SCM Chapter 11 Managing inventory throughout the supply chain

Demand Uncertainty: (inventory drivers):

The risk of significant and unpredictable fluctuations in downstream demand. -safety stock, hedge

Total Holding Costs and Ordering Costs (continuous review system)

holding= (Q/2)H ordering cost= (D/Q)S

Key features of continuous review system: (3)

1)Inventory levels are monitored constantly, and a replenishment order is issued only when a preestablished reorder point has been reached. 2)The size of a replenishment order is typically based on the trade-off between holding costs and ordering costs. 3)The reorder point is based on both demand and supply considerations, as well as on how much safety stock managers want to hold.

Assumptions of continuous review system:(5)

1)The inventory item we are interested in has a constant demand per period (d). That is, there is no variability in demand from one period to the next. Demand for the year is D. 2)L is the lead time, or number of periods that must pass before a replenishment order arrives. L is also constant. 3)H is the cost of holding a single unit in inventory for a year. It includes the cost of the space needed to store the unit, the cost of potential obsolescence, and the opportunity cost of tying up the organization's funds in inventory. H is known and fixed. 4) S is the cost of placing an order, regardless of the order quantity. S is also known and fixed. 5) P, the price of each unit, is fixed.

five decision factors of how much safety stock to hold: (continuous review system):

1)The variability of demand 2)The variability of lead time 3)The average length of lead time 4)The desired service level 5)The average demand

Hedge Inventory: (types of inventory)

A form of inventory buildup to buffer against some event that may not happen. *uncertainty*

Bullwhip Effect:

An extreme change in the supply position upstream in a supply chain generated by a small change in demand downstream in the supply chain

Periodic Review System:

An inventory system that is used to manage independent demand inventory where the inventory level for an item is checked at regular intervals and restocked to some predetermined level.

Continuous Review System:

An inventory system used to manage independent demand inventory where the inventory level for an item is constantly monitored and when the reorder point is reached, an order is released.

Inventory Drivers:

Business conditions that force companies to hold inventory.

Cycle stock (types of inventory):

Components or products that are received in bulk by a downstream partner, gradually used up, and then replenished again in bulk by an upstream partner *mismatch between downstream levels demand and the most efficient upstream supplier*

Inventory Positioning:

Deciding where in the supply chain to hold inventory. -The cost and value of inventory increase as materials move down the supply chain. -The flexibility of inventory decreases as materials move down the supply chain.

Safety stock (types of inventory):

Extra inventory that a company holds to protect itself against uncertainties in either demand or replenishment time -uncertainty

Inventory Pooling:

Holding safety stock in a single location instead of multiple locations.

Independent demand inventory:

Inventory items whose demand levels are beyond a company's complete control

Dependent Demand Inventory:

Inventory items whose demand levels are tied directly to a company's planned production of another item.

Anticipation Inventory:(types of inventory)

Inventory that is held in anticipation of customer demand *mistmatch between the timing of customer demand and supply chain lead times*

Transportation Inventory: (types of inventory)

Inventory that is moving from one link in the supply chain to another. *mistmatch between timing of customer demand and supplier lead time*

Smoothing Inventory: (types of inventory):

Inventory that is used to smooth out differences between upstream production levels and downstream demand.

Order Quantity (periodic review system):

Q = R - I where Q = order quantity R = restocking level I = inventory level at the time of review

Reorder point ROP( when d and L vary)

ROP= d(line above)L(line above)+ss ss=safety stock

Economic Ordering Cost (EOQ): continuous review system:

The order quantity that minimizes annual holding and ordering costs for an item. Q=√(2DS)/H *annual demand and annual holding cost*

Supply Uncertainty (inventory drivers):

The risk of interruptions in the flow of components from upstream suppliers.

Inventory:

Those stocks or items used to support production (raw materials and work-in-process items), supporting activities (maintenance, repair, and operating supplies) and customer service (finished goods and spare parts).

Reorder point ROP (when d and L are constant)

When demand rate (d) and lead time (L) are constant: ROP= dL