders transfer the responsible for managing the inventory located at a customer's facility back to the vendor/manufacturer of that inventory

service level

is a performance target specified by management and defines inventory performance objectives

quick response (QR)

is a technology-driven cooperative effort between retailers and suppliers to improve inventory velocity while matching supply to consumer buying patterns

maintenance, repair and operating supplies (MRO)

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

inventory carrying cost

measures how much it costs a company to store inventory over a given period of time

Periodic Review

monitor inventory status of an item at regular intervals such as weekly or monthly

external inventory

pipeline inventory

calculating safety stock

probability theory enables the calculation of safety stock for target service level - service level = 100% - probability % of stockout safety stock is only needed for under-forecast error (demand>forecast)

Supplier Negotiation

the company can prioritize and focus on negotiating with suppliers of the class A category items since they represent 70%-80% of the money spent.

transportation

the item being ordered and transported may require specialized or dedicated transportation, impacting the quantity per order

obsolescense

the model may generate an order quantity which could create spoilage or obsolescence

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

days of supply (DOS)

the most common KPI used by managers in measuring the efficiency in supply chain

inventory days of supply

the number of days it would take to run out of supply if it was not replenished

inventory turnover

the number of times that a company's inventory cycles per year

case fill rate

the percent of cases ordered that are shipped as requested

order fill

the percent of customer orders filled completely as requested

line fill rate

the percent of order lines (items) that were filled completely as requested

Fill rate

the percentage of a customer's order that is filled on the first shipment. This can be represented as the percentage of items, SKUs or order value that is included with the first shipment

perfect order measurement

the percentage of orders that are error-free. Delivered complete, on time, at the right location, in perfect condition, with complete and accurate documentation

unitization

the supplier may require the company to order an item in full pack case, or pallet configuration

production lot size

the supplier may require the company to order an item in full production lot sizes

inventory accuracy

the variance between perpetual inventory and physical inventory

Segmentation Strategy: ABC Classification

this allows different inventory management techniques to be applied to different segments of the inventory in order to increase revenue and decease costs

demand uncertainty

when and how much product will our customers order?

End of Life Management

with the ABC analysis, inventory planners can forecast the declining demand and manage the stock levels accordingly; reducing inventory levels stock minimize carrying costs and avoid obsolescence

Assumptions of the EOQ Model

- model must be calculated for one product at a time - demand must be known and constant throughout the year - the delivery replenishment lead time is known and doe snot fluctuate - replenishment is instantaneous - the purchase price 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 - stockouts are not allowed

calculating safety stock - considerations

- there are numerous other deterministic safety stock formulas than those that are covered here. Some models can be quite complex - a company will have to determine which of the many formulas is the most appropriate for their products - many companies calculate safety stock based on demand uncertainty alone, and rely on that to at least partially cover for supply uncertainty as well

Inventory Management Practices

1) Production.Market Classification 2) Segmentation Strategy 3) Policies and Parameters

safety stock

"buffer stock" is inventory that is above and beyond what is actually needed to meet anticipated demand protect against fluctuation in demand or supply

inventory deployment planning appraoches

- fair share allocation - requirements planning

Volume Economies of Scale

- individual item purchase price discounts - multiple-item purchase price discounts - transportation freight-rate discounts

Inventory Metrics

- inventory carrying cost - inventory accuracy - inventory days of supply - days of supply (DOS) - inventory turnover

Constraints on the practical use of EOQ

- limited capital - storage capacity - transportation - obsolescence - production lot size - utilization

inventory

- one of the company's largest assets - maintaining adequate finished product inventory allows a company to fill customer orders immediately - maintaining adequate materials inventory allows a company to support manufacturing operations and the production plan while avoiding delays

Customer Service Level Metrics

- perfect order measurement - fill rate

measures of service level

- performance cycle - order fill - case fill rate - line fill rate

Reorder Point Formulas

- periodic review - perpetual review

safety stock in dependent demand situations

1) add safety time 2) increase the replenishment order 3) utilize statistical techniques

planning safety stock requires:

1) determine the likelihood of a stockout using a probability distribution (forecast accuracy/error) 2) estimate the demand during a potential stockout period 3) establish the desired level of stockout protection (the desired service level)

functions of inventory

1) meet customer demand 2) to buffer against uncertainty in demand and/or supply 3) to decouple supply from demand 4) to decouple dependencies in the supply chain

categories of inventory

1) raw materials 2) work-in-process 3) finished goods 4) maintenance, repair and operating supplies (MRO) can be current or obsolete

levels of internal inventory

1) strategic stock 2) safety stock 3) cycle stock

inventory management

1) who are your key customers? 2) how do the inventory decisions you make: - impact service levels to your customers? - impact the total cost to serve?

Inventory Optimization

ABC analysis allows inventory planners to organize high priority items aligned to customer requirement inventory levels can be set to satisfy to high demand items while also carrying lows tock for undesirable items

Customer Service Levels

ABC analysis allows planners to set customer service levels based on product classification, which improves the overall supply chain performance by carrying less safety stock the customer service level is set by product and depends on multiple factors such as the item cost, demand, and margin

Strategic Pricing

ABC analysis helps in setting the prices strategically for products which bring more value to the company prices for highly desirable products can be increased which will have significant impact on profits

Which one of the following is NOT a valid reason to hold inventory?

Efficient utilization of warehouse space

Safety Time is defined as discrete increments of time used to facilitate planning activities.

FALSE

QUIZ

QUESTIONS

Resource Allocation

a continuous process requiring periodic tracking of class A items If a class A item is no longer desired by the customers or has lower demand, the item can to be moved to a lower classification

Economic Order Quantity

a quantitative decision model based on the trade-off between the annual ordering costs and the annual carrying costs

distribution requirements planning (DRP)

a time-phased finished good inventory replenishment plan in a distribution network. The function of determining the need to replenish inventory at branch warehouses

B & C items

account for the other 80% of the total number of items, but only 20% of total inventory cost

safety stock for independent demand uncertainty

add safety stock to base inventory to protect against a potential stock out when demand uncertainty exists (demand exceeds forecast)

replenishment programs

are designed to streamline the flow of goods within the supply chain reduce the reliance on forecasting and position inventory using actual demand on a JIT basis

A items

are given the highest priority "80/20 rule". 20% of the total number of items, but about 80%of the total inventory cost

Ordering costs

are incurred each time an order is placed - preparation - transportation - receipt processing - material handling

fiar share allocation

determines a fair share % of the available supply which is then allocated to each competing demand

individual item purchase price discounts

discounts for ordering larger quantities

profile replenishment

extends QR and VMI by giving suppliers the right to anticipate future requirements according to their knowledge of a product category (JIT II)

supply uncertainty

how long will it take to replenish inventory with our customers?

multiple-item purchase price discounts

if you purchase a combination of items from a supplier you may be able to take advantage of a volume discount based on the total volume across all the items purchased rather than just an individual item's volume

inventory management models

independent demand dependent demand

Inventory carrying cost

is the expense associated with maintaining inventory cost components: - cost of capital - taxes - insurance - obsolescence - storage expressed as a percentage of inventory value (about 24%)

Perpetual Review

monitor inventory status of an item continuously

transportation freight-rate discounts

ordering a larger quantity may mean that you can take advantage of transportation freight-rate discounts which will lower the per unit costs

Segmentation Strategy

specified all aspects of inventory management for each segment of inventory

independent demand

the demand for the final product. Demand pattern affected by trends, seasonal patterns, and market conditions ex: automobile potential need for safety stock

performance cycle

the elapsed time between release of a purchase order by the buyer to the receipt of shipment