Supply Chain Midterm 2

Four main categories of inventory

1. Raw Materials

2. Work-in-Process (WIP) sometimes called Work-in-Progress

3. Finished Good

4. Maintenance, Repair and Operating (MRO) supplies

Raw Materials

Purchased items or extracted materials converted via the manufacturing process into components and products.

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

Finished Goods

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

Maintenance, Repair and Operating (MRO)

Items used to support general operations and maintenance, such as maintenance supplies, spare parts, and consumables, and are used in manufacturing and supporting operations.

Service Inventory

Activities carried out in advance of the customer’s arrival

Ex: Restaurants offer dining services, but cannot inventory the actual dining service; they can only begin the dining service when the customers arrive.

Why is Inventory Held

1. Meet customer demand

2. Buffer against uncertainty in demand and/or supply

3. Decouple supply from demand

4. Decouple dependencies in the supply chain

Cycle Stock

Inventory that a company builds to satisfy its’ immediate demand.

Safety Stock

Inventory that is above and beyond what is actually needed to meet anticipated demand.

Strategic Stock

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

Direct Costs

directly traceable to unit produced (e.g., materials, labor, etc.)

Indirect Costs

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

Variable Costs

dependent on the unit volume produced vary with output level (e.g., materials, labor, utility power, etc.)

Fixed Costs

independent of the unit volume produced (e.g., buildings, equipment, rent, allocated overhead costs, etc.

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.

Order Costs

Labor costs associated with placing an order for inventory and the cost of receiving the order.

Absolute Inventory Value

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

Inventory Turnover

The number of times that an inventory cycles, or “turns over,” during the year.

Inventory Turnover Ratio

Cost of Goods Sold / Average Inventory at Cost

Reorder Point (ROP)

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

Economic Order Quantity (EOQ) Model

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

Order Costs

costs that are incurred each time an order is placed

Carrying Costs

costs that are incurred for holding inventory in storage

Examples of Order Costs

1. Order preparation costs

2. Order transportation costs

3. Order receipt processing costs

4. Material handling costs

Examples of Carrying Costs

1. Cost of capital - specified by senior management

2. Taxes - on inventory held in warehouses

3. Insurance - based on estimated risk or loss over time and facility characteristics

4. Obsolescence - deterioration of product during storage, and shelf-life

5. Storage - facility expense related to product holding rather than product handling

EQQ Equation

Other Types of Inventory Systems

1. ABC System

2. Bin System

3. Base Stock Level System

4. Single-Period” Inventory Mode

ABC System

Classifies inventory based on the degree of importance

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

Single-Period Inventory Model

type of inventory system in which inventory is only ordered for a one-time stocking

Ex: newspaper stands, christmas tree lots

Linear Barcodes

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

2D Bar Codes

a graphical image that stores information both horizontally and vertically

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

Radio Frequency Identification (RFID)

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

How Does RFID Automate the Supply Chain

1. Materials Management – goods automatically counted and logged as they enter the supply warehouse

2. Manufacturing – assembly instructions encoded on RFID tag provide information to computer controlled assembly devices

3. Distribution Center – shipment leaving DC automatically updates ERP to trigger a replenishment order and notify customer for delivery tracking

4. Retail Store – no check out lines as scanners link RFID tagged goods in shopping cart with buyers credit card

Common Metrics for Inventory

1. Units – the number of units available

2. Dollars – the amount of dollars tied up in inventory

3. Weeks of Supply - (avg. on-hand inventory) / (avg. weekly usage)

4. Inventory Turns - (cost of good sold) / (avg. inventory value)

Purchase Requisition

An Internal Document that defines the need for goods and/or services

Request for Information (RFI)

standard business process whose purpose is to collect written information about the capabilities of various suppliers

Request for Proposal (RFP)

A detailed capabilities document used to determine a supplier's capability and interest in the production of a product or service

Request for Quote (RFQ)

A document used to solicit bids (i.e., price and delivery) from interested and qualified suppliers for goods or services that the organization needs to obtain

Primary Objectives of Purchasing

1. Ensure an uninterrupted flow of materials and services at the lowest

total cost.

2. Improve the quality of the finished goods produced.

3. Optimize customer satisfaction

Purchasing Process Steps

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

6. Supplier confirmation of the Purchase Order

7. Fulfillment

8. Receipt of Goods

9. Invoice and Reconciliation

10. Payment

11. Close out the Purchase Order

12. Analysis

Total Cost of Ownership

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

Make vs Buy Decision

the act of deciding whether to produce an item internally or buy the item from an outside supplier

Make

Producing (i.e., manufacturing) materials or products internally (i.e., in operations owned by the company).

Buy / Outsource

Buying materials, components, or products from a supplier(s) instead of, or in addition to, making them inhouse (i.e., buying from a 3rd-party external source).

Qualitative Reasons for Making

1. Protect proprietary technology

2. No competent supplier

3. Control of lead-time

4. Use existing idle capacity

5. Better quality control

Qualitative Reasons for Buying or Outsourcing

1. Non-Strategic

2. Insufficient Capacity

3. Temporary Capacity Constraints

4. Lack of Expertise

5. Quality

6. Multi-Sourcing Strategy

7. Brand Strategy

8. Cost Advantage

9. Inventory Considerations

Backward Vertical Integration

Refers to a company acquiring (i.e., buying) one or more of its suppliers
Ex: a manufacturer buying the key supplier of a critical material to take ownership of this aspect of their supply chain.

Forward Vertical Integration

Refers to a company acquiring (i.e., buying) one or more of its customers.
Ex: manufacturer buying a wholesaler/distributor to take ownership of that aspect of their supply chain

Tariffs

Duties, taxes, or customs imposed by the host country for imported or exported goods

Non-tariff Barriers

Quotas, licensing agreements, embargoes, laws, and regulations imposed on imports and exports.

Countertrade

International trade by exchange of goods rather than by currency

Insourcing

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

Outsourcing

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

Reasons for a Single Supplier

1. To establish a good relationship

2. Less quality variability

3. Lower cost [100% of volume]

4. Transportation economies

5. Proprietary product or process

6. Volume too small to split

Reasons for Multiple Suppliers

1. Need more capacity

2. Spread risk of supply disruption

3. Create competition

4. More sources of information

5. Dealing with special kinds of business

Functional Products

MRO items and other commonly low profit margin items with relatively stable demands and high levels of competition i.e. office supplies, food staples, etc

Innovative Products

characterized by short product life cycles, volatile demand, high profit margins, and relatively less competition i.e. technology products such as the iPhone

Spend Analysis

Categorizing and analyzing expenditure data for the purpose of decreasing costs, improving efficiency, and monitoring compliance.

The basic steps for conducting a spend analysis

1. Defining the scope (e.g., expenditures over a specific time period).

2. Identify all of the data sources.

3. Gathering and consolidating all of the data into one database.

4. Cleansing the data (finding and correcting errors) and standardizing it for easy review.

5. Categorizing the data (e.g., commodity and sub-commodities)

6. Analyzing the data for:

− the best deals per supplier

− to ensure that all purchases are from preferred suppliers

− to reduce the number of suppliers per category.

7. Repeating the process on a regular schedule.

Key areas of a typical spend analysis

1. Total historic expenditures and volumes

2. Future demand projections or budgets

3. Expenditures categorized by commodity and sub-commodity

4. Expenditures by division, department, or user

5. Expenditures by supplier

Non-Critical Sourcing

routine items that involve a low percentage of the firms’ total spend and involve very little supply risk. e.g. standard screws in a computer factory.

Bottleneck

unique procurement problems. Supply risk is high and availability is low. Small number of alternative suppliers. e.g. an integral part of technology hardware, the power pack for a laptop.

Leverage

commodity items where many alternatives of supply exist, and supply risk is low. Spend is high and there are potential procurement savings. e.g., plastic or raw material for Lego bricks

Strategic

strategic items and services that involve a high level of expenditure and are vital to the firm’s success. e.g., the Qualcomm chipsets for mobile phones.

Kraljic Model

Preferred Suppliers

Suppliers that best meet your company’s overall purchasing requirements

Distributive Negotiations

Refers to a process that leads to selfinterested, one-sided outcome

Collaborative Negotiations

Both sides work together to maximize the outcome or create a win-win result. Requires open discussions and a free-flow of information between parties

Vendor Managed Inventory

Suppliers directly manage buyer inventories to reduce the buyer’s inventory carrying costs and avoid stockouts for the buyer

Benefits for Buyer in Vendor Managed Inventory

─ Supplier tracks inventories

─ Supplier determines delivery schedules and order quantities

─ Buyer can take ownership at the stocking location

─ Buyer may also be able to avoid taking ownership until the material is actually being used.

Benefits for Supplier in Vendor Managed Inventory

─ Avoids ill-advised customer orders

─ Supplier decides inventory set up and shipments

─ Opportunity for supplier to educate customers about other products

Supplier Co-location

a representative of the supplier is actually embedded in the buyer’s purchasing group to forecast demand, monitor inventory, and place orders

Corporate Social Responsibility

The practice of business ethics

Business Ethics

Application of ethical principles to business

Utilitarianism

an ethical act is that which creates the greatest good for the greatest number of people, and should be the guiding principle of conduct

Rights and Duties:

Some actions are just right in and of themselves,regardless of the consequences. Do the right thing!