chp 4

Functions of Inventory - Why hold inventory?

-TO MEET CUSTOMER DEMAND -TO BUFFER AGAINST UNCERTAINTY (SAFETY STOCK) -TO DECOUPLE SUPPLY FROM DEMAND (STRATEGIC STOCK, like anticipating a price increase so buying alot before the spike) -TO DECOUPLE DEPENDENCIES IN THE CHAIN

Fixed-Order Quantity System

A continuous inventory review system in which the same order quantity is used from order to order pre-defined quantity

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. many companies view as the "black hole" of inventory as they may not have very good or very timely visibility into this part of their inventory. SPACE AND COSTLY

80/20 rule

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

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

Strategic Stock

Additional inventory beyond cycle and safety stock, generally used for a VERY SPEICFIC PURPOSE or future event, and for a DEFINED PERIOD OF TIME take advantage of a price discount protect against a short-term disruptive event in supply for life cycle changes: seasonal demand, new product launch, transition protection

Costs Related to Inventory

DIRECT INDIRECT FIXED VARIABLE ORDER CARRYING

Reorder Point without Safety Stock

Demand (D) = 150 month / 30 days = 5 units/day Lead Time (LT) = 10 days Safety Stock (SS) = 0 units Reorder Point (ROP) = D x LT + SS = (5) x (10) + (0) = 50 units

Inventory Policy

Establishing target inventory levels for all products and materials When to review? When to order? How much to order?

Hidden Costs of Inventory

Having too much or too little inventory on hand can sometimes build hidden costs that create a risk for a company.

order costs

Incurred each time an order is placed: order transportation, preparation, receipt processing costs and material handling costs

Volume Economies of Scale

Individual Item Purchase Price Discounts Multiple-Item Purchase Price Discounts Transportation Freight-Rate Discounts

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. The ownership of this inventory has been transferred to the trading partners

FIXED TIME PERIOD SYSTEM

Inventory is checked in fixed time periods against a target inventory level

Obsolete Inventory

Inventory items that have met the obsolescence criteria established by the company. is stock that is expired, damaged, or no longer needed. will never be used or sold at full value

Continuous Review System

Inventory levels are CONTINUOSLY REVIEWED As soon as inventory falls below a pre-determined level (i.e., a reorder point), a replenishment order is triggered. More costly to conduct , but it potentially requires less safety stock because inventory is constantly monitored

Periodic Review System

Inventory levels are reviewed at a SET FREQUENCY e.g., weekly, monthly if the stock levels are below the pre-determined level (i.e., a reorder point), an order for replenishment is placed, otherwise no action is taken until the next cycle greater risk of inventory dropping well below the reorder point between reviews and, therefore, a greater potential need for safety stock

Bin system

Inventory system that uses either one or two bins to hold a quantity of the item being inventoried. mainly used for small or low value items. When the inventory in the first bin has been depleted, an order is placed to refill or replace the inventory. The second bin is set up to hold enough inventory to cover demand during the replenishment lead time so as to last until the replacement order arrives.

Cycle Stock

Inventory that a company builds to satisfy its' IMMEDIATE DEMAND depletes gradually as customer orders are received, and is replenished cyclically when supply orders are received is dependent on actual demand in the immediate time period, supply replenishment lead time and order quantities

Maintenance, Repair and Operating (MRO)

Items used in support of GENERAL OPERATIONS AND MAITENCE such as maintenance supplies, spare parts, and consumables used in the manufacturing process and supporting operations. do not end up as part of the finished product

EOQ Constraints

Limited Capital: The model may generate an order quantity which the company does not have sufficient available funds to purchase at one time. Storage Capacity: The model may generate an order quantity which the company does not have sufficient storage capacity to handle at one time. Transportation: The item being ordered and transported may require specialized or dedicated transportation, impacting the quantity per order. Obsolescence: The model may generate an order quantity which would create spoilage or obsolescence. Production Lot Size: The supplier may require the company to order an item in full production lot sizes. Unitization: The supplier may require the company to order an item in full pack, case, or pallet configurations.

Inventory control tools

Linear barcode 2D barcode Radio frequency identification (RFID)

four main categories of inventory:

Raw Materials Work-in-Process (WIP) sometimes called Work-in-Progress Finished Goods Maintenance, Repair and Operating (MRO) supplies

Radio frequency identification (RFID)

Successor to the barcode for tracking individual unit of goods. RFID does not require direct line of sight to read a tag, and the information on the tag is updatable.

Inventory Management

The function of planning and controlling inventories

REORDER POINT

The lowest inventory level at which a new order must be placed to avoid a stockout

Inventory Turnover

The number of times that an inventory cycles, or "turns over," during the year

Absolute Inventory Value

The value of the inventory at either its cost or its market value

Maintenance, Repair & Operating (MRO) supplies

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.

Finished Goods

Those items on which all manufacturing operations, including final testing, have been completed. These products are AVAILABLE FOR SALE From a cost perspective, THEY 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 Economic Order Quantity (EOQ) Model

a fixed-order quantity model A quantitative decision model based on the trade-off between annual inventory carrying costs and annual order costs

Base stock level system

a type of inventory system that issues an order whenever a withdrawal is made from inventory. used for expensive items a form of just in time

FINISHED PRODUCT INVENTORY

allows a company to fill customer orders immediately

MATERIALS INVENTORY

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

ABC System

classifies inventory based on important A is the highest value B is moderate value C is low value A method to determine which inventories should be counted & managed more closely than others

Failing to manage inventory adequately can lead to

dissatisfied customers lost sales lost revenues higher costs

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 Reducing the amount of inventory held in stock, while . . . Ensuring there is enough inventory to satisfy customer demand

Barcodes

help businesses track products and stock levels for inventory management

carrying costs

incurred for holding inventory cost of capital, taxes, insurance, obsolescence, and storage

Single period model

inventory is only ordered for 1 time stocking Goal is to maximize profits Ex: christmas tree lots, newstands

INVENTORY

is usually one of the company's largest assets is the quantities of goods and materials held in stock

Assumptions of EOQ model

order and carrying costs are constant constant known demand purchase price is constant and replenishment is instantaneous HOWEVER, ASSUMPTIONS DO NOT HOLD TRUE, SUPPLY CHAIN MANAGERS MUST MAKE ADJUSTMENTS TO EOQ

Inventory Stock Levels

strategic stock safety stock cycle stock ----------------------- External pipeline stock (in transit)

MAKE TO STOCK

supply chain where product is produced prior to receipt of a customer order

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

PURCHASED ITEMS or EXTRACTED MATERIALS

that are converted via the manufacturing process into components and products.

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 A POTENTIAL LIABILITY The more inventory a company holds, the MORE SPACE is needed, and SPACE COSTS MONEY INSURANCE, TAXES, SECURITY EXPENSES UNUSABLE due to expiration, obsolescence, damage, or spoilage.

Holding some inventory may be necessary

to MAINTAIN OPERATIONS and ENUSRE THAT PRODUCTS ARE AVAILABLE when customers demand them.

FACILITATING GOODS

which are those items that are used to help facilitate the service being provided

safety stock

**BUFFER** 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 AND SUPPLY