exam 2 and quiz (best ?)
Procurement cost is calculated by: Safety Stock x Average Inventory Level Procurement cost + Inventory holding cost (Demand/Order Quantity) x Cost per order Average Inventory Level + (Order Quantity/2)
(Demand/Order Quantity) x Cost per order
Push
- Allocates production to stocking locations based on overall demand - *Encourages economies of scale in production
Just-In-Time
- Attempts to synchronize stock flows so as to just meet demand as it occurs - Minimizes the need for inventory
Reasons against keeping inventories
- Consume capital that might be better used elsewhere - Mask quality problems that would be seen and solved more immediately - Divert managements attention away from careful planning and control of the supply and distribution channels by promoting an insular attitude about channel management
Carrying Cost
- Cost for holding inventory over time - primary cost
4 types of inventory holding costs
- Cost of Capital - Insurance and taxes - Obsolescence Cost - Storage Cost
How else to classify inventory?
- Criticality to Operations - Profitability - Usage rate * Volume Dollar - Value & # Customer Transactions Dollar - Value & Criticality - Multiple dimensions (cluster analysis)
Pull
- Draws inventory into the stocking locations based on overall demand - each stocking location is considered independent - maximizes local control over inventories - Encourages economies of scale in production
Aggregate Control
- Groups Items based on their sales level by the 80-20 Principle (Inventory Stratification) - Allows different control policies for 3 or more broad product groups
Classifying Inventory: ABC Analysis
- Identify the SKUs that management should spend time on - Prioritize SKUs by their value to firm - Create logical groupings - Adjust as needed
Reasons for keeping inventory
- Improve customer service - Encourage production, purchase, transportation economies - Act as a hedge against price changes - Protect against uncertainties in demand and lead times - Act as a hedge against contingencies
Types of inventory
- In transit (pipeline) - Work-in-process inventory - Regular/cyclical/seasonal - Safety - Speculative/anticipatory - Obsolete/dead stock
What are the Out-of-stock costs?
- Lost sales cost - backorder cost
B Items
- Many Moderate impact items - Automated control with management by exception
C Items
- Many if not most of the items that make up a minor impact - Control system should be as simple as possible - Reduced wastes management time and attention - Group into common regions, suppliers, end users
Classifying Inventory: ABC Analysis
- Pareto's Rule (80-20 Rule) - 80% of sales from 20% of the inventory SKU's - most elements had very little influence in most situations A items B items C items
Lost sales cost
- Profit immediately forgone - future profits foregone through loss of goodwill
Inventory Management Philosophies (5)
- Pull - Push - Just-in-time - supply-driven - aggregate control
Mathematical methods are popular for this type of problem
- Search for the best combination of facilities to minimize costs - Do so within a reasonable computational time - Do not require enormous amounts of data for the analysis
Types of Inventory Management Objectives
- Service objectives - cost objectives
Inventory Control Models/Approaches
- Single Order Purchasing: make a one-time purchase of an item - Procedure: balance incremental profit against - Continuous Review - Periodic Review - Joint Replenishment - Risk Pooling (Inventory Consolidation) incremental loss
Virtual Inventories
- Stockouts are filled from other stocking locations in the distribution network - Customers assigned to a primary stocking location - Backup locations are usually determined by "zoning" rules - Expectation is that lower system-wide inventories can be achieved while maintaining or improving stock availability levels - Total distribution costs should be lower to support the cross filling of customer demand
Supply-Driven
- Supply quantities and timing are unknown - All supply must be accepted and processed I- nventories are controlled through demand
It involves trading off costs
- Transportation inbound to and outbound from the facilities - Storage and handling costs - Inventory carrying costs - Production/purchase costs - Facility fixed costs
A Items
- Very High Impact items - Require the most managerial attention and review - Expect many exceptions to be made
Method appraisal
A continuous location method Locates on the basis of transportation costs alone
Multiple Location Methods
A more complex problem that most firms have It involves trading off costs: Subject to: - Customer service constraints - Facility capacity restrictions Mathematical methods are popular for this type of problem
Which method of transportation will you use if you are transporting a very high-valued, time sensitive product?
Air
Primary intercity carriers (Transport)
Air Truck Rail Water Pipe
An effective transportation system does ____________. Reduces in-transit costs Increases logistical accuracy Adds value to the supply chain All of the above
All of the above
What is reasoning for NOT using water for domestic transportation? Water way systems are confined Requires multiple transportation modes to get to end user Shipping schedule greatly influenced by weather All of the above
All of the above
What will a good transportation management system do? Suggest the best carrier for each shipment. Keep track of the service frequency. Have a detailed report of the freight rates. All of the above.
All of the above
Which one of the following is a characteristic of push strategy? Draws inventory into the stocking location Allocates production to stocking locations based on overall demand Attempts to synchronize stock flows so as to just meet demand as it occurs Minimizes the need for inventory
Allocates production to stocking locations based on overall demand
Others
Autos Bicycles Taxis Human Electronic
Performance
Average transit time Transit time variability Loss and damage Other factors including availability, capability, frequency of movement, and various less tangible services
Which of the following is not a component of inventory carrying cost? Capital costs Inventory service costs Inventory risk costs Backorder costs
Backorder costs
Cost objectives
Balancing conflicting costs to find the most economical replenishment quantities and timing
Private fleeting
Carrier route Vehicle routing and scheduling Routing from multiple points Routing from coincident origin-designation points
Manufacturing
Decisions are driven by economics. Relevant costs such as transportation, inventory carrying, labor, and taxes are traded off against each other to find good locations
Retail
Decisions are driven by revenue. Traffic flow and resulting revenue are primary location factors, cost is considered after revenue
Service
Decisions are driven by service factors. Response time, accessibility, and availability are key dimensions for locating in the service industry
The COG method invloves
Determining the volumes by source and destination point Determining the transportation costs on $/unit/mi. Overlaying a grid to determine the coordinates of source and/or destination points Finding the weighted center of gravity for the graph
Special Service charges
Extra charges Stop-off privilege example
A push inventory strategy attempts to synchronize product flow to meet demand just as it occurs. T/F?
False
Capital cost refers to the cost associated with deterioration or shrinkage. T/F?
False
Consuming capital resources is a reason to hold inventories.
False
Forward buying involves purchasing additional product quantities at higher current prices rather than at lower anticipated future prices. T/F?
False
If shipping volume is high, it may be more economical to outsource transportation services than to own it.
False
Intermodal services is a term that is used to describe a product when it has been shipped over international waters.
False
Inventories do NOT include goods in-transit. T/F?
False
Procurement cost is the costs of holding inventory over time. T/F?
False
Railroad transportation has low fixed costs and high variable costs.T/F?
False
The 80-20 Rule says that 80% of inventory should be shipped by ground and 20% by air.
False
Two modes of transportation have the same door-to-door transit time and rate, therefore their total costs are equivalent. T/F?
False
Under a (Q, R) policy, inventory position is periodically checked to determine the order quantity. T/F?
False
Under a time-based consolidation policy, a shipment is dispatched when a threshold quantity is reached. T/F?
False
Variable costs are those that do not vary with the distance that the vehicle travels over time. T/F?
False
When a combination of air, rail, and truck shipping methods are used, it is called "hybrid transportation." T/F?
False
What should be done to minimize the cost for during vehicle routing? Find shortest route Operate with low traffic density Ship only light goods Ship only heavy/bulk items
Find shortest route
Agents
Freight forwarders Shipper associations
Which of the following is NOT a consequence of a backorder situation? Costs of extra order handling Possible additional set up cost Correct Future profits foregone through loss of goodwill Cost of expedited shipment
Future profits foregone through loss of goodwill
Why location is important
Gives structure to the network Significantly affects inventory and transportation costs Impacts on the level of customer service to be acheived
Inventory Management Objectives
Good inventory management is a careful balance between stock availability and the cost of holding inventory
In an ABC classification, hits provide information about ______________. How many times an item is requested How many of an item is sold How many times an item was in stock How many times an item was NOT in stock
How many times an item is requested
The largest element of inventory carrying cost is: Storage and handling cost Obsolescence cost Interest and opportunity cost Insurance cost
Interest and opportunity cost
The largest element of inventory carrying cost is: Storage and handling cost Obsolescence cost Interest and opportunity cost Insurance cost
Interest and opportunity cost
Back order and lost sales costs are two types of _____ costs. Out-of-stock Procurement Service Inventory
Out-of-stock
Back order and lost sales costs are two types of _____ costs. Procurement Service Inventory Out-of-stock
Out-of-stock
Transport system defined
Performance Cost
Coordinated Services
Piggyback: rail and truck Birdyback: plane and truck Fishyback: boat and truck
Which mode of transportation is usually limited to natural gas and petroleum products?
Pipe
Sourcing points
Plants Vendors Ports
Which of the following is NOT a component of the inventory holding cost? Insurance and taxes Storage cost Obsolescence cost Preparation cost
Preparation cost
Procurement cost includes: Carrying Cost Cost for holding inventory over time Price of Goods Storage Costs
Price of Goods
Transport choices
Primary intercity carriers Small shipment carriers Coordinated Services Agents Others
_____ inventory management draws inventory into stocking locations; each stocking location is considered independent and maximizes local control of inventory. Push Just-In-Time Pull Aggregate
Pull
Typically, the ______ method is used when purchasing or production economies of scale outweighs the benefits of minimum collective inventory levels. push pull climb sprint
Push
Which inventory management philosophy includes allocating of production to stocking locations based on overall demand and encourages economies of scale in production? Pull Supply Driven Aggregate Control Push
Push
The equation of average inventory (AIL) Q/2 + SS T/2 +Q D/LT +Q LT/2 + SS
Q/2 + SS
Sink points
Retail outlets Customers/Users
Which of the following is NOT an inventory management philosophy? Pull Safety stock Just-in-time Aggregate Control
Safety Stock
Which of the following is NOT an inventory management philosophy? Pull Safety stock Just-in-time Aggregate Control
Safety stock
Mode/service selection
The problem - Define the available choices - Balance performance effects on inventory against the cost of transport Methods for selections -Indirectly through network configuration -Directly through channel simulation
Which of the following is NOT a reason for keeping inventory? Act as a hedge against contingencies They divert management's attention away from planning and distribution channels They improve customer service They help fill orders on time
They divert management's attention away from planning and distribution channels
Cost for holding the inventory over period of time is called inventory carrying cost. T/F?
True
Costs that vary with services or volume are variables costs, and those that do not are fixed costs. But under the consideration of a long enough time and a great enough volume all cost are variable.
True
Improving customer service, acting as a hedge against contingencies, and protection against uncertainties in demand are all reasons for keeping inventories. T/F?
True
Order preparation cost is part of the procurement cost. T/F?
True
Order-up-to level and review interval are two parameters that need to be optimized for a periodic review inventory control policy. T/F?
True
The 80-20 rules states that 80% of sales comes from 20% of line items
True
Three general classes of costs that are important to determine inventory policy: procurement costs, carrying costs, and stockout costs. T/F?
True
Under a continuous review inventory policy, the order quantity is always fixed. T/F?
True
Data for Planning
Typical data items Common data sources Converting data to useful planning information
Small Shipment carriers
UPS Federal Express Postal Services Bus Package Express
Air
Very high values, time sensitive products Usually fast over long distances and a fair degree of relative variability
Water
Very low-valued products moved domestically, high-valued if move internationally Very slow and moderately reliable
Intermediate points
Warehouses Terminals Public facilities (fire, police, and ambulance stations) Service centers
If you are delivering very low value product domestically which one of the following is the best mode of transportation?
Water
Which mode of transportation has the lowest cost? Rail Water Pipeline Truck
Water
Which of the following modes of transportation dominates international transportation?
Water
Which of the following is NOT a type of inventory? Aggregate control Work-in-process Supply-driven Just in time
Work-in-Progress
Which of the following is a type of inventory? Aggregate control Work-in-process Supply-driven Just in time
Work-in-progress
The three general classes of costs that are important determining inventory policy : procurement cost, ________,and _______. stockout costs, and product cost carrying cost, and trade-offs trade-offs, and stockout costs carrying cost, and stockout costs
carrying cost, and stockout costs
Which of the following is NOT considered as a part of the procurement cost? cost of preparing the order price of the good cost of order transmission cost of holding inventory
cost of holding inventory
Primary cost
cost of money tied up in inventory, but also included obsolescence, insurance, personal property taxes, and storage costs
Pipe
generally limited to petroleum products and natural gas
Single warehouse location
graphic grid, or center-of-gravity, approach
The objective of freight consolidation is to ______ whereas the objective of tailored transportation is to ________. minimize threshold value; maximize profit maximize threshold value; minimize transportation cost maximize profit; minimize transportation cost minimize transportation cost; maximize profit
minimize transportation cost; maximize profit
Service Objectives (Inventory Management)
setting stock levels so that there is only specified probability of running out of stock
Backorder cost
- cost of order handling - additional transportation and handling costs - possibly additional setup costs
Procurement Cost
- cost of preparing order - cost of the order transmission - cost of production setup if appropriate - cost of materials handling or processing at the receiving dock - price of goods
Minimize total transportation cost
-Time based policy: Ship a certain time (most companies use this method) - Quantity-based Policy: ship once hit certain quantity (reduces cost the most but causes problems) - Hybrid policy: time and quantity restraits
Line Haul rates
Class - Freight Classification - Rate tables of tariffs Contract rates Drayage (local delivery)
Freight Consolidation
Combine small shipments into larger shipments A problem of balancing cost savings against customer service reductions An important area for cost reduction in many firms Based on the rate-shipment size relationship for for-hire carriers Minimize total transportation cost
The Planning Problem
Configure the facilities of the supply chain from source points to customers Consider all major logistical costs, namely transportation, inventory, and facility Consider practical restrictions, such as capacity and customer service Position the analysis toward top management, strategic concerns
Which of the following makes up the largest portion of inventory holding costs? Cost of capital Storage cost Obsolescence cost Insurance and taxes
Cost of capital
The components of the inventory holding cost are: Cost of capital, obsolescence cost, storage cost and transportation cost. Cost of capital, obsolescence cost, storage cost and insurance/taxes cost Cost of capital, transportation cost and insurance/taxes cost Cost of capital, obsolescence cost and storage cost.
Cost of capital, obsolescence cost, storage cost and insurance/taxes cost
Which of the following is NOT considered as a part of the procurement cost: Cost of preparing the order Price of the good Cost of order transmission Cost of holding inventory
Cost of holding inventory
Cost
Line Haul Terminal/local Accessorial or special charges
Rate types
Line haul rates Commodity and contract rates Special Service charges Private Carrier cost
All of the following is considered fixed cost EXCEPT. Roadway acquisitions and maintenance Terminal facilities Line-haul transportation Transportation equipment
Line-haul transportation
Rail
Low-valued products including many raw materials Slower and less reliable than trucks
Which of the following is NOT a part of procurement cost? Preparing the order Order transmission Manufacturing Production setup if possible
Manufacturing
Nature of Location Analysis
Manufacturing (plants/warehouses) Retail Service
Typical Transport Decisions
Mode/service selection Private fleet planning Freight Consolidation
Truck
Moderately high-valued, time sensitive products (many finished and semi-finished goods)
Multiple warehouse location
Simulation Optimization Heuristics
Method of Solution
Single warehouse location Multiple warehouse location
Commodity and contract rates
Specific rates for given shipments sizes for specific products moving between designated points
Which of the following management philosophies is in place when a customer can procure limited amount of a product? Aggregate Control Pull Supply Driven Just-in-time
Supply Driven
