Intro Supply Chain Management Chap 4

Maintaining adequate finished product inventory allows a company to:

fill customer orders immediately

Maintaining adequate materials inventory allows a company to:

support manufacturing operations and the production plan while avoiding delays

Inventory:

the quantities of goods and materials that are held in stock

Inventory is an __; however, carrying too much inventory can be a significant __

asset; liability

What are the four main categories on inventory:

raw materials, work-in-process, finished goods, maintenance repair and operating supplies

Make-to-Order:

• finished goods are not produced until a customer order is received

• little to no finished goods inventory is maintained

Make-to-Stock:

• the product is produced before receipt of a customer order based on demand forecast

• significant amounts of finished goods inventory can be maintained

Maintenance, Repair and Operating (MRO):

materials that you need to run the manufacturing operation and the business but do not end up as part of the finished product

Service Inventory:

activities carried out in advance of the customer’s arrival

Why hold inventory?

1. To meet customer demand (cycle stock)

2. To buffer against uncertainty in demand or supply (safety stock)

3. To separate supply from demand (strategic stock)

4. To separate dependancies in the supply chain (strategic stock)

The goal of inventory management is to:

help a company be more profitable by lowering the cost of goods sold and increasing sales

To achieve inventory management goal, it balances two competing considerations:

• reducing the amount of inventory help in stock while…

• ensuring there is enough inventory to satisfy customer demand

Inventory Stock Levels:

strategic stock, safety stock, cycle stock, pipeline inventory

Cycle Stock:

inventory that a company builds to satisfy its’ immediate demand

• depletes gradually as customer orders are received

• replenished cyclically when supply orders are received

Safety Stock:

inventory above and beyond what is needed to meet anticipated demand

• AKA buffer stock

• a quantity of stock is planned to be in inventory to protect against fluctuations in demand or supply

Strategic Stock:

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

• AKA anticipation stock, build stock, or seasonal stock

Pipeline Inventory:

inventory in the transit being held by wholesalers, distributors, retailers, or consumers

• the ownership of this inventory has been transferred to the trading partners

Obsolete Inventory:

stock that is expired, damaged, or no longer needed and will never be used or sold at total value

Cost related to inventory:

direct, indirect, variable, fixed, carrying, order

Direct:

directly traceable to unit produced

Indirect:

cannot be traced directly to the unit produced

Variable:

dependent on the unit volume produced varies with output level

Fixed:

aka sunk costs - independent of the unit volume produced

Carrying:

cost of physically having inventory on-site and maintaining the infrastructure needed to store the inventory and secure and insure it over time

Order:

labor costs associated with placing an order for inventory and receiving the order

Having too much or too little inventory on hand can sometimes:

build hidden costs that create a risk for a company

Inventory investment common measures include:

• absolute inventory value

• inventory turnover

Absolute Inventory Value:

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

Inventory Turnover:

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

• (COGS) / (average inventory value)

Fundamental questions when setting target inventory levels for all products and materials:

1. when to review inventory

   1. periodic & continuous review

2. when to order inventory

   1. ROP

3. how much inventory to order

   1. fixed-time & fixed-order

Periodic Review System:

inventory levels are reviewed at a set frequency

Continuous Review System:

as soon as inventory falls below a pre-determined level, a replenishment order is automatically triggered - continuously reviewed

Reorder Point (ROP):

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

• Demand x Lead Time + Safety Stock

Economic Order Quantity (EOQ) Model:

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

• √ (2 x order cost x annual demand volume) / (annual carrying cost % x unit cost)

Order Costs:

incurred each time an order is placed

• preparation costs

• transportation costs

• receipt processing costs

• material handling costs

Carrying Costs:

costs that are incurred for holding inventory in storage

• cost of capital

• taxes

• insurance

• obsolescence

• storage

Limited Capital (EOQ):

the model may generate an order quantity that the company does not have sufficient available funds to purchase at one time

Storage Capacity (EOQ):

the model may generate an order quantity that the company does not have sufficient storage capacity to handle at one time

Transportation (EOQ):

the item being ordered and transported may require specialized or dedicated transportation, impacting the quantity per order

Obsolescence (EOQ):

the model may generate an order quantity that would create spoilage or obsolescence

Production Lot Size (EOQ):

the supplier may require the company to order an item in full production lot sizes

Unitization (EOQ):

the supplier may require the company to order an item in full pack, case, or pallet configurations

ABC System:

classifies inventory based on the degree of importance

Bin System:

inventory system that uses one or two bins to hold a quantity of the item being inventoried

• when the inventory in the first bin has been depleted, an order is placed to refill or replace the inventory

Base Stock Level System:

an inventory system that issues an order whenever a withdrawal is made from inventory

Single-Period Model:

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

• objective is to maximize profits

Barcode Systems:

help business track products and stock levels for inventory management

Linear Bar Codes:

a series of alternating bars and spaces printed or stamped on parts, containers, labels, or other media, representing encoded information that electronic readers can read

2D Bar Codes:

a graphical image that stores horizontal and vertical information

• can store over 7,000 characters, allowing transmission of almost two paragraphs of information

Radio Frequency Identification (RFID):

successor to the barcode for tracking individual units of goods

• does not require a direct line of sight to read a tag and the information is updatable

Weeks of Supply:

(avg. on-hand inventory) / (avg. weekly usage)