Supply Chain Management Exam 1: Chapter 4

Why Hold Inventory?

1. To Meet Customer Demand 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

companies in the service industry:

do not maintain inventory services since services are produced and consumed immediately upon demand; companies rather maintain facilitating goods because the help facilitate service provided

Hidden costs: too much inventory effects

financial resources are tied up, quality problems, no incentive for improvements

levels of inventory

internal: cycle stock, safety stock, strategic stock, obsolete inventory external: pipeline inventory; in transit

order costs

labor costs associated with placing an order for inventory and the cost of receiving the order

inventory as an asset v. liability

necessary to maintain operations and ensure that products are available when customers demand them; too much ties up capital; the more inventory, the more space and space costs money; pay for security, insurance, taxes; and finally it becomes a liability if it is unusable due to expiration, damage, etc.

inventory

quantities of goods and materials that are held in stock ; a company's largest assests ; includes raw materials, work-in-progress items, finished products; too much inventory is a significant liability

make-to-stock

supply chain where product is produced prior to recepit of a customer order; forecast and demand plan; significant amount of finished goods inventory can sometimes be maintained

make-to-order

the finished goods are not produced until a customer order is received; little to no finished good inventory is maintained

inventory metrics

units dollars weeks of supply (avg on hand inventory)/average weekly usage inventory turns-(costo of good sold)/avg inventory value

Pipeline Inventory

inventory that is out in the market being held by wholesalers, distributors, retailers, and customers; ownership of inventory has been transferred to the trading partners

inventory controls

linear barcode(can only be read horizontally), 2d barcode(stores info horizontal and vertically), radio frequency identification(do not require direct line of sight)

transportation

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

goal of inventory management

to help a company be more profitable by lowering the cost of goods sold and/or by increasing sales by: reducing the amount of inventory held ensuring there is enough inventory to satisfy customer demand

fixed

(sunk costs) independent of the unit volume produced (building equip rent)

Bin System

Inventory system that uses either one or two bins to hold a quantity of the item being inventoried; 2nd bin is to hold enough until replacement comes

inventory investment

absolute inventory value: the value of the invetory at eithe rits cost or its market value inventory turnonver: the number of times that an inventory cycles during the year

obsolete inventory

inventory items that have met the obsolescence criteria established by the company; obsolete inventory will never be used or sold at full value

transportation freight-rate discounts

lower the per unit costs

Hidden Costs: having too little inventory

productino disruptions leading to additional costs, longer delivery replenishment lead times, reduced responsvieness, lost revenue

limited capital

teh model may generate an order quantity which the company does not have sufficient available funds to purchase at one time

Inventory Management

the function fo planning and controlling inventories

4 Main Categories of Inventory

1) Raw Materials 2)Work-in-Process (WIP) 3)Finished Goods 4)Maintenance, Repair and Operation supplies

fixed-order quantity system

a continuous inventory review system in which the same order quantity is used from order to order when the inventory position drops to a predetermiend reoder point, a predetermined fixed order quantity is placed the time between orders varies from order to order

Economic order quantity (EOQ) Model

a fixed-order quantity model; a quantitiative deciision model based on the trade-off between annual inventory order costs and annual inventory crarying costs; when the sum of annul and carrying costs is minimized; constant demand, costs, purchase price

work-in-process

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; try to limit WIP!

"single-period" inventory model

a type of inventory system in which inventory is only ordered for a one-time stocking to maximize profits

base stock level system

a type of inventory system that issues an order whenever a withdrawal is made from inventory replenishment order=withdrawal quantity used for expensive items, a form of just-in-time

service inventory

activities carried out in advance of the customer's arrival

continuous review system

as soon as inventory falls below a pre-determined level (i.e a reorder point) a replenishment order automatically is triggered adv: allows for real-time updates of inventory facilitates accurate accounting requires less safety stock dis: generally requires an automated system

indirect

cannot be traced directly to the unit produced

carrying costs

costs for physically having inventory on-site and for maintaining the infrastructure needed to store the inventory and to secure and insure it over time

Variable

dependent on the unit volume produced vary with output level

direct

directly traceable to unit produced

Individual Item Purchase Price Discounts

discounts for ordering large quantities

failure to manage inventory leads to :

dissatisfied customers, lost sales and revenue, higher costs

Maintenance, Repair, and Operating (MRO)

general operations and maintenance such as maintenance supplies, spare parts, and consumables used in manufacutring process and supporting operations

periodic review system

inventory levels are reviewed at a set frequency advantages: reduces the time spent analyzing inventory, less expensive to implement and operate than a continuous review system disadvantage: can be difficult to determine the best review/reordering intervals it can make inventory less accurate greater risk of inventory dropping well below the reorder point

order costs examples

preparation costs, transportation costs, receipt costs, material handling costs

When to order inventory?

the lowest inventory level at which a new order must be placed to avoid a stockout is known as the reorder point (ROP)

storage capacity

the model may generate an order quantity which the company does not have sufficients storage capacity to handle at one time

Maintenance, repair, and operating (MRO) supplies

these are materials that you need to run the manufacturing oepration and the business, but do not end up as part of the finsihed product i.e oil which is consumed, or cleaning supplies, office supplies

Finished Goods

those items on which all manufacturing operations, including final testing have been completed. These prodcuts are available for sale and/or shipment to the customer.

Safety Stock

"buffer stock" that is planned to protect companies against fluctuations in demand or supply

finished product inventory

allows a company to fill customer orders immediately

materials inventory

allows a company to support manufacturin operations and the production plan while avoiding delays

ABC System

classifies inventory based on the degree of importance 1. determine annual usage or sales of each item 2. determine % of toal usage each item represents 3.rank items from highest to lowest % 4.classify items into groups (highest, moderate, lowest value) A (80/20 rule) highest priority, Bs requirei closer management since they are more expensive, C has lowest value

carrying costs examples

cost of capital, taxes, insurance, obsolescence , and storage

inventory turnover ratio

cost of good sold/average inventory @ cost

fixed-time period system

inventory is checked in fixed time periods against a target inventory level if 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 Q=R-IP

RFID

materials management-goods counted and logged manufacturing-assembly instructions encoded on RFID tag disribution center-shipment leaving DC automatically updates ERP to trigger a replenishment order and notify customer for delivery retail store-no check out lines as scanner link RFID tagged goodds in shopping cart with buyers credit

multiple-item purchase price discounts

purchase of a combination of items from a supplier you may able to take advantage of a volume discount based on teh total volume across al the items purchased

raw materials

purchased items or extracted materials that are converted via the manufacturing process into components and products; comapnies by excess when they fear a potential shortage or upcoming price increase

obsolescence

the model may generate an order quantity which would create spoilage

unitization

the supplier may require the compapny to order an item in full pack, case, or pallet configurations

production lot size

the supplier may requirei the company to order an item in full production lot size

strategic stock

very specific purpose or future event, and for a defined period of time can hedge currency fluctuations, take advantage of price discount, pprotect against a short-term disruptive event, take advantage of business opp, seasonal demand, new product, transition protection

fundamental inventory set target questions:

when to review inventory? when to order inventory? how much inventory to order?

cycle stock

Inventory to satisfy demand in the immediate time period