supply chain exam 2

chapters 4-6

critical decision in product-based supply chain

how much inventory to keep on hand (as its one of the largest assets)

inventory

quantity of goods and materials that are held in stock

includes all materials used to support production, the finished products needed to provide the customer service, and all other supplies to run a business

inventory as a liability

to much ties up capital that could be used elsewhere

more inventory held needs more space which costs money

security, insurances, taxes to hold inventory

can be become unusable due to expiration, obsolescence, damage, spoilage

categories of inventory

raw material

work in process (WIP)

finished goods

maintenance, repair, and operating supplies (MPO)

raw materials

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

work-in-process (WIP)

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 customers

finished goods cost perspective

finished goods are usually worth much more than raw materials or WIP since all material, labor, and overhead costs are fully applied to finished goods

make-to-order

little to no finished goods inventory is maintained

make-to-stock

significant amount of finished goods inventory can be maintained

maintenance, repair and operating (MRO)

items used to support general operations and maintenance such as maintenance supplies, spare parts, and consumable and are used in manufacturing and supporting operations

service inventory

activities carried out in advance of the customer’s arrival

don’t maintain an inventory of services since services are produced and consumed upon demand

can maintain an inventory of “facilitating goods” that facilitate services

why hold inventory

meet customer demand

buffer against uncertainty in demand or supply

decouple supply from demand

decouple dependencies in the supply chain

meet customer demand

immediately fill customer orders

deploy the product/material

to buffer against uncertainty in demand or supply

uncertainty in demand: sales or usage above expectations

uncertainty in supply: shortages, delays, disruptions

decouple supply from demand

supply pattern is different from demand pattern

• achieve economies of scale in purchasing

• speculative buying in anticipation of a price increase

• economical order size, lot size, production output

• seasonal products/demand

decouple dependencies in the supply chain

separating operations in a process

smoothing production and reducing peak period capacity needs

inventory management

the function of planning and controlling inventories

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

effective inventory management

balances reducing the amount of inventory held in stock while ensuring there is enough inventory to satisfy customer demand

cycle stock

inventory that a company builds to satisfy its immediate demand

depletes gradually with customer orders and replenished cyclically

safety stock

inventory above what is needed to meet anticipated demand

quantity of stock planned to be in inventory to protect against fluctuations in demand

strategic stock

additional inventory used for a specific purpose or future event and a defined period

(seasonal, price-discounts, business opportunity, currency fluctuations, protect against disruptions in supply)

pipeline inventory

in the transportation network and distribution system being held by wholesalers, distributors, retailers, consumers

ownership transfers to trading partners

obsolete inventory

obsolescence criteria established by company (expired, damaged, no longer needed)

unusable inventory takes up space and storage, but also costs are associated with disposal of inventory — hard decision

MRO supplies

needed to run manufacturing and business operations, but not part of finished product

ex. oil for equipment, cleaning supplies, spare parts, office supplies, coffee for break room

costs related to inventory - direct

directly traceable to unit produced (materials, labor)

costs related to inventory - indirect

cannot be traced directly to the unit produced (MRO, equipment)

costs related to inventory - variable

dependent on the unit volume produced varies with output level (materials, labor, utility power)

costs related to inventory - fixed

independent of unit volume produced (buildings, equipment, rent)

costs related to inventory - carrying

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

costs related to inventory - order

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

hidden costs of inventory

having too much or too little inventory on hand can build hidden costs that create a risk for company

too much inventory

financial resources tied up in inventory

underlying problems being hidden rather than exposed and solves, including quality problems not being immediately identified

no incentive to process improvements

too little inventory

production disruptions creating need for expediting and additional costs

longer delivery replenishment lead times

reduced responsiveness

lost revenue

absolute inventory value

the value of the inventory at either its cost or market value (balance sheet)

inventory turnover

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

the more the better

turnover ration = COGS / average inventory @ cost

inventory policy

set target inventory levels for all products and materials

address questions:

1. when to review inventory

2. when to order inventory

3. how much inventory to order

periodic review system

inventory levels are reviewed at a set frequency (weekly, monthly)

at the time of review, if stock levels are below pre-determined level, an order for replenishment is placed, otherwise no action is taken until the next cycle

advantages of periodic review system

reduce the time spent analyzing inventory

less expensive to implement and operate than a continuous review system

disadvantages of periodic review system

challenging to determine the best review/reordering intervals

can make inventory accounting less accurate

since items are only reviewed periodically, theres greater risk of inventory dropping below the reorder point between reviews, and therefore a greater potential need for safety stock

continuous review system

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

advantages of continuous review system

allows for real-time updates of inventory, which can make it easier to know when to replenish

facilitate accurate accounting since 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

disadvantages of continuous review system

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

reorder point

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

ROP = demand during lead time (d x lead time) + safety stock

fixed-time period system

inventory is checked in fixed periods against a target inventory level

if the inventory is less than target, a quantity necessary to bring inventory back up to target level is ordered

amount of inventory ordered will potentially vary from period to period based on the remaining inventory at each time interval checked

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

the time between order varies from order to order

economic order quantity model (EOQ)

a fixed order quantity model based on the trade-off between annual inventory costs and annual inventory carrying costs - formula given on exam

order costs

incurred each time an order is placed

• order preparation costs

• order transportation costs

• order receipt processing costs

• material handling costs

carrying costs

costs incurred for holding inventory in storage

• cost of capital - specified by senior management

• taxes - on inventory held in warehouses

• insurance - based on estimates risk or loss over time and facility characteristics

• obsolescence - deterioration of the product during storage and shelf-life

• storage - facility expense related to product holding rather than product handling

constraints on the practical use of EOQ

limited capital

storage capacity

transportation

obsolescence

production lot size

utilization

ABC system

method to determine which inventories should be counted and managed more closely than others

• A: highest priority (20% of total items, 80% of total inventory cost)

• B&C (80% of items, 20% of cost)

  • B: items require closer management since relatively more expensive & more purchase effort

  • C: lowest value and lowest priority

Bin system

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

mainly for small low-value items

when inventory in first bin depletes, an order is placed to refill

second bin is set up to hold enough to cover demand during the replenishment led time

base stock level system

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

equal to to quantity withdrawn from inventory

form of JIT

single-period mode

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

maximize profits — christmas trees, newspaper stands

inventory control tools

many inventory control tools exist in today’s market, those incorporating barcode tracking or RFID tagging generally offer the most flexibility and ease of use

barcodes

help business track products and stock levels for inventory management

linear barcode

series of alternating bars and spaces printed on representing encoded info that electronic reader can read

2D barcodes

graphical image that stores horizontal and vertical info

• can store 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

doesn’t require a direct line of sight to read a tag, and the information on the tag is updatable

automates the supply chain - materials management

goods automatically counted and logged as they enter the supply warehouse

automates the supply chain - manufacturing

assembly instructions encoded on RFID tags provide info to computer-controlled assembly devices

automates the supply chain - distribution center

shipment leaving DC automatically updates ERP to trigger a replenishment order and notify customer for delivery tracking

automates the supply chain - retail store

no check-out lines as scanners link RFID tagged goods in shopping carts with buyer credit cards

procurement

the process of selecting and vetting suppliers, negotiating contracts, establishing payment terms, and the actual purchasing of goods and services

purchasing

obtaining merchandise, capital equipment, raw materials, services, and/or MRO is exchange for money

transaction function of procurement with a 3rd party

supply management

encompasses all acquisition activities beyond the simple purchase transaction

purchase requisition

an internal document that defines the need for goods or services

doesn’t constitute a contractual relationship with external part

generated by a user department to notify purchasing personnel of item to order, quantity, and timeframe

purchase order (PO)

an external commercial document, an official offer issued by a buyer to a seller to acquire goods or services

• used to control the purchasing of products and services from external suppliers

• indicated types, quantities, and agreed prices for products or services

• becomes a legally binding contract only when accepted by the supplier

e-procurement

B2B purchase and sale of supplies and services over the internet

merchants

wholesalers and retailers who purchase for resale

industrial buyers

individuals within an organization who purchase raw materials for conversion into products or purchase services, capital equipment and MRO supplies

contracting

used for the acquisition of services

request for information (RFI)

a 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 producing a product or service

request for quote (RFQ)

a document to solicit bids (price and delivery) from interested and qualified suppliers for goods or services the organization needs to obtain

primary objective of purchasing

1. ensure an uninterrupted flow of materials and services at the lowest overall cost

2. improve the quality of the finished goods produced

3. optimize customer satisfaction

purchasing contributed to these objectives by

1. actively seeking reliable suppliers

2. working with the expertise of strategic suppliers to improve quality and materials

3. involving suppliers and purchasing personnel in new product design and development

1st step of purchasing process

need identified and purchase requisition issues

request for goods/services submitted to procurement/purchasing organization

2nd step in purchasing process

obtain authorization as necessary

purchase requisition routed to authorized approver

3rd step in purchasing process

identify and evaluate potential suppliers

may be determined from a list of approved suppliers

alternatively, a request for information may be used to collect info from potential suppliers

4th step in purchasing process

make supplier selection

competitive bidding process, if supplier isn’t already known, initiated through a request for proposal

supplier selected from the bids based on criteria; price, availability, quality, delivery costs, etc.

5th step in purchasing process

purchase order (PO) is created and delivered to the supplier

informs the supplier of intent to purchase

identify items, quantity, delivery date, price, location, etc

PO is buyer’s formal offer to supplier to obtain items

6th step in purchasing process

supplier confirmation of PO

supplier formally agrees to supply items and terms of PO

PO becomes a legally binding contract when accepted and confirmed

7th step in purchasing process

fulfillment

supplier delivers items to buying organization as per the PO

8th step in purchasing process

receipt of goods

once items arrive, buyer conducts receipt process where items are checked to ensure they conform to details of PO

confirmation of receipt may be sent to supplier

9th step in purchasing process

invoice and reconciliation

supplier prepares invoice for items

may need to be reconciled to the PO and goods receipt before payment (3-way match)

10th step in purchasing process

payment

payment is processes using an appropriate payment method, assuming items meet all criteria from PO

11th step in purchasing process

close out the purchase order

if all terms and conditions of PO are met, PO is closed out in the purchasing system

if not, decision about whether balance will be received or order will be complete/closed

12th step in the purchasing process

analysis

measurement of efficiency and accuracy of the procurement process

specific PO data and info captured and used during performance meeting

purchasing process steps

in leading procurement organizations every step is completed

however many steps are achieved via automated systems using rules

e-Procurement

automation, through web-enabled tools, of the non-strategic and transaction activities that would otherwise consumer buyers time

basic e-Procurement process

1. electronic purchase request and PO

2. an invoice (which might be one with the receipt)

3. a payment

   1. for high-dollar includes authorization of PO and reconciliation of invoice

advantages of e-Procurement systems

time-saving

cost savings

accuracy

real-time

management

mobility

trackability

profit-leverage effect

a decrease in purchasing expenditures directly increases profits before taxes (assuming no decrease in quality or purchasing total cost)

bottom line impact is $ for $

ROA effect

high ROA indicated managerial prowess in generating profits with lower spending

inventory turnover effect

increase in Inventory turnover indicated optimal utilization of space and inventory levels, increased sales, and avoidance of inventory obsolescence

inventory is an asset; but is also capital tied up

inventory turnover

COGS / average inventory

high: beneficial, means company generates sales efficiently to sell turnover

low: unfavorable and means the company isn’t selling efficiently

total cost of ownership (TCO)

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

purchase price remains important, but is only one part of the total cost of ownership

four elements of cost

quality, service, delivery, price (QSDP) — sum of all is TCO

quantity discounts

may be offered to encourage buyers to purchase larger quantities