Supply Chain Exam 2

adequate finished product inventory allows _____

a company to fill customer orders immediately

adequate materials inventory allows ______

a company to support manufacturing operations while avoiding delays

Inventory is _____

the quantities of goods and materials that are held in stock

Inventory is an _____, but too much can be a ____-

asset; liability

too much inventory is a liability because

- Ties up capital

- more inventory = more space = more money

- inventory can be unusable

Raw materials are

purchased or extracted materials converted into components

how to tell how much raw material you should hold in inventory

- Buy from supplier and have it delivered JIT

- Buy and hold

Work-in-process

goods in various stages of completion (but not finished)

many companies view WIP as "black hole" of inventory because ______

they may not have very good visibility in this part

Finished goods

items which all manufacturing operations and testing have been completed, and are available for sale

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

Examples of MRO

- Some are consumed (oil for equipment)

- Some are used to facilitate manufacturing (cleaning supplies)

- Some are used to facilitate administrative activities (office supplies)

Service Inventory

Activities carreid out in advance of the customer's arrival

Why hold inventory

- To meet Demand

- To buffer against uncertainty

- To decouple supply from demand

-To decouple dependencies in supply chain

The goal of inventory management is to ______

help a company become more profitable by lowering COGS and increasing sales

Inventory management balances two competing considerations

- Reducing the amount of inventory held in stock

- Ensuring there is enough inventory to meet demand

cycle stock is

the inventory that a company builds to satisfy it's immediate demand

cycle stock gets depleted and replenished when....

as customers orders are recieved and when supply orders are recieved

safety stock

inventory above and beyond what is needed to meet anticipated demand, also known as "buffer stock"

strategic stock

Additional inventory beyond cycle and safety stock, used for a specific purpose

why would you want strategic stock

- Hedging

- take advantage of discount

- protect against supply disruptions

- Seasonal demand

Pipeline inventory

Inventory in the transportation network being held by others

Obsolete Inventory

stock that is expired, damage, or no longer needed

Direct costs

directly traceable to unit produced (labor, materials)

Indirect costs

Can't be traced directly to the unit produced (MRO)

Variable costs

dependend on the unit volume produced varies with output level

fixed costs

independent of the unit volume produced (buildings, rent)

Carrying costs

costs for having inventory on-site and maintaining infrastructure for storing inventory

Order costs

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

Absolute inventory value

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

Inventory turnover

Number of times an inventory cycles during the year

Inventory Turnover Ratio

COGS / Average cost of inventory

Periodic Review System

Inventory levels are reviewed at set frequency (weekly or monthly)

Continuous Review System

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

Reorder Point

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

Reorder point calculation

Demand during lead time (demand * lead time)

2 ways to calculate how much to order

Fixed time period and fixed order quantity system

2 ways to review inventory

Periodic and continuous review system

Fixed-time period system

Inventory is checked in fixed periods against target inventory level

fixed-order quantity stem

Continuous inventory system that uses same order quantity from order to order

Economic Order Quantity Model

model based on the trade-off of inventory order costs and carrying costs

EOQ Calculation

Sqroot((2ordercostsannual demand)/(annual carrying cost % * unit cost)

ABC System

Classifies inventory based on the degree of importance

A items in ABC System

Highest priority, "80/20" rule where A items account for 20% of total items but 80% of inventory costs

B in ABC Systems

B items require closer management since they are more expensive

C in ABC Systems

Have the lowest value and lowest priority

Bin System

Inventory system that uses two bins where you use one until it's depleted, then order to replace that bin and use second bin to cover in meantime

Base Stock Level System

Issues an oeder whenever a withdrawal is made from inventory

Single-period model

Inventory is only ordered for a one-time stocking

Inventory Control tools

- Linear barcode

- 2d Barcode

- Radio Frequency Identification (RFID)

Linear Barcode

Series of alternating bars and spaces for electronic readers

2d Bar codes

Graphical image that stores horizontal and vertical information

RFID

Doesn't require a direct line of sight to read a tag

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, or maintenace, repair, and MRO suppliers in exchange for money

Supply management

Identification, acquisition, access, positioning, and management of resources an organization needs

Purchasing terms

Internal document that defines need for goods or services

Purchase Order

External commercial document, the official offer issued by a buyer to a seller

a purchase order become legally binding when

accepted by the supplier

e-procurement

The B2B purchase and sale of supplies and services over the internet

Merchants

Wholesalers and retailers who purchase for reslae

Industrial Buyers

Individuals who purchase raw materials for conversion into products

Contracting

Acquisition of services

Request for Information (RFI)

Business process whose purpose is to collect written info about capabilities of various suppliers

Request for Proposal (RFP)

Detailed capabilities document used to determine a supplier's capability and interest

Request for Quote (RFQ)

Document to solicit bids from interested and qualified suppliers for goods or services the organization needs

3 Objectives of Purchasing

- Ensure uninterrupted flow of materials

- Improve the quality of the finished goods produced

- Optimize customer satisfaction

1st Step of Purchasing Process

Need is identified, purchase requisition is issued

2nd step of purchasing process

Obtain authorization as neccesary

3rd step of purchasing process

Identify and evaluate potential suppliers

4th step of purchasing process

Make supplier selection

5th step of purchasing process

Purchase Order is created and delivered to supplier

6th step of purchasing process

Supplier confirmation of the purchase order

7th step of purchasing process

Fufillment

8th step of purchasing process

Receipt of Goods

9th step of purchasing process

Invoice and reconciliation

10th step of purchasing process

Payment

11th step of purchasing process

Close out the Purchase Order

12th step of purchasing process

Analysis

basis e-procurement process

- Electronic purchase requisition and purchase order

- Invoice

- Payment

Profit-leverage effect

Decrease in purchasing expenditures directly increases profits before taxes

Return on Assets effect

high ROA indicates managerial prowess in generating profits

Inventory Turnover Effects

Increased inventory turnovers is great

Total Cost of Ownership

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

Factors beyond purchase price for TCO that must be considered

- Quantity discounts

- Cash discounts

- Value-added services

- Admin Expenses

- Poor supplier quality

Componenets of TCO

Pre-transaction costs

Transaction costs

Post-transaction costs

Qualitative reasons for MAKING the product

- Protect proprietary technology

- No competent supplier

- Control of lead-time

- Use existing idle capacity

- Better quality control

Quantitative reasons for MAKING the product

- Lower Cost

- Higher control

Qualitative reasons for BUYING the product

- If its non strategic

- Insufficient capacity

- Temporary capacity constraints

- Lack of expertise

- Better quality

- Multi-sourcing strategy

- Brand strategy

Quantitative reasons for BUYING the product

- Cost advantage

- Inventory Considerations

In-sourcing

Reverting to in-house production when external production don't meet expectations

Co-sourcing

Sharing of a process or function between internal staff and external provider

Backward Vertical Integration

Company acquiring one or more of suppliers

Forward vertical integration

Company acquiring one of their customers

Centralized Purchasing

Purchasing department located at corporate office decides

Decentralized purchasing

Individuals at local departments make their own decision

Hybrid purchasing approach

Centralized for products used throughout the corporation, decentralized for specific stuff at each facility

Import Brokers

Agents that conduct business on behalf of importers for fee by the government

Import Merchants

Entity engaged in purchasing and selling imported commodities for profit