Intro to Supply Chain Chapter 4

hidden costs of too little inventory

-shortage --> work overtime, pay extra money -Production disruptions creating the need for expediting and additional costs. -Longer delivery replenishment lead times. -Reduced responsiveness. -Lost revenue

raw materials strategies

1. buy from a supplier and have it delivered to the operation just in time for when it is needed 2. buy and hold a larger quantity for strategic reasons (better price) **companies would risk increasing carrying costs if they fear there may be a potential shortage in the material or if they think the price will increase soon**

how much to order?

1. fixed time period system 2. fixed order quantity system

linear bar codes

1D -a series of alternating bars and spaces printed or stamped on parts, containers, labels, or other media, representing encoded information that can be read by electronic readers. —Linear bar codes do have some limitations: they are one-dimensional, can only be read horizontally, and can only hold a maximum of 85 characters.

work in process/progress

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 **black hole of inventory because they may not have a very good or very timely visibility into this part of their inventory

continuous review system

As the name implies, inventory levels are continuously reviewed -As soon as inventory falls below a pre-determined level (i.e., a reorder point), a replenishment order automatically is triggered. Advantages: -Allows for real-time updates of inventory, which can make it easier to know when to replenish. -Facilitates accurate accounting, since the inventory system can generate real-time costs of goods sold. -Potentially requires less safety stock because inventory is constantly monitored, and replenishment actions are taken more quickly. Disadvantage: -Cost of implementation. Generally requires an automated system. The hardware and software necessary to run the system can be expensive to purchase, install, and maintain.

when to order inventory

ReOrder Point (ROP)

internal inventory

Strategic, safety, cycle stock held to: -Meet customer demand -Buffer against uncertainty in demand and/or supply -Decouple supply from demand -Decouple dependencies in the supply chain

reorder point (ROP)

The ROP is set at a level that provides enough inventory so demand is covered during the lead time (L) needed to replenish inventory. Given: Demand (d) = 600/month d = (600 / 30 days) = 20/day Lead Time (L) = 6 days ROP = dL = (20) x (6) = 120

inventory management

The function of planning and controlling inventories. **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 §In an effort to achieve this stated goal, effective inventory management balances two competing considerations: —Reducing the amount of inventory held in stock, while . . . —Ensuring there is enough inventory to satisfy customer demand.

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. -consumed during the process of converting raw materials to finished goods facilitate the manufacturing operation -facilitate the company's administrative activities -separate from production inventory -expensed by a different group

finished goods

Those items on which all manufacturing operations, including final testing, have been completed. These products are available for sale and/or shipment to the customer. * usually worth much more than raw materials or WIP since all of the material, labor, and overhead costs are fully applied to finished goods

base stock level system

Used for very expensive items : as soon as you take one engine out to use it, you replace it immediately; a type of inventory system that issues an order whenever a withdrawal is made from inventory. -Replenishment order quantity is equal to the quantity withdrawn from inventory. -This will maintain the inventory at a base stock level. -Used primarily for very expensive items, e.g., airplane engine -A form of just-in-time.

b & c items

account for the other 80% of the total number of items, but only 20% of total inventory cost. -B items require closer management since they are relatively more expensive (per unit), require more effort to purchase / make, & may be more prone to obsolescence. -C items have the lowest value, and hence the lowest priority

service inventory

activities carried out in advance of the customer's arrival -do not maintain inventory of services since services are consumed upon demand --> facilitating goods

barcode reader

an electronic device that can read barcodes and transmit the data to a computer. These might be handheld cordless devices, corded devices that attach directly to a PC's USB port, or computers with integrated laser scanners

indirect costs

cannot be traced directly to the unit produced--> MRO, buildings, equipment -if I buy a building, regardless of how many products I made in the building, the cost of the building is the same

variable costs

dependent on the unit volume produced vary with output level (e.g., materials, labor, utility power, etc.) -direct costs; more units = more materials, etc

direct costs

directly traceable to unit produced -ex: materials, labor, etc

absolute inventory value

dollar value: the value of the inventory at either its cost or its market value found on balance sheet

order costs

labor costs associated with placing an order for inventory and the cost of receiving the order. certain amount of money it costs to place an order **only at the time you place the order §are costs that are incurred each time an order is placed. àplacing the order, transporting, receiving it

finished product inventory

maintaining an adequate amount allows a company to fill customer orders immediately from stock

materials inventory

maintaining an adequate amount allows a company to support manufacturing operations and the production plan while avoiding delays

when to review inventory

periodic review system and continuous review system

raw materials

purchased items or extracted materials that are converted via the manufacturing process into components and products

fixed order quantity system

**order quantity is always the same but the interval between each purchase changes** --A continuous inventory review system in which the same order quantity is used from order to order. —When the inventory position drops to a predetermined reorder point, a predetermined fixed order quantity is placed —The time between orders (i.e., order period) varies from order to order.

production lot size

- Suppliers requires us to purchase a certain amount -The supplier may require the company to order an item in full production lot sizes

storage capital

- not enough of storage space - The model may generate an order quantity which the company does not have sufficient storage capacity to handle at one time.

unitization

-Buy the inventory in certain sub-increments = full case quantities, etc.à adjust quantity - The supplier may require the company to order an item in full pack, case, or pallet configurations.

single period inventory model

- a type of inventory system in which inventory is only ordered for a one time stocking -The objective is to maximize profits. Examples: Christmas tree lots, and Newspaper stands.

hidden costs of too much inventory

-money is tied up in inventory and you expect to make money from the investment; too much inventory hides issues = fat, dumb, and happy -supplier might always be late, but you are not aware of it because you have extra inventory to rely on--> efficiency problem but you don't even realize it -problems hidden rather than exposed--> quality problems not immediately identified -no incentive for process improvements

ABC system

classifies inventory based on the degree of importance and determines which inventories should be counted and managed more closely than others: 1.Determine annual usage or sales for each item. 2.Determine % of total usage or sales that each item represents. 3.Rank items from highest to lowest %. 4.Classify items into groups: A: Highest Value B: Moderate Value C: Least Valuable

to meet customer demand

cycle stock -immediately fill customer orders and deploy the product/material near where it will be used -Customer expects they would be able to order something at a certain time, they must keep inventory to give it out and satisfy the customer. Keep in warehouse close to place = cycle stock -maintaining raw materials allows companies to maintain their production schedule -distribution centers or research outlets

Economic Order Quantity (EOQ) Model

fixed order quantity model A quantitative decision model based on the trade-off between annual inventory order costs and annual inventory carrying costs. --> sum of the annual order costs and the annual inventory carrying costs is minimized

Failing to manage inventory adequately can lead to

significant issues and inefficiencies throughout the supply chain, including dissatisfied customers, lost sales and revenue, and higher costs (trying to expedite to get to customers) **if a customer places an order

fixed costs

sunk costs: independent of the unit volume produced (e.g., buildings, equipment, rent, allocated overhead costs, etc.) once you have these things, you invested a certain amount of money whether you made any or not

inventory turnover

the number of times that an inventory cycles or turns over during the years--> more turns the better cost of goods sold (cost of sales or revenues) / average inventory @ cost

inventory

the quantities of goods and materials that are held in stock -includes all fo the materials used to support production, all of the finished products needed to provide customer service, and all of the other supplies needed to run a business. -necessary to maintain operations and ensure products are available -no inventory could be a problem

finished goods strategy

1. make to order: the finished goods are not produced until a customer order is received--> little to no finished goods inventory is maintained 2. make to stock: the product is produced prior to receipt of a customer order based on a forecast of demand --> significant amounts of finished goods inventory can be maintained

functions of inventory

1. to meet customer demand 2. to buffer against uncertainty in demand and/or supply 3. to decouple supply from demand 4. to decouple dependencies in the supply chain

3 questions for target inventory levels

1. when to review inventory 2. when to order inventory 3. how much to order

bin system

At the beginning, fill up 2 bins worth of inventory--> use the inventory of the first bin, place order for Bin 1 and use the inventory from Bin 2 Inventory system that uses either one or two bins to hold a quantity of the item being inventoried. -It is 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

pipeline inventory

If you know that your customers (wholesalers/retailers) have a lot of extra stock (pipeline inventory), you may not hold that much stock because you know they have enough -if you know how much they have you could reduce your own strategic and safety to the min 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, 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.

annual total cost

(EOQ, P) when annual carrying costs = annual ordering costs Ordering costs is very high if quantity is smallà ordering 1000 units 1000 times then you have to pay 1000 ordering costs, place an order for 1000 units one time is lower bc only paying one ordering cost Carrying = ordering à lowest annual total cost

cycle stock

**varies* Inventory that a company builds to satisfy its' immediate demand Cycle stock depletes gradually as customer orders are received, and is replenished cyclically when supply orders are received. The amount of cycle stock that a company holds is dependent on actual demand in the immediate time period, supply replenishment lead time and order quantities.

carrying costs

- costs for physically having inventory on-site and for maintaining the infrastructure needed to store the inventory and to secure and insure it over time. -cost of holding inventory for any period of time; secure and insure to make sure the asset is supported are costs that are incurred for holding inventory in storage.

Assumptions of the EOQ Model

-The model must be calculated for one product at a time. -The demand must be constant throughout the year. -The delivery replenishment lead time does not fluctuate. -Replenishment is instantaneous. -The purchase price (i.e., unit cost) is constant and no discounts or price breaks are factored into the model. -Carrying cost is known and constant. -Order cost is known and constant.

limited capital

-cash flow constraints--> don't have enough money to purchase the whole lot size -The model may generate an order quantity which the company does not have sufficient available funds to purchase at one time.

transportation

-ex: At 500 units it requires multiple truck loads or if it is a fraction of the truck then you lose money -The item being ordered and transported may require specialized or dedicated transportation, impacting the quantity per order.

inventory as an asset and liability

-it is an asset but carrying it for too long could be a liability -too much ties up capital (cash) which could be used for other things -the more inventory a company has the more space it needs to hold it and the more money it costs -security, insurance, taxes to hold onto inventory -risks expiration, obsolescence, damage, or spoilage

constraints on EOQ

-limited capital -storage capacity -transportation -obsolescence -production lot size -unitization

obsolescence

-short shelf life and expires soon = waste -The model may generate an order quantity which would create spoilage or obsolescence.

impacts on EOQ

1. individual item purchase price discounts: larger discount in bulk 2. multiple item purchase price discounts: larger discount for buying multiple products 3. transportation freight rate discounts: larger quantity means you can use a different mode of transportation and save money

periodic review system

Inventory levels are reviewed at a set frequency e.g., weekly, monthly -At the time of review, 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. Advantages: -Reduces the time spent analyzing inventory. -Less expensive to implement and operate than a Continuous Review System. Disadvantages: -Can be difficult to determine the best review/reordering intervals. §It also can make inventory accounting less accurate. -Since items are only reviewed periodically, there is a greater risk of inventory dropping well below the reorder point between reviews and, therefore, a greater potential need for safety stock.

maintenance, repair, and operating (MRO) products

Items used in support of general operations and maintenance such as maintenance supplies, spare parts, and consumables used in the manufacturing process and supporting operations. -do not end up in the finished product -some are consumed during the process of converting raw materials into finished goods = oil for manufacturing equipment -used to facilitate manufacturing operation: cleaning supplies, spare parts -used to facilitate the company's administrative activities: office supplies, coffee for break room, etc.

fixed time period system

Q = R - IP Quantity = Target Inv Level - Inv Position **quantity differs from one order to another** —Inventory is checked in fixed time periods against a target inventory level. —If the inventory is less than target, a quantity necessary to bring inventory back up to the target level is ordered. The amount of inventory ordered will potentially vary from period to period based on the remaining inventory at each time interval checked

safety stock

Safety stock, also known as "buffer stock," 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 fluctuates in demand or supply Companies operating in a make-to-stock environment will generally maintain some amount of safety stock whether based on a management decision or based on a safety stock determination formula.

To Buffer Against Uncertainty in Demand and/or Supply

Safety stock: -Uncertainty in demand: sales or usage above expectations --> forecast may be off -Uncertainty in supply: shortages, delays, disruptions, increase in prices of supplies/raw materials

radio frequency identification

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. automates: materials management, manufacturing, distribution center, retail store

strategic stock

anticipation stock, build stock, or seasonal stock used for a very specific purpose or future event, and for a defined period of time -hedge currency fluctuations -take advantage of a price discount -protect against a short-term disruptive event in supply -take advantage of a business opportunity -for life cycle changes: seasonal demand, new product launch, transition protection

facilitating goods

items that are used to help facilitate the service being provided 1. Restaurants: food, tableware, other elements that are necessary to provide the service; prepare some meals ahead of time 2. car rental service or cabs: inventory of cars, but the rental service is upon demand

WIP strategy

minimizing the amount of WIP inventory in the manufacturing area since too much WIP may clutter up the physical space and impede the process flow

external inventory

pipeline inventory -held external to the company by downstream supply chain trading partners = MRO

obsolete inventory

stock that is expired, damaged, or no longer needed. -->will never be used or sold at full value You made an investment and will never recoup 100% --> write this inventory off the books and dispose of it so you have to recognize a loss of assets -better to absorb the loss ASAP and write it off as a lost in a certain time frame -there may be a cost for disposing the inventory: putting in landfill, getting somebody to take it away -donate to non-profit org which could result in a tax benefit and they don't have to worry about it costing them to take it off their hands -try to eliminate it ASAP bc as long as you hold on to it it costs money

to decouple dependencies in the supply chain

strategic stock -separating operations in a process -smoothing production and reducing peak period capacity needs Ex: 10 steps at the same rate would flow very smoothly, but if one process runs at a different rate then it will affect all of the other stepsà keep extra stock to balance out; peak and off peak production schedule for seasonal items

To Decouple Supply from Demand

strategic stock: *Supply pattern is different from demand pattern: 1. Achieve economies of scale in purchasing; take advantage of volume price breaks/discounts 2. speculative buying in anticipation of a price increase--> buy if you think price is a good deal or it might increase 3. economical order size, lot size production output --> supplier might sell in a certain quantity only 4. seasonal products/demand--> price goes up during a certain period of time

2D bar codes

§are a graphical image that stores information both horizontally and vertically. —2D Barcodes can store over 7,000 characters, allowing transmission of almost two paragraphs of information.

a items

§are given the highest priority. "80/20 rule" Generally, A items account for approximately 20% of the total number of items, but about 80% of the total inventory cost.