CHP 7 TRA

two major inventory management decisions are to determine

(1) the right order quantity or lot size and (2) when to release an order

EPC global's tag classes

-Class 0: read only -class 1: write once, read many -class 2: read/write -class 3: read/write with battery power to enhance range -class 4- read/write active transmitter

Inventory includes

all the materials and goods that are purchased, partially completed materials and component parts, and the finished goods produced

deterministic inventory models

assume demand, delivery lead time, and other parameters are deterministic

The primary functions of inventory

buffer uncertainty in the marketplace and to decouple, or break the dependencies between stages in the supply chain.

Inventory requires

capital investment, handling, and storage space, and it is also subject to deterioration and shrinkage.

U.S. retailers focus on

case- and pallet-level tagging for inventory management to help reduce inventory and stockouts while simultaneously improving customer service.

problem with many inventory management systems

challenge to maintain accurate inventory records

Finished goods

completed products ready for shipment. -are often kept to buffer against unexpected demand changes and in anticipation of production process downtime; to ensure production economies when the setup cost is very high; or to stabilize production rates, especially for seasonal products.

annual physical stock

counts to determine the total dollars invested in inventory provide an absolute measure of inventory investment.

Independent demand

demand for a firm's end products and has a demand pattern affected by trends, seasonal patterns, and general market conditions -EX: the customer demand for all-terrain vehicles is independent demand. (the replacement batteries, headlights, seals, and gaskets sold as service parts to the repair shops or end users are independent demand items)

Inventory costs are categorized as

direct and indirect costs, fixed and variable costs, and order (or setup) and holding (or carrying) costs.

All manufacturing and service organizations are concerned with

effective inventory planning and control

two major RFID standards

electronic product code (EPC), & 18000 standard of the International Standards Organization (ISO)

In the increasingly global business environment, organizations use

geographical specialization to manufacture their products in developing countries -the developing countries specialize in cheap labor and abundant raw materials, whereas the manufacturing firms provide the technology and capital to produce the goods

Dependent demand

internal demand for parts based on the demand of the final product in which the parts are used; calculated once the demand of the final product is known. -material requirements planning (MRP) software is often used to compute exact material requirements. -EX: Subassemblies, components, and raw materials -may have a pattern of abrupt and dramatic change because of its dependency on the demand of the final product, particularly if the final product is produced in large lot sizes. (Batteries, headlights, seals, and gaskets originally used in assembling the all-terrain vehicles are dependent demands)

the optimal order quantity

lies at either a feasible EOQ or at a price break point.

Maintenance, repair, and operating supplies

materials and supplies used when producing the products but are not parts of the products. -Solvents, cutting tools, and lubricants for machines are examples of MRO supplies. -The two main reasons for storing MRO supplies are to gain purchase economies and to avoid material shortages that may shut down production.

Work-in-process

materials that are partially processed but not yet ready for sales. -One reason to keep WIP inventories is to decouple processing stages or to break the dependencies between work centers

(s, Q) continuous review policy

orders the same quantity, Q, when physical inventory reaches the reorder point, s. The quantity, Q, can be determined by one of the fixed order quantity methods (such as the EOQ). -works properly only if the quantity demanded is 1 unit at a time

four broad categories of inventories

raw materials; work-in-process; finished goods; and maintenance, repair, and operating (MRO) supplies.

steps by which the RFID can automate the supply chain

1. Materials Management: 2. manufacturing (RFID tag can be placed on the unit being produced so that specific customer configurations can be incorporated automatically during the production process. This is invaluable in a make-to-order environment.) 3. distribution center (logistics vehicle arrives at the loading dock, the fixed-portal RFID reader communicates with the tag on the vehicle to confirm that it is approved to pick up goods) 4. retail store (RFID software application processes the signals to provide specific handling instructions and initiate automatic routing of the goods)

Assumptions of the Economic Order Quantity Model

1. The demand is known and constant. 2. Order lead time is known and constant 3. Replenishment is instantaneous. The entire order is delivered at one time and partial shipments are not allowed. 4. Price is constant. Quantity or price discounts are not allowed. 5. The holding cost is known and constant. The cost or rate to hold inventory must be known and constant. 6. Order cost is known and constant. The cost of placing an order must be known and remains constant for all orders. 7. Stockouts are not allowed. Inventory must be available at all times.

cycle counting

A commonly used technique in which physical inventory is counted on a periodic basis to ensure that physical inventory matches current inventory records. -reconcile discrepancies between their physical inventory and inventory record on a monthly or quarterly basis -helps to identify obsolete stocks and inventory problems so that remedial action can be taken in a reasonable amount of time -can be costly and time-consuming and can disrupt operations

ABC Inventory Matrix

A diagram that illustrates whether a firm's physical inventory matches its inventory usage. It is derived by plotting an ABC analysis based on inventory usage classification on the vertical axis and an ABC analysis based on physical inventory classification on the horizontal axis.

Pareto Analysis

A graphic technique that prioritizes the most frequently occurring problems or issues. -The analysis recommends that problems falling into the most frequently occurring category be assigned the highest priority and managed closely.

ABC inventory control system prioritizes inventory items into groups A, B, and C.

A items are given the highest priority (20 percent of the items make up about 80 percent of the total annual dollar usage), while C items (40 percent of the items, making up about 5 percent of the total annual dollar usage of inventory) have the lowest priority and are typically the most numerous (the B items (40 percent of the items and account for about 15 percent of the total annual dollar usage) fall somewhere in between). -Greater attention, safety stocks, and resources are devoted to the high-priority or A items

periodic review system

A review of physical inventory at specific points in time. -reviewed at regular intervals, such as weekly or monthly.

near field communication (NFC)

A secure form of data exchange between an NFC tag or Android-powered device with another Android-powered device. -a specialized subset of RFID technology.

Radio frequency identification (RFID)

A technology that enables huge amounts of information to be stored on chips (called tags) and read at a distance by readers, without requiring line-of-sight scanning. -used in libraries, for passport identification, animal tracking, medical disciplines, toll payments, and in many other fields

80/20

A theory originating from Pareto analysis, which suggests that most of a firm's problem "events" (80 percent) are accounted for by just a few (20 percent) of the problems; can also be applied to other areas, such as ABC inventory control, which says that 80 percent of the inventory dollars come from 20 percent of the inventory items.

ABC inventory control system

A useful technique for determining which inventories should be managed more closely and which others should not (A-items are the most important).

economic manufacturing quantity (EMQ) (production order quantity (POQ) model)

A variation of the classic EOQ model, used to determine the most economical number of units to produce. -It relaxes the instantaneous replenishment assumption by allowing usage or partial delivery during production

quantity discount model (price break model)

A variation of the classic EOQ model, wherein purchase price is allowed to vary with the quantity purchased.

electronic product code (EPC)

A widely used RFID standard managed by EPC global, Inc. subsidiary of GS1 that created the UPC barcode,

inventory turnover ratio

A widely used measure to analyze how efficiently a firm uses its inventory to generate revenue (monthly, quarterly, yearly) -ratio shows how many times a company turns over its inventory in an accounting period. -Higher turnovers are generally viewed as a positive trend because it indicates the company generates more revenue per dollar in inventory investment; allow the company to increase cash flow and reduce warehousing and carrying costs. -low inventory turnover may point to overstocking or deficiencies in the product line or marketing effort

active RFID tags

An RFID tag that is equipped with an onboard power supply to power the integrated circuits and broadcast its signal to the tag reader.

safety stock or buffer stock

An appropriate amount of inventory that can be used to cushion uncertainties due to fluctuations in supply, demand, and/or delivery lead time

continuous review system

An inventory management system where the physical inventory levels are counted on a continuous or daily basis; implies that physical inventory is known at all times -difficult to achieve and very expensive to implement

(S, R) periodic review policy

At each review time, a sufficient quantity is ordered to bring the inventory up to a predetermined maximum inventory level, S. This policy places a variable-sized order as long as the physical inventory is less than the maximum inventory level, S.

direct costs

Costs that are directly traceable to the unit produced, such as the amount of materials and labor used to produce a unit of the finished good.

fixed costs

Costs that are independent of the output quantity. -EX: Buildings, equipment, plant security, heating, and lighting

(s, S, R) policy:

If at the time of inventory review, the physical inventory is equal to or less than the reorder point, s, a sufficient quantity is ordered to bring the inventory level up to the maximum inventory level, S -if the physical inventory is higher than the reorder point s, no order is placed. This policy addresses the major deficiency of the (S, R) policy.

(nQ, s, R) periodic review policy

If at the time of inventory review, the physical inventory is equal to or less than the reorder point, s, the quantity, nQ, is ordered to bring the inventory up to the level between s and (s + Q

fixed order quantity models

Independent demand inventory models that use fixed parameters to determine the optimal order quantity to minimize total inventory costs.

passive RFID tags

RFID tags that are without an internal power source and require power from a tag reader.

key function of inventory

The ability to geographically separate the consumption of the finished goods from production

economic order quantity model (EOQ)

The classic independent demand inventory system that computes the optimal order quantity to minimize total inventory costs -basic order decision is to determine the optimal order size that minimizes total annual inventory costs—that is, the sum of the annual order cost and the annual inventory holding cost. -carrying cost is often used in place of holding cost and setup cost is used in place of order cost.

set up costs

The costs associated with setting up machines and equipment to produce a batch of product; the term is often used in place of order costs.

holding/carrying costs

The costs incurred for holding inventory in storage. -handling charges, warehousing expenses, insurance, pilferage, shrinkage, taxes, and the cost of capital.

service level

The in-stock probability.

reorder point (ROP)

The lowest inventory level at which a new order must be placed to avoid a stockout during the order cycle time period.

price break point

The minimum quantity required to receive a quantity discount. -EOQ may not be feasible at that particular price level because the order quantity may not lie in the given quantity range for that unit price.

indirect costs

Those costs that cannot be traced directly to the unit produced and are synonymous with manufacturing overhead. -EX: Maintenance, repair, and operating supplies; heating; lighting; buildings; equipment; and plant security

EOQ calculation

Total Annual Inventory Cost= Annual purchase cost + annual holding cost + annual order cost TAIC= APC + AHC + AOC = (R*C) + (Q/2*K*C) + R/Q*S) C= purchase cost per unit S= cost of placing one order Q= order quantity R= annual requirement or demand K= holding rate, where annual holding cost per unit = K*C (R, K & S are deterministic aka assumed costant, Q is the only unknown variable in TAIC equation)

(s, S) continuous review policy

When current inventory reaches or falls below the reorder point, s, sufficient units are ordered to bring the inventory up to a predetermined level, s. If the quantity demanded is 1 unit at a time, this system is similar to the (s, Q) policy

RFID

a valuable technology for tracking inventory in the supply chain -It can synchronize information and physical flow of goods across the supply chain from manufacturers to retail outlets and to the consumers at the right place at the right time -can track returned goods through the supply chain and prevent counterfeiting & helps to reduce out-of-stock items - latest developments in inventory management

order costs

Direct variable costs associated with placing an order with a supplier. -include managerial and clerical costs for preparing the purchase, & incidental expenses that can be traced directly to the purchase

variable costs

Expenses that vary as a function of the output level -EX: direct materials and labor costs

Inventory management models are generally separated by

the nature and types of the inventory being considered -can be classified as dependent demand and independent demand models.

bottom line of effective inventory management

to control inventory costs and minimize stockouts

key focus of inventory management

to control variable costs since fixed costs are generally considered sunk costs.

raw materials

unprocessed purchased inputs or materials for manufacturing the finished goods. -become part of finished goods after the manufacturing process is completed. -keeping RM inventories includes volume purchases to create transportation economies or take advantage of quantity discounts; stockpiling in anticipation of future price increases or to avoid a potential short supply; or keeping safety stock to guard against supplier delivery or quality problems.