Chapter 7 Rutgers Business Logistics

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 goods inventory replenishment plan in a distribution network A logical extension of the MRP system and ties physical distribution to the manufacturing planning and control system

Strategic Stock

Additional inventory generally used for a very specific purpose/ defined period of time

ABC Classification

Allows different inventory management techniques to be applied to different segments of the inventory in order to increase revenue and decrease costs

Carrying Cost Components

Cost of Capital Taxes Insurance Obsolescence Storage

Dependent Demand

Internal demand for parts and materials based on the demand for the final product Calculated Demand Generally, no need for Safety stock Ex. Car engine

Pipeline Inventory

Inventory in the transportation network and the distribution system Already out in the market being held by wholesalers, distributors, retailers and even consumers

Fill Rate

(1 - ((Total Items - Shipped Items)/ Total Items)) x 100 The percentage of a customer's order that is filled on the first shipment

Annual Order Cost

(Annual Demand/EOQ x Order Cost)

Periodic ROP Formula

(D x (T + P/2)) + SS D = Average Daily Demand T = Average Lead Time in Days P = Review Period in Days SS = Safety Stock

Perpetual ROP Formula

(D x T) + SS D = Average Daily Demand T = Average Lead Time in Days SS = Safety Stock

Safety Stock Formula #1

(Max. Daily Usage x Max. LT in Days) - (Avg. Daily Usage x Avg. LT in Days)

Cycle Stock

Inventory that a company builds to satisfy its' immediate demand

Safety Stock

Inventory that is above and beyond what is actually needed to meet anticipated demand

Constraints on Practical use of EOQ

Limited Capital Storage Capacity Transportation Obsolesce Production Lot Sizes Unitization

Maintenance, Repair & Operating (MRO) Supplies

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

Ordering Cost Components

Order Preparation costs Order Transportation costs Order Receipt Processing costs Material Handling costs

Inventory Ordering Cost (On Exam)

Order preparation costs Order transportation costs Order receipt processing costs Material handling costs

Common Measures of service level

Performance Cycle Order Fill Case Fill Rate Line Fill Rate

External Inventory

Pipeline Inventory ex. inventory in transit

Inventory Management Practices

Product/Market Classification Segmentation Strategy Policies and Parameters

Main Categories of Inventory

Raw Materials Work-in-Process Finished Goods Maintenance, Repair and Operating Supplies

EOQ Formula

SQRT((2 x Order Cost x Annual Demand Volume)/ (Annual Carrying Cost % x Unit Cost))

Obsolete Inventory

Stock that is expired, damaged or no longer needed

Three Levels of Internal Inventory

Strategic Stock Safety Stock Cycle Stock

Independent Demand

The demand for the final product. Demand pattern affected by trends, seasonal patterns & market conditions Forecasted Demand Potential need for Safety stock Ex. Car

Days of Supply (DOS)

The most common KPI used by managers in measuring the efficiency in supply chain Average Inventory / Monthly Demand x 30

Inventory Days of Supply

The number of days it would take to run out of supply if it was not replenished Inventory on Hand / Avg Daily Usage

Inventory Turnover

The number of times that a company's inventory cycles per year COGS / AVG Inventory

Perfect Order Measurement

The percentage of orders that are error-free ((Total Orders - Error Orders)/ Total Orders) x 100

Inventory Accuracy

The variance between perpetual inventory and physical inventory

Annual Carrying Cost

[EOQ/2 x (5 x .20)]

Vendor Managed Inventory (VMI)

a modified QR that eliminates the need for replenishment orders

Quick Response (QR)

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

B & C items

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

Policies and Parameters

defined at the detail level ex. data requirements, softwares applications, performance objectives, and decisions guideline

Fair Share Allocation

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

Profile Replenishment (PR)

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

A items

given the highest priority; generally account for approximately 20% of total items but 80% of inventory cost

Product/Market Classification

groups products, markets, or customers with similar characteristics together to facilitate inventory management ex. classify by sales, profit contribution, inventory value, usage rate

Supply Uncertainty

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

Requirements Planning

integrated across the supply chain taking into consideration unique requirements MRP- driven by Master Production Schedule DRP- driven by customer demand

Safety Stock Formula #2

k x SQRT(Lead time x dc) x (1.25 x MAD) k = customer service level target dc = number of distribution centers at which safety stock is maintained

Periodic Review

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

Perpetual Review

monitor inventory status of an item continuously

B items

require closer management since they are more expensive (per unit, require more effort to purchase/make more prone to obsolescence

Segmentation Strategy

specifies all aspects of inventory management for each segment of inventory ex. service objectives, forecasting method, management technique, and review cycle by segment

Performance Cycle

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

Case Fill Rate

the percent of cases ordered that are shipped as requested

Order Fill

the percent of customer orders filed completely as requested

Line Fill Rate

the percent of order lines that were filled completely as requested

Demand Uncertainty

when and how much product will our customers order?

Benefits of a Segmentation Strategy

1. End of Life Management 2. Supplier Negotiation 3. Inventory Optimization 4. Strategic Pricing 5. Resource Allocation 6. Customer Service Levels

Functions of Inventory

1. To Meet Customer Demand (Cycle Stock) 2. To Buffer Against Uncertainty in Demand and/or Supply (Safety Stock) 3. To Decouple Supply from Demand (Strategic Stock) 4. To Decouple Dependencies in the Supply Chain (Strategic Stock)