Supply Chain chp 4-6

finished product inventory

allows company to fill customer orders immediately

materials inventory

allows a company to support manufacturing operations and the production plan while avoiding delays

failing to manage inventory correctly leads to

dissatisfied customers, lost sales and revenue, and higher costs

Inventory

the quantities of goods and materials that are held in stock

how can inventory be a liability

if it becomes unusable due to expiration, obsolescence, damage, and spoilage

four main categories of inventory

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

raw materials

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

work in process

a good in various stages of completions throughout the plant (anywhere between a raw material that has been released for initial processing to fully processed materials awaiting final inspection)

finished goods

products that are available for sale and/or shipment to the customer, worth more than raw materials

Maintenance, repair, and operating

materials needed to run the manufacturing operations and the business, but do not end up as part of the finished product

MRO items can be

consumed during the manufacturing process, used to facilitate the manufacturing operation or used to facilitate the company’s administrative activities

service inventory

activities carried out in advance of the customer’s arrival

functions of inventory

meet customer demand, buffer against uncertainty in demand/supply, decouple supply from demand, decouple dependencies in the supply chain

Goal of inventory management

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

effective inventory management balances…

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

Internal inventory stock levels

strategic stock, safety stock, and cycle stock

external inventory stock levels

pipeline inventory

cycle stock

inventory that meets immediate demand of customers

safety stock

inventory built to protect against fluctuation in demand or supply (buffer stock)

strategic stock

inventory used for a very specific purpose or future event, and for a defined period of time (anticipation stock)

why do companies decided to carry strategic stock

hedge currency fluctuation, price discount, protect against short-term disruption, take advantage of a business opportunity, and life cycle changes

pipeline inventory

inventory that is already out in the market, the ownership of this inventory has been transferred to the trading partners

obsolete inventory

inventory that will never be used or sold at full volume, takes up spaces and costs money

how can obsolete inventory taken care of

dispose (with some costs) or donate to non-profits if it has remaining value

direct costs

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

indirect costs

can not be traced directly to the unit produced (overhead, MRO, buildings, equipment)

variable costs

dependent on the unity volume produced vary with output level (materials, labor, utility power)

fixed costs (sunk costs)

independent of the unit volume produced (rent, allocated overhead)

carrying costs

costs incurred for holding inventory in storage

order costs

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

Having too much inventory results in

financial resources tied up, underlying problems being hidden, and no incentive for process improvements

Having too little inventory can result in

production disruptions, longer delivery replenishment lead times, reduced responsiveness, and lost revenue

absolute inventory value

value of inventory at either its cost or market value

inventory turnover

the number of times that an inventory cycles during the year

inventory turnover ratio

cost of goods sold/average inventory @ cost

Before setting target inventory levels you need to address…

when to review inventory, when to order inventory, and how much inventory to order

two models for determining when to review inventory

periodic review system and continuous review system

Periodic review system

inventory levels are reviewed at a set frequency

advantages of the periodic review system

reduces the time spend analyzing inventory and it’s less expensive to implement and operate

disadvantages of the periodic review system

difficult to determine the best intervals, less accurate inventory accounting, greater risk of inventory dropping

continuous review system

inventory levels are continuously reviewed

advantages of the continuous review system

real-time inventory updates, accurate accounting, less safety stock

disadvantages of the continuous review system

requires an automated system (cost of implementation)

Reorder point (ROP)

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

ROP

demand x leadtime

ROP with safety stock

D x L + SS

fixed time period system

inventory is checked in fixed time periods against a target inventory level

fixed time period system formula

Q (order quantity) = R (target inventory level) - IP (inventory position)

fixed order quantity system

the same order quantity is used from order to order

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 includes

preparation, transportation, receipt processing, and material handling

Carrying costs include

capital, taxes on inventory, insurance, obsolescence (deterioration), and storage

EOQ formula

√2  x  Order Cost  x  Annual Demand Volume

Annual Carrying Cost %  x  Unit Cost

EOQ model is impacted by

individual item purchase price discount, multiple item purchase price discount, and transportation freight-rate discount

EOQ constraints

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

Inventory system types

ABC, bin, base stock level, and single period model

ABC system

classifies inventory based on the degree of importance

Bin system

uses either one or two bins to hold a quantity of the item being inventoried

based stock level system

issues an order whenever a withdraw is made from inventory

single period inventory model

inventory is only ordered for a one-time stocking

linear barcodes

alternating bars printed or stamped on parts representing info

2D bar codes

graphical images that store information horizontally and vertically

radio frequency identification (RFID)

successor to barcode for tracking individual unit of goods, does not reauire a direct line fo sight

weeks of supply formula

avg on hand inventory/ avg. weekly usage

procurement

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

purchasing

the process of how goods and services are ordered from an external third party, transaction of procurement

institute of supply chain management

encompasses all acquisition activities beyond the simple purchase transaction

purchase requistion

an internal document generated by a user department that defines the need for goods/services but does not constitute a contractual relationship

purchase order

an external commercial document acting as an official offer from a buyer to seller to acquire goods

a purchase order is legally binding when

it is accepted by the supplier

e-procurement

The business-to-business purchase and sale of suppliers and services over the internet (not strategic and transactional)

e-procurement process

an electronic purchase requisition or purchase order, an invoice, and a payment (authorization and reconciliation included for high-dollar purchases)

merchants

wholesalers and retailers who purchase for resale

industrial buyers

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

contracting

the acquisition of services

request for information

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

request for proposal

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

request for quote

a document used to solicit bids from interested and qualified suppliers for goods or services that the organization needs to obtain

primary objectives of purchasing

ensuring an uninterrupted flow of materials and services at the lowest cost, improve the quality of finished goods, optimize customer satisfaction

how does purchasing contribute to its 3 objectives

actively seek reliable suppliers, working with expert strategic suppliers to improve quality, involving suppliers and purchasing personnel in new product design and development

purchasing process steps

Identify a need (purchase requisition issued), obtain authorization, identify and evaluate potential suppliers (RFI), make supplier selection (RFP and RFQ if needed, create a purchase order, get supplier confirmation, fulfillment, receipt of goods, invoice and reconciliation, payment, close out purchase order, and analysis

advantages of an e-procurement system

time savings, cost savings, accuracy, real-time, management, mobility, trackability, and benefits to suppliers

profit leverage effect

a decrease in purchasing expenditures directly increases profits before taxes

return on assets effect

indicates managerial prowess in generating profits with lower spending

inventory turnover effect

indicate optimal utilization of space and inventory levels, increases sales, avoidance of inventory obsolescence

Inventory is an asset but also

represents financial capital tied up and not available for use in other parts of the business

Total cost of ownership

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

four elements of cost

quality, service, delivery, and price

total cost ownership

the sum of the cost elements

other factors of total cost ownership other than purchase price

quantity discounts, cash discounts, value-added services

administrative costs

associated with the procurement activity itself: screening potential suppliers, negotiation, order preparation, order transmission

poor supplier quality

related to defective finished goods: scrap, rework, recycling, recovery of materials, warranty administration, and repair costs

components of the total cost of ownership

pre-transaction, transaction, post-transaction

3 key pillars of the make v. buy decision

business strategy, risks, and economic factors

business strategy includes

The strategic importance to the company of the product or service that is being considered for outsourcing, and the process, technology, and skill required to make the product or deliver the service

risks include

lower quality, reliability, and predictability of outsourced solutions as compared with in-house manufacturing or services

economic factors include

the impact of outsourcing on capital expenditures, return on invested capital, return on assets, and possible savings

qualitative factors of the make v buy decision

more subjective and include control over quality, reliability, and reputation of the potential suppliers, and the impact of the decisions on customers and suppliers

quantitative factors of the make v buy decision

incremental costs of either making or purchasing the item, such as the availability of manufacturing facilities, needed resources, and manufacturing capacity

qualitative reasons for making over buying

protect proprietary technology, no competent supplier, control of lead time, using existing idle capacity, and better quality control