Supply Chain Ch4

Inventory

• Companies largest assets

• Maintaining adequate finished product inventory and lets company satisfy customers orders immediately

• Maintaining adequate material inventory lets company support manufacturing operations

Inventory is an _____ but carrying too much is a _______.

asset;liability

Four categories of inventory

• Raw Materials

• Work in Progress(WIP)

• Finished Goods

• Maintenance, Repair, & Operating(MRO) Supplies(don’t end up as finished product)

Too much inventory ties up ______.

capital

Raw Materials

Every company that produces a product generally starts with some raw material, part, or starting material

Finished Goods

Those items on which all manufacturing operations, including final testing, have been completed. These products are for sale and shipment to the customer.

Functions of inventory

1. Meet customer demand(Cycle Stock)

2. Buffer against uncertainty in demand or supply(Safety Stock)

3. Decouple supply from demand(Strategic Stock)

4. Decouple dependencies in supply chain(Strategic Stock)

Cycle Stock

Inventory that a company builds to satisfy it’s immediate demand.

Safety Stock

Inventory above and beyond what is needed to meet anticipated demand. Protects against fluctuations in demand or supply.

Strategic Stock

Additional inventory beyond cycle and safety stock generally used for specific purpose or future event and a defined period.

Pipeline Inventory

Inventory in the transportation network and the distributions system being held by the wholesalers, distributors, retailers, or consumers. Ownership of this inventory has been transferred to the trading partners.

Obsolete Inventory

Will never be used or sold at total value

Costs Related to Inventory

Indirect and Variable

Indirect

Cannot be traced directly to the unit produced(e.g. overhead, MRO items, buildings, equipment, etc.)

Variable

Dependent on the unit volume produced varies with output level(e.g. materials, labors, utility power, etc.)

Having too much inventory can result in effects like:

• Financial resources tied up in inventory

• Underlying problems being hidden instead of being exposed and solved, including quality issues not immediately being identified.

• No incentive for process improvements

Having too little inventory can result in effects like:

• Production disruptions creating the need for expediting and additional costs

• Longer delivery replenish lead times

• Reduced responsiveness

• Lost revenue

Inventory Turnover Ratio

COGS/Average Inventory @ Cost

Reorder Point(ROP)

Lowest inventory level at which a new order must be placed to avoid a stockout is known as the ______ _____.

ROP(Reorder Point) Formula

Demand during Lead Time(dL) —> d x L

Reorder Point without Safety Stock

Demand(D) = 150 month/30 days = 5 Units a Day

LT = 10

Safety Stock = 0

ROP = D x LT + SS(But we don’t have that without safety stock)

ROP —> (5 x 10) + 0 = 50 units

Reorder Point with Safety Stock

Demand(D) = 150 month/30 days = 5 units/day

LT = 10 days

SS = 25

ROP = D x LT + SS(we have)

ROP —> (5 × 10) + 25 = 75 Units

Inventory Ordering Systems

Fixed Time Period System & Fixed Order Quantity System

Fixed Time Period System

If inventory is less than target, a quantity necessary to bring inventory back up to target level is ordered.

Fixed Order Quantity System

A continuous inventory review system uses the same order quantity from order to order. When the inventory position drops to a predetermined reorder point, a predetermined fixed order quantity is placed. If the review determines that an order should be placed, then the order for a pre-defined quantity for that item is placed.

EOQ(Economic Order Quanitity)

Quantitative decision model based on the trade off between annual inventory order costs and annual inventory carrying costs.

Order Costs

Incurred each time an order is placed, not a storage cost

Carrying cost

Incurred for holding inventory

• Insurance —> Based on estimated risk or loss over time and facility characteristic

• Storage —> Facility expense related to product holding rather than product handling

Why is EOQ generally used only as a baseline?

Because of practical constraints and assumptions, supply chain managers must adjust EOQ based on their judgment and real-world limitations.

ABC System classifies inventory based on its _____ _____ _____.

degree of importance.

Companies have many different products, but not all products are equally valuable. This helps companies determine which inventory items deserve the most attention based on their annual usage or sales value.

ABC System

A method to determine which inventories should be counted and managed more closely than others. Focus limited resources on the items that have the highest inventory value. A items have highest priority.

Single Period Inventory Model

Inventory systems in which inventory is only ordered for a one time stocking. Eg. Christmas tree lots and newspaper stands

RFID does not require a

direct line of sight to read a tag.

What is the relationship between procurement and purchasing?

Procurement is the umbrella term covering the entire process of acquiring goods and services, including selecting suppliers, negotiating contracts, and purchasing. Purchasing is just one part of procurement that focuses on actually buying goods and services.

What is purchasing in a business?

It is a business function and responsibility involving the acquisition of materials, supplies, and services for an organization.

What is supply management, and how does it go beyond purchasing?

It encompasses all acquisition activities beyond simply buying goods. It involves identifying what materials and services a company needs, acquiring them, and managing resources to achieve the organization's strategic objectives.

Supply Management Includes the function of…

Determining the materials and services that a company needs.

What is a purchase requisition, and does it create a contractual relationship?

A purchase requisition is an internal document used to request goods or services within an organization. It does NOT create a contractual relationship with an external supplier.

When does a purchase order (PO) become a legally binding contract?

A purchase order is an external commercial document issued by a buyer to a supplier. It becomes a legally binding contract only when the supplier accepts it.

What is a Request for Proposal (RFP), and what is its purpose?

Detailed document used to determine a supplier's capability (ability) and interest (willingness) in providing a product or service.

What are the three primary objectives of purchasing?

• Ensure an uninterrupted flow of materials and services at the lowest overall cost.

• Improve the quality of finished goods produced.

• Optimize customer satisfaction.

Steps Of Purchasing Process

1. A need is identified, and a Purchase Requisition is issued

2. Obtain authorization as necessary

3. Identify and evaluate potential suppliers

4. Make supplier selection

5. Purchase Order (PO) is created and delivered to the supplier.

9. Invoice & Reconciliation: Reconciled to the purchase order and goods receipt

What are the five main advantages of an e-Procurement System?

• Time Savings: Reduction in the time between need recognition and the relapse and receipt of an order.

• Cost Savings: Lower overhead costs in the purchasing area

• Accuracy: A reduction in errors

• Mobility: Access virtually everywhere

• Trackability: Real time status tracking

Profit Leverage Effect

Reduce in purchasing expenditures directly increases profits before taxes.

A high Return on Assets Effect(ROA) indicates what

Indicates managerial prowess(managers doing a good job using company resources efficiently to generate profits) in generating profits with lower spending.

ROA(Return On Assets)

Profit Before Tax/Assets

Inventory Turnover

COGS/Average Inventory

TCO(Total Cost Ownership)

Sum of all the costs associated with every activity in the supply stream of a product.

4 Elements of TCO

Quality, Service, Delivery, Price(QSDP).

*The acquisition cost (initial cost of buying a product) is often only a small part of its total cost.

What is the Make vs. Buy Decision.

Involves choosing whether to produce goods internally (Make) or purchase them from external suppliers (Buy/Outsource). A company can also do both. It is a strategic decision because it affects costs, quality, resources, and long-term business operations.

Key factors that need to be considered for make v buy

Business Strategy; Risk; Economic Factors.

Qualitative Factors: Subjective, non-numerical considerations such as quality control, reliability, supplier reputation, and impact on customers and suppliers.

Quantitative Factors: Measurable considerations such as incremental costs of making versus buying, available facilities, resources, and manufacturing capacity.

Qualitative Reasons for Buying or Outsourcing

Insufficient capacity - A firm may be at or near capacity, and subcontracting from a supplier may make better sense.

Risks Associated w/ Outsourcing

• Loss of control

• Increased reliance on suppliers

• Increased need for supplier management

What is co-sourcing, and how does it work?

Involves either sharing a business process or function between internal employees and an external provider, or using dedicated external staff who work exclusively under the company's control and direction.

What is backward vertical integration?

When a company acquires one or more of its suppliers to gain control over its supply chain.

Centralized Purchasing

Purchasing department located at the firms corporate office makes all the purchasing decisions.

Decentralized Purchasing

Individual, local purchasing departments such as a plant level make their own purchasing decisions.

Import Brokers

Agents licensed by a governmental regulatory authority to conduct business on behalf of importers for a service fee.

Bid Bond

A proposal or quotation submitted in response to a solicitation from a contracting authority. aka Offer submitted by a supplier in response to a request from an organization looking to purchase goods or services.

Payment Bond

Is a debt secured by a bidder to protect against 3rd party liens not fulfilled by the bidder.

Strategic Sourcing

A comprehensive approach for locating and sourcing key suppliers to leverage it’s consolidated(combining purchases to buy larger quantities and negotiate better deals) purchasing power to find the best possible values in the marketplace.

Insourcing

Producing goods or services using a company’s internal resources.

Outsourcing

The traditional definition involves purchasing an item or service externally, which had been produced using a company’s internal resources previously.

Sourcing Strategies

Single Source & Multi Source

Single Source

A sourcing strategy where multiple potential suppliers are available for a product or service, but the company decides to purchase from only one supplier.

Multi Source

Purchasing a good or service from more than one supplier. Companies may use multi-sourcing to create competition between suppliers to achieve higher quality and lower prices.

Sole source is NOT a strategy because ….

there isn’t a choice and a company has minimal opportunity to negotiate price or service.

Reasons for a single supplier

• To establish a good relationship

• Less quality variability

• Transportation economies

Reasons for multiple suppliers

Spread risk of supply disruption

Innovative Products

Characterized by short product cycles, volatile demand, high profit margin, and relatively less competition. Potential Strategy —> Single sourced(Innovative, high tech, cutting edge, market leading supplier. Long term partnership.)

General Sourcing Categories

Non critical, bottleneck, leverage, strategic

Non Critical

Routine items involving a low percentage of the firms total spend and minimal supply risk.

• Simplify and streamline the purchasing process: Make ordering faster and easier.

• Lower the amount of suppliers and simplify

• Transfer buying responsibility to users in the company

Bottleneck

Unique procurement problems. Supply risk is high, availability is low, and few alternate suppliers exist.

• Maintain safety/strategic stock

• Develop contingency plans

• Strengthen relationship

• Search for alternative suppliers

Leverage

Commodity items with many supply alternatives and low supply risk.

• Consolidate volume as a negotiation tool

• use competitive marketplace to make suppliers compete and offer lower prices.

• Automate supplier interfaces to make to reduce process and ordering costs.

Strategic

Items and services that involve high level of expenditure and are vital to the firms success.

• Ensure availability of supply

• Build relationships

• Process integration and innovation: Work closely with suppliers to improve operations and develop better products.

• Performance criteria: Agree on standards suppliers must meet, such as quality and delivery times.

Supply Base Rationalization

Reduction in the supply base to the lowest number of suppliers possible without significantly increasing risk.

Preferred Suppliers

Suppliers that best meet your company’s overall purchasing requirements. Can meet the capacity for meeting unexpected demand and cost efficiency due to economies of scale.

Strategic Alliance

Agreement between a buyer and a supplier to pursue some agreed upon objectives while remaining independent organizations. The companies agree to share information and resources to achieve a mutual benefit.

Distributive Negotiations

Refers to a process that leads to a self interested, one sided outcome.

Eg. A buyer pressures a supplier to lower prices significantly, benefiting the buyer but reducing the supplier's profits.

Collaborative Negotiations

Both sides work together to

maximize the outcome or create a win-win result.

Reverse Auction

A sourcing technique where pre qualified suppliers enter a website at a pre designated time and date and try to underbid competitors.

VMI(Vendor Managed Inventory)

Suppliers directly manage buyer inventories to reduce the buyers inventory carrying costs and avoid stockouts for the buyer. Supplier tracks the inventories and determines delivery schedules and order quantities.

Diff of VMI vs CMI(Co Managed Inventory)

The supplier is just recommending an order, which is not confirmed until and

unless the buyer approves it(CMI)

Supplier Co-location

Supplier representative is embedded in the buyers purchase group to forecast demand, monitor inventory, and place orders.

Ethical Sourcing

Attempts to consider the public consequences of organizational buying or to bring about positive social change through organizational buying behavior.

• People producing these products should be treated fairly and work in a safe environment

• The environmental and societal impacts must also be considered

Sustainable Sourcing

Ability to meet the current needs of the supply chain without hindering the ability to meet future need in terms if economic, social, and environmental challenges.