supply chain ch 4

why hold inventory/ functions?

1Cycle stock - 2Safety stock 3Strategic stock 4To Decouple Dependencies in the Supply Chain: Separating operations in a process Smoothing production and reducing peak period capacity needs

WIP

A good or goods in various stages of completion throughout the plant, spanning from raw material that has been released for initial processing up to fully processed material awaiting final inspection and acceptance as finished goods. Due to the range of potential stages of completion, and the fact that materials in WIP may be in a state of continuous transformation, many companies view WIP as the "black hole" of inventory as they may not have very good or very timely visibility into this part of their inventory. Best practice generally suggests minimizing the amount of WIP inventory in the manufacturing area since too much WIP may clutter up the physical space and impede the process flow.

service inventory

Activities carried out in advance of the customer's arrival Companies in the service industry do not maintain inventory of services since services are basically produced and consumed immediately upon demand. Companies can however, maintain inventory of "facilitating goods," which are those items that are used to help facilitate the service being provided. For example: Restaurants offer dining services, but cannot inventory the actual dining service; they can only begin the dinning service when the customers arrive. Restaurants can inventory the food, tableware, and other elements of the dining operation as these are facilitating goods necessary to provide the service. Restaurants can even prepare some of their meal options in advance, such as salads or deserts. They can inventory these facilitating products so they are ready to go when the customers arrive for the dining service.

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. A company may decide to carry strategic stock to: hedge currency fluctuations take advantage of a price discount protect against a short-term disruptive event in supply take advantage of a business opportunity for life cycle changes: seasonal demand, new product launch, transition protection Also called anticipation stock, build stock, or seasonal stock

inventory as an asset and liability

Holding some inventory may be necessary to maintain operations and ensure that products are available when customers demand them. Too much inventory ties up capital which could otherwise be used for purposes such as research and development, marketing and sales, stockholder dividends, salary increases, etc. The more inventory a company holds, the more space is needed, and space costs money. In addition to storage costs, a company may also have to pay for security, insurance, taxes, etc. to hold inventory. Inventory can become a liability if it becomes unusable due to expiration, obsolescence, damage, or spoilage.

cycle stock

Inventory that a company builds to satisfy its' immediate demand. Cycle stock depletes gradually as customer orders are received, and is replenished cyclically when supply orders are received. The amount of cycle stock that a company holds is dependent on actual demand in the immediate time period, supply replenishment lead time and order quantities.

raw materials

Purchased items or extracted materials that are converted via the manufacturing process into components and products. Every company that produces a product generally starts with some type of raw material, component part or starting material. There are strategies around the question of how much raw material a company should hold in inventory. Buy from a supplier and have it delivered to the operation just in time for when it is needed Buy and hold a larger quantity for strategic reasons Companies might be willing to increase costs by storing excess raw material inventory if they fear there may be a potential shortage of the material or if they suspect that there is an upcoming price increase and want to buy at the current lower price.

safety stock

Safety stock, also known as "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. Companies operating in a make-to-stock environment will generally maintain some amount of safety stock whether based on a management decision, or based on a safety stock determination formula.

internal inv stock levels

So, what is the right amount of inventory? The answer to that question is, "It depends." It depends on the supply chain strategy and set-up, the type of product(s), customers' expectations, customer service objectives, product shelf life, etc. cycle, strategic, safety

inventory management

The function of planning and controlling inventories. The goal of inventory management is to help a company be more profitable by lowering the cost of goods sold and/or by increasing sales. To an effort to achieve this stated goal, effective inventory management balances two competing considerations: Reducing the amount of inventory held in stock, while . . . Ensuring there is enough inventory to satisfy customer demand. So, what is the right amount of inventory? The answer to that question is, "It depends." It depends on the supply chain strategy and set-up, the type of product(s), customers' expectations, customer service objectives, product shelf life, etc. We will explore this questions throughout the remainder of this chapter.

4 categories of inventory

There are four main categories of inventory: 1 Raw Materials 2 Work-in-Process (WIP) sometimes called Work-in-Progress 3 Finished Goods 4 Maintenance, Repair and Operating (MRO) supplies

external inv stock levels

There may also be inventory which is held external to the company by downstream supply chain trading partners Pipeline Inventory Inventory in transit. Inventory held / owned by suppliers, or by wholesalers, distributors, retailers, and customers.

safety stock - reasons to hold inv

To Buffer Against Uncertainty in Demand and/or Supply (safety stock): Uncertainty in demand: sales or usage above expectations Uncertainty in supply: shortages, delays, disruptions

inventory

is the quantities of goods and materials that are held in stock. Includes all of the raw materials and work-in-process items used to support production, all of the finished products needed to provide customer service, and all of the other materials and supplies needed to run a business, i.e., maintenance, repair, and operating supplies. Inventory can be one of the largest and most important assets of an organization. However, too much inventory can also be a significant liability.

intro to inventory

A key decision in any product-based supply chain is how much inventory to keep on hand. Inventory is usually one of the company's largest assets, so careful management of that asset is an essential business requirement. 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. Failing to manage inventory adequately can lead to significant issues and inefficiencies throughout the supply chain, including dissatisfied customers, lost sales and revenue, and higher costs.

MRO

Maintenance, Repair and Operating (MRO) used throughout , but not in finished product. 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. Materials that you need to run the manufacturing operation and the business but do not end up as part of the finished product. Some MRO items are consumed during the process of converting raw materials into finished goods, e.g., oil for the manufacturing equipment. Other MRO items are used to facilitate the manufacturing operation, e.g., cleaning supplies, spare parts, etc. While still other MRO items may be used to facilitate the company's administrative activities, e.g., office supplies, coffee for the break room, etc.

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. From a cost perspective, finished goods are usually worth much more than raw materials or WIP since all of the material, labor, and overhead costs are fully applied to finished goods. The amount of finished goods inventory that a company decides to maintain is a strategic decision: Companies can operate a Make-to-Order supply chain where the finished goods are not produced until a customer order is received, and the raw materials may not even be ordered from the supplier(s) in advance. Little to no finished goods inventory is maintained. Companies can operate a Make-to-Stock supply chain where product is produced prior to receipt of a customer order. A forecast and demand plan are created and the finished goods are produced and held in inventory until a customer order is received. Significant amounts of finished goods inventory can sometimes be maintained.

strategic stock - reasons to hold inv

To Decouple Supply from Demand Supply pattern is different from demand pattern: Achieve economies of scale in purchasing; take advantage of volume price breaks/discounts Speculative buying in anticipation of a price increase Economical order size, lot size, production output Seasonal products/demand

cycle stock- reasons to hold inv

To Meet Customer Demand : Immediately fill customer orders Deploy the product / material near where it will be used