ISC Exam 2 Key Terms (Ch. 4-6)

inventory

one of a company’s largest assets, so careful management of this asset is an essential business requirement

four categories of inventory

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

raw materials

purchased items/expected materials that are converted via the manufacturing process into components and products

work-in-process

goods in various stages of completion through the plant, spanning from raw material that has been released for initial process up to fully processed material awaiting final inspection

finished goods

items on which all manufacturing operations, including final testing, have been completed

Maintenance, repair and operating (MRO)

items used in support of general operations and maintenance such as material supplies, spare parts, and consumables used in manufacturing process and supporting operations

service inventory

activities carried out in advance of customer’s arrival

facilitating goods

items used to help facilitate service being provided

inventory management

planning and controlling inventories

internal inventory

strategic stock → safety stock → cycle stock

external inventory

pipeline inventory

cycle stock

inventory that company builds to satisfy immediate demand

safety stock

above what is needed to meet anticipated demand

decoupling

separating parts from parent item (buying without planning factor)

strategic stock

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

pipeline inventory (only external)

inventory in transportation network and distribution system

obsolete inventory

stock that is expired, damaged, or no longer needed

MRO supplies

materials you need to run manufacturing or operations and business, do not end up as part of finished product

direct costs

directly traceable to units produced (materials, labor, etc.)

indirect costs

cannot be traced directly to units produced (overhead, MRO, building, etc.)

variable costs

dependent on unit volume produced vary with output level (materials, labor, etc.)

fixed/sunk costs

independent of unit volume produced (building, equipment, rent, etc.)

carrying costs

costs for physically having inventory onsite and for maintaining infrastructure needed to store inventory and secure and insure over time

order costs

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

hidden costs

unknown costs that occur when there is too much or too little inventory

absolute inventory value

value of inventory at either cost or market value

inventory turnover

number of times that inventory cycles or turns over during the year

periodic review system

inventory levels are reviewed at a set frequency (daily, weekly, etc.)

continuous review system

inventory levels are continuously reviewed and monitored

reorder point (ROP)

Lowest inventory at which the new order must be placed to avoid stockout

fixed time period system

inventory checked in fixed time periods against target inventory level

fixed order quantity system

continuous inventory review system in which same order quantity is used from order to order

economic order quantity (EOQ) model

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

individual item purchase price discounts

discounts for ordering larger quantities

multiple item purchase price discount

purchasing a combination of items from a supplier you may be able to take advantage of volume discount based on total volume across all items purchased rather than just an individual item’s volume

transportation freight rate discounts

order large quantities → take advantage of freight discounts, lower per unit cost

ABC system

classifies inventory based on degree of importance

bin system

uses one or two bins to hold quantity of item inventory

base stock level

issues order whenever withdrawal made from inventory

single period inventory model

only ordered for one-time stocking

linear barcodes

series of alternating bars and spaces printed/stamped on parts, containers, labels, other media, representing encoded information that can be read by e readers

2D barcode

graphical image that stores info both horizontally and vertically

radio frequency identification (RFID)

does not require direct line of sight to read tag, information on tag is updatable

RFID material management

goods auto counted/logged as they enter supply warehouse

weeks of supply

(average on-hand inventory) / (average weekly usage)

inventory turns

(cost of goods sold) / (average inventory value)

procurement

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

purchasing

action of obtaining merchandise, capital equipment, raw materials, services, and MRO in exchange for money or equipment

purchase requisition (PR)

internal document that defines the need for goods or services

purchasing order (PO)

external commercial document issue by the buyer to seller

e procurement

business to business (B2B) purchase and sale of supplies and services over the internet

merchants

wholesalers and retailers who purchase for resale

industrial buyers

takes materials, converts it, then sells it

contracting

acquisition of services

request for information (RFI)

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

request for proposal (RFP)

detailed capabilities document used to determine supplier’s capability of suppliers

request for quote (RFQ)

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

profit leverage effect

decrease in purchasing expenditures directly increases profits before taxes

return on assets effect

high ROA indicates managerial prowess in generating profits and lower spending

high turnover ration

beneficial, company generates sales efficiently to sell

total cost of ownership

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

elements of TCO

quality, service, delivery, price

components of TCO

pre-transaction costs, transaction costs, post-transaction costs

make

producing materials and products internally

buy/outsource

buying materials, components, or products from suppliers instead of or in addition to making them in house

business strategy

 strategic importance to company of product or service that is being considered for outsourcing

risks

lower quality, reliability, predictability of outsourced solutions as compared to in-house manufacturing

economic factor

impact of outsourcing on capital expenditures, ROA, and ROA

outsourcing risks

loss of control, increased reliance, need for supplier management

outsourcing benefits

concentrate on core capabilities, reduce staffing, accelerate reengineering, reduce internal manufacturing problems, improve manufacturing flexibility

insourcing

reverting to in-house production when external, quality, delivery, or services do not meet expectations

cosourcing

sharing of process between internal staff and external providers

backward vertical integration

company acquiring one or more suppliers

forward vertical integration

company acquiring one or more customers

centralized purchasing

located at firm’s corporate office, makes all decisions

decentralized purchasing

individual, local purchasing department, making own decisions

hybrid purchasing

centralized use throughout corporation, decentralized purchasing for goods and services used only locally at each facility

tariffs

duties, taxes, and customs imposed by host country for imported or exported goods

non-tariff barriers

quotas, licensing agreements, embargoes, laws/regulations imposed on imports and exports

countertrade

international trade by exchange of goods rather than by currency

import brokers

agents licensed by government regulatory authority to conduct business on behalf of importers for a service fee

import merchants

person or company engaged in purchase or sale of imported commodities for profit

trading companies

buy products in one country and sell indifferent countries with own distribution network

government purchasing

expenditures made in private sector by all levels of government

nonprofit

expenditures made in private sector by all types of nonprofit organizations

bid

proposal or quotation submitted in response to solicitation from community authority

competitive bidding

procurement process in which bids from competing suppliers for right to supply materials to a company

open bid

sealed bids open in full view of all who wish to witness

closed bid

sealed bids opened in presence only of authorized personnel

bid bond

debt secured by bidder for purpose of providing guarantee successful bidder will accept contract once awarded

performance bond

debt secured by bidder for purpose of providing guarantee that work will be on time and meet specifications

payment bond

debt secured by bidder for purpose of providing protection against third part lines not fulfilled by bidder

benchmarking

process of measuring performance of company’s products, services, or process against those of another business considered to be best in industry

sourcing

identifying company that provides needed goods and services

strategic sourcing

comprehensive approach for locating or sourcing key suppliers, high level of expenditure, vital to firm’s success

single sourcing

purchasing from only one supplier

multisourcing

purchasing goods and services from many suppliers

functional products

stable demand, high levels of competition

innovative products

short life cycles, volatile demand, high profit margins, relatively less competition

spend analysis

categorizing and analyzing expenditure data for a purpose of reducing costs, improving efficiency, and monitoring compliance