Chapter 7
safety stock
"buffer stock" 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
on hand
Both periodic review and perpetual review compare the ____ and on-order inventory to the item's reorder point. If the total is < reorder point, then a replenishment order is initiated
safety
Companies operating in a make-to-stock environment will generally maintain some amount of ______ stock whether based on a management decision, or based on a safety stock determination formula
k
Customer Service Level Target (safety factor). Derived from the normal distribution using the desired product availability or customer service level target (think of it as z in stats)
known
Dependent demand inventory requirements are a function of _____ events that are not random
dependent demand
Describes the internal demand for parts based on the demand of the final product in which the parts are used determined/calculated demand order quantities computed with MRP
pure
Every unit/dollar of inventory that you can reduce drops right to the bottom line as ____ savings
managerial
Final carrying cost percent used by a firm is a ___ policy
purchased
Frequently MRO items are expensed at the time they are _____, and there may be a separate function, group, or individual who plans and orders these MRO items, from those who plan and order production items
1
From analysis of historical demand data the safety stock required to ensure a stockout only __% of the time is possible
safety
Generally, no specific ____ stock is needed to support time-phased procurement programs (e.g., MRP)
higher
Generally, the _____ the service level target, the higher the amount of inventory you will need to assure the target is achieved
financial
Inventory carrying cost is an imputed cost. It doesn't appear in the _____ statement. Companies determine the cost of capital they want to use which is typically the return they expect on investments
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 consumers
cycle stock
Inventory that a company builds to satisfy its' immediate demand
joint, convolution
Planning for both demand and supply uncertainty requires combining two independent variables The ___ impact of the probability of both demand and supply variation must be determined Direct method is to combine standard deviations using a ____ formula
target
Probability theory enables the calculation of safety stock for a ____ service level
consumed, facilitate
Some MRO items are _____ during the process of converting raw materials into finished goods, e.g., oil for the manufacturing equipment. Other MRO items are used to ______ the manufacturing operation, e.g., cleaning supplies, spare parts, etc
actual, immediate
The amount of cycle stock that a company holds is dependent on ____ demand in the _____ time period, supply replenishment lead time and order quantities
independent demand
The demand for the final product. Has a demand pattern affected by trends, seasonal patterns, & general market conditions
normal
The most common probability distribution for demand is the _____ distribution, i.e., "bell curve"
pipeline inventory
The ownership of this inventory has been transferred to the trading partners, but may still influence decisions the company makes regarding how they manage and control their internal inventory, and how much safety stock and/or strategic stock to hold
maintenance, repair, and operating
These are materials that you need to run the manufacturing operation and the business, but do not end up as part of the finished product.
inventory
Total cost is driven by ____ planning decisions which establish when and how much to order
inventory management
_____ _____ models are generally classified as independent demand and dependent demand
dependent
_____ demand does not require forecasting because there is no uncertainty
service
_____ level is equal to 100% minus probability % of stockout e.g., level of 99% results in a stockout probability of 1%
cycle
_____ stock depletes gradually as customer orders are received, and is replenished cyclically when supply orders are received
dependent
______ demand does not require safety stock
vendor managed inventory
a modified QR that eliminates the need for replenishment orders arrangements transfer the responsibility for managing the inventory located at a customer's facility back to the vendor/manufacturer of that inventory
service level
a performance target specified by management and defines inventory performance objectives
quick response
a technology-driven cooperative effort between retailers and suppliers to improve inventory velocity while matching supply to consumer buying patterns
ABC
an _____ system classifies inventory based on the degree of importance
1.25 MAD
an approximation of the standard deviation of the forecast error, which is assumed to be normally distributed (i.e. "bell shaped curve"). This is to approximate up to 25% more than the Mean Absolute Deviation (forecast error). Anything beyond this would be considered "abnormal demand" and not covered by safety stock
equally, infinite, independent, consistent, quantity, cannot
assumptions of reactive (pull) inventory logic All customers, market areas, and products contribute ____ to profits ____ capacity exists at the production facility Infinite inventory availability at the supply location Supply cycle time can be predicted and cycle lengths are _____ Customer demand patterns are relatively stable and _____ Each distribution warehouse's timing and ____ of replenishment orders are determined independently of all other sites, including the supply source Supply cycle length ____ be correlated with demand
one, constant, fluctuate, instantaneous, discounts, carrying, stockout
assumptions of the EOQ model: The model must be calculated for ___ product at a time. The demand must be known and ___ throughout the year. The delivery replenishment lead time is known and does not ____. Replenishment is _____. There is no delay in the replenishment of the stock, and the order is delivered in the quantity that was demanded, i.e. in one whole delivery. The purchase price (i.e., unit cost) is constant and no _____ or price breaks are factored into the model. ______ cost is known and constant. Order cost is known and constant. _____ are not allowed
weeks of supply, inventory turns
common metrics for inventory: units dollars (tied up in inventory) ____ ___ ____ (avg on hand inventory / avg weekly use) _____ ____ (COGS / avg inventory value) inventory carrying cost (discuss with EOQ)
perpetual review
continuously monitors inventory levels to determine inventory replenishment needs
fill rate
customer service level is measured as _______
inventory control
defines how often inventory levels are reviewed to determine when and how much to order
reorder point
defines when a replenishment order is initiated
replenishment programs
designed to streamline the flow of goods within the supply chain Intent is to reduce reliance on forecasting and position inventory using actual demand on a just-in-time basis
time buckets
discrete increments of time used to facilitate planning activities
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)
stocks inventory, replenishment, customer
for VMI, the vendor/manufacturer: ___ ____ Places ______ orders Arranges the display Typically owns inventory until purchased Is required to work closely with _____
predictable, purchase requirements
for dependent demand, no safety stock assumes: Procurement replenishment is _____ and constant Vendors and suppliers maintain adequate inventories to satisfy 100% of ___ ____
don't
in the real world, the EOQ assumptions _____ hold true over time
ordering costs
incurred each time an order is placed
current, obsolete
individual items within each category of inventory can be ______ or _______
taxes
inventory carrying cost component ______ on inventory held in warehouses
insurance
inventory carrying cost component based on estimated risk or loss over time and facility characteristics
obsolescence
inventory carrying cost component deterioration of product during storage, and shelf-life
storage
inventory carrying cost component facility expense related to product holding rather than product handling
cost of capital
inventory carrying cost component specified by senior management
requirements planning
inventory deployment planning approach integrates across the supply chain taking into consideration unique requirements consists of MRP and DRP
fair share allocation
inventory deployment planning approach provides each distribution facility with an equitable distribution of available inventory limited ability to manage multistage inventories
pull
inventory management policy "make to order" Producing stock in response to actual demand Responds to actual customer demand to pull the product through the distribution channel
push
inventory management policy "make to stock" Producing stock on the basis of anticipated demand. Proactively allocates inventory on the basis of forecasted demand and product availability
segmentation strategy
inventory management practice definition specifies all aspects of inventory management process for each segment of inventory e.g., service objectives, forecasting method, management technique, and review cycle
product/market classification
inventory management practice groups products, markets, or customers with similar characteristics to facilitate inventory management e.g., classify by sales, profit contribution, inventory value, usage rate or item category
policies and parameters
inventory management practice must be defined at a detailed level e.g., data requirements, software applications, performance objectives, and decision guidelines
customers, manufacturers, service, value,
inventory policy considers: Who are your key ______/stakeholders? _____ (internal/external), Wholesalers, Distributors, Retailers, Consumers Level of _____ required (does it differ by customer) What is important to them? What _____ do they create? What risks do they take? Inventory positioning / ABC classification How do the inventory decisions you make impact service levels to your customers, "total costs" to serve?
demand uncertainty
involves the variation in sales during the lead time necessary to replenish inventory
supply uncertainty
involves variation in the time and/or quantity necessary to replenish inventory also called performance cycle uncertainty
MAD
is a measurement of the size of the average absolute forecast error over a given period of time normally calculated based on the past 12 months actual sales -vs- the lead-time offset forecast for those months
performance cycle
measure of service level the elapsed time between release of a purchase order by the buyer to the receipt of shipment
case fill rate
measure of service level the percent of cases ordered that are shipped as requested
order fill
measure of service level the percent of customer orders filled completely as requested
line fill rate
measure of service level the percent of order lines (items) that were filled completely as requested
periodic review
monitors inventory status of an item at regular intervals such as weekly or monthly
full
obsolete inventory will never be sold at ____ value
safety time
ordering an item earlier than necessary based on the lead time, to ensure timely arrival
preparation, transportation, receipt, material handling
ordering costs involve these 4 costs
likelihood, demand, service
planning safety stock requires 3 steps: Determine the _____ of a stockout using a probability distribution, i.e., forecast accuracy/error Estimate the _____ during a potential stockout period Establish the desired level of stockout protection, i.e., the desired ____ level
transportation
practical consideration of EOQ; constraint The item being ordered and transported may require specialized or dedicated transportation, impacting the quantity per order
limited capital
practical consideration of EOQ; constraint The model may generate an order quantity which the company does not have sufficient available funds to purchase at one time
storage capacity
practical consideration of EOQ; constraint The model may generate an order quantity which the company does not have sufficient storage capacity to handle at one time
obsolescence
practical consideration of EOQ; constraint The model may generate an order quantity which would create spoilage or obsolescence
unitization
practical consideration of EOQ; constraint The supplier may require the company to order an item in full pack, case, or pallet configurations
production lot size
practical consideration of EOQ; constraint The supplier may require the company to order an item in full production lot sizes
individual item purchase price discounts
practical consideration of EOQ; volume economies of scale Discounts for ordering larger quantities If the volume discount is sufficient to offset the added cost from carrying additional inventory, then ordering a larger volume may be desirable
multiple item purchase price discounts
practical consideration of EOQ; volume economies of scale 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
transportation freight rate discounts
practical consideration of EOQ; volume economies of scale Ordering a larger quantity may mean that you can take advantage of this which will lower the per unit costs
limited capital, storage capacity, transportation, obsolescence, production lot size, unitization
practical considerations of EOQ; constraints (6)
individual item purchase price discounts, multiple item purchase price discounts, transportation freight rate discounts
practical considerations of EOQ; volume economics of scale (3)
bill of materials
relationship between independent and dependent demand is shown in the ______
under
safety stock is only need for the ____-forecast error!!
obsolete inventory
stock that is expired, damaged, or no longer needed Some companies may donate this inventory to a non-profit organization if it has any remaining value, which not only helps the non-profit but also avoids disposal costs and may result in a tax benefit for the company
anticipation stock, build stock, seasonal stock
strategic stock is also called (3)
carrying cost
the expense associated with maintaining inventory
fill rate
the magnitude of a backorder or stockout. Can be case fill rate, line fill rate, etc
inventory control
the managerial procedure for implementing an inventory policy
strategic stock
the stock to decouple demand from supply additional inventory beyond cycle and safety stock, generally used for a very specific purpose or future event, and for a defined period of time
lead time
the time necessary to fully replenish inventory including all manufacturing, assembly, packaging, quality control, etc., activities must also consider how long it will take to respond once a stockout occurs expressed in months
economic order quantity
this model is generally used as a baseline for further modification before determining the actual quantity to order
MRP
this requirements planning is driven by a production schedule
DRP
this requirements planning is driven by supply chain demand
product/market classification, segmentation strategy, policies and parameters
what are 3 inventory management practices
performance cycle, order fill, case fill rate, line rill rate
what are common measures of service level (4)
purchasing cost, ordering cost, holding cost
what are the 3 components of total cost
quick response, vendor managed inventory, profile replenishment
what are the 3 inventory replenishment programs
strategic stock, safety stock, cycle stock
what are the 3 levels of internal inventory
raw materials, work in process, finished goods, MRO
what are the 4 main categories of inventory
cost of capital, taxes, insurance, obsolescence, storage
what are the 5 inventory carrying cost components
fair share allocation, requirements planning
what are the two inventory deployment planning approaches (to coordinate inventory requirements across multiple locations in the supply chain)
demand and supply
what are the two types of uncertainty we are trying to account for with safety stock?
review period in days
what is used in the periodic review calculation of reorder point that is not used in the perpetual review?
scale, speculative, economical, seasonal
why do you decouple supply from demand? Achieve economies of ____ in purchasing; take advantage of volume price breaks/discounts ______ buying in anticipation of a price increase _____ order size, lot size, production output ______ products/demand
demand, uncertainty, decouple, dependencies
why hold inventory? to meet customer _____ to buffer against _____ in demand/supply to ______ supply from demand to decouple ______ in the supply chain
fluctuations, discount, opportunity, seasonal
why might a company decide to carry strategic stock? hedge currency _____ take advantage of a price ______ protect against a short-term disruptive event in supply take advantage of a business _____ for life cycle changes: _____ demand, new product launch, transition protection
periodic review, perpetual review
2 types of inventory control using reactive approaches
safety time, expected plan error, set safety stocks directly
3 approaches to introduce safety stock into dependent demand situations if necessary: 1. Put ___ ___ into the requirements plan e.g., order a component earlier than needed to assure timely arrival 2. Increase the replenishment order by a quantity specified by some estimate of ____ ____ ____, i.e., over-planning / top-level demand 3. Utilize statistical techniques to ____ ____ ____ ___ for a component rather than to the item of top-level demand
greater
A one-tailed normal distribution is used because only demand that is ____ than the forecast can create a stockout
economic order quantity
A quantitative decision model based on the trade-off between the annual ordering costs and the annual inventory holding costs the sum of the annual ordering costs and the annual inventory holding cost is minimized
