Chapter 7 Logistics

service level is equal to

100% minus the probability % of stockout

80/20 rule

A items account for approximately 20% of the total number of items, but 80% of the total inventory cost. B and C items account for the other 80% of inventory, but only the remaining 20% of cost.

inventory optimization

ABC analysis allows inventory planners to organize high priority items aligned to customer requirement. inventory levels can be set to satisfy to high demand items while also carrying low stock for undesirable items

customer service levels

ABC analysis allows planners to set customer service levels based on the product classification, which improves the overall supply chain performance by carrying less safety stock.

strategic pricing

ABC analysis helps in setting the prices strategically for products which bring more value to the company

resource allocation

a continuous process requiring periodic tracking of class A items. if class A item is no longer desired, the item can be moved to a lower classification

service level

a performance target specified by management and defines inventory performance objectives

what are the 3 approaches to introduce to safety stock into dependent demand situations if necessary

add safety time, increase the replenishment order, and utilize statistical techniques

how are inventory carrying cost components expressed?

as a percentage of inventory value

how do companies know how much safety stock to have?

by a management decision or a formula

ABC classification segmentation strategy

classifies inventory based on the degree of importance. first, you determine annual usage or sales for each item, determine the % of the total that each item represents, and then rank items from highest to lowest %.

6 benefits of a segmentation strategy such as ABC

end of life management, supplier negotiation, inventory optimization, strategic pricing, resource allocation, and customer service levels

two planning approaches to coordinate inventory requirements across multiple locations in the supply chain:

fair share allocation and requirements planning

"A" items in the ABC classification strategy

given the highest priority. the 80/20 rule applies

product/market classification

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

C items

have the lowest value and hence the lowest priority.

review frequency

how often inventory levels are reviewed

why is pipeline inventory important in knowing how much safety/strategic stock to hold?

if there is not a lot of pipeline inventory, this can be an issue and drive customers to competitors. it is very important in determining how much inventory to keep.

requirements planning

integrates across the supply chain taking into consideration unique requirements, MRP and DRP

dependent demand

internal demand for parts and materials based on the demand for the final product. this is calculated with no need for safety stock.

strategic stock

inventory in addition to cycle and safety stock, generally used for a very specific purpose and for a defined period of time. there are only CERTAIN times that you will need to have this.

cycle stock

inventory that a company has to satisfy its immediate demand. it continuously goes up and down as orders come in and go. it is dependent on demand and how you replenish your supplies with outside suppliers

how do you calculate EOQ on a graph?

it is the intersection of the annual ordering costs and the annual inventory carrying costs. this yields the lowest annual total cost.

who are your 5 key customers?

manufacturers (internal and external), wholesalers, distributors, retailers, and consumers

maintenance, repair, and operating supplies

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

obsolescence constraint on the use of EOQ

model may generate an order quantity which would create spoilage

periodic review

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

what is total cost equal to

purchase cost + ordering cost + holding cost

4 main categories of inventory

raw materials, work in process, finished goods, and MRO supplies

B items

require closer management since they are more expensive per unit and require more effort to purchase and make.

inventory to buffer against uncertainty in demand and/or supply

safety stock, this is to make up for uncertainty in demand or supply forecasts

segmentation strategy

specifies all aspects of inventory management for each segment of inventory. forecasting method, management technique, etc. for the product classifications

obsolete inventory

stock that is expired, out of date, or no longer needed

inventory to decouple dependencies in the supply chain

strategic stock, this is for separating operations in a process and to make smooth production during peak needs

policies and paramters

these are defined at the detail level for the segmentation strategies and segmentation groups, such as software, guidelines, and objectives

4 reasons to hold inventory

to meet customer demand, to buffer against uncertainty in demand and/or supply to decouple supply from demand, and to decouple dependencies in the supply chain

vendor managed inventory

transfers the responsibility for managing the inventory located at a customer's facility back to the vendor/manufacturer of that inventory

why may deciding whether or not to get rid of obsolete inventory be a difficult decision?

unusable inventory takes up space and costs money, but there may also be a cost associated with the actual disposal of the inventory.

end of life management

with the ABC analysis, inventory planners can forecast the declining demand and manage the stock levels accordingly; reducing inventory levels to minimize carrying costs and avoid obsolescence

what is the typical carrying cost percent used by a firm?

24%

safety stock

"buffer stock". it is inventory that is above and beyond what is ACTUALLY needed to meet anticipated demand. `

economic order quantity

a quantitative decision model based on the trade-off between the annual ordering costs and the annual carrying costs

convolution formula

combining standard deviations (demand and supply uncertainty) to consider variations in making effective inventory planning decisions

5 components of inventory carrying cost

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

individual items in an inventory category can be either

current or obsolete

inventory to meet customer demand

cycle stock, this is to immediately fill customer orders and move the product/material closer to the customers and where it will be used

reorder point

defines when a replenishment order is inititated

3 steps for planning safety stock:

determine the likelihood of a stockout using a forecast, estimate the demand during a potential stockout period, and establish the desired level of stockout protection, ex: the desired service level

fair share allocation

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

why may a company want to have strategic stock?

hedge currency fluctuations, take advantage of a price discount, protect against a short term disruption in supply, take advantage of business opportunity, and for life cycle changes such as seasons

pipeline inventory

inventory that has already been sold and that is in transit. there has been a transfer of ownership. this is not recorded, because you do not own it anymore

where does MRO supplies go?

it is immediately expensed, because it is not physically going into the inventory, only the production of it

perpetual (continuous) review

monitor inventory status of an item continuously

why is a one-tailed normal distribution used for calculating safety stock?

only demand that is greater than the forecast can create a stockout

4 aspects of ordering costs

order preparation costs, order transportation costs, order receipt processing costs, and material handling costs

safety time

ordering an item earlier than necessary based on the lead time, to ensure timely arrival

inventory to decouple supply from demand

strategic stock, this means to separate the amount of supply needed for the demand. each reason why supply might be different than demand has a strategy behind it

unitization constraint on the use of EOQ

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

production lot size constraint on the use of EOQ

supplier may require the company to order an item in full production lot sizes

supplier negotiation

the company can prioritize and focus on negotiating with suppliers of the class A category items since they represent most of the money spent.

independent demand

the demand for the final product. demand pattern affected by trends, seasons, and market conditions. this is the forecasted demand with a potential need for safety stock

performance cycle

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

transportation constraint on the use of EOQ

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

limited capital constraint on the use of EOQ

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

storage capacity constraint on the use of EOQ

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

order fill rate

the percent of cases ordered that are shipped as requested

order fill

the percent of customer orders filled completely as requested

line fill rate

the percent of order lines (items) that were filled completely as requested

perfect order measurement

the percentage of orders that are error-free