Intro to Supply Chain Management Chapters 4-6

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What is inventory considered in a company?

One of the company's largest assets.

What can carrying too much inventory result in?

It can tie up capital and hide underlying problems.

What are the four main categories of inventory?

Raw materials, Work-in-Process (WIP), Finished Goods, Maintenance, Repair, and Operating (MRO) supplies.

Why do companies hold inventory?

To meet customer demand, buffer against uncertainty, decouple supply from demand, and decouple dependencies in the supply chain.

What are the three levels of internal inventory?

Strategic Stock, Safety Stock, Cycle Stock.

What is pipeline inventory?

Inventory in transit or held by suppliers, wholesalers, distributors, retailers, and customers.

What is strategic stock?

Additional inventory beyond cycle and safety stock used for a specific purpose or future event.

What is obsolete inventory?

Inventory that will never be used or sold at total value.

What is indirect inventory?

Inventory that cannot be traced directly to the unit produced, such as overhead and MRO items.

What happens if a company has too little inventory?

It can lead to production disruptions, longer delivery lead times, reduced responsiveness, and lost revenue.

What is the Inventory Turnover Ratio?

Cost of Goods Sold divided by Average Inventory at Cost.

What is the Reorder Point (ROP)?

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

How is ROP calculated?

ROP = Demand during Lead Time (dL).

What is a Fixed-Time Period System?

inventory is checked on a set schedule, such as every two weeks. You order whatever amount brings stock back up to a target level

What is the Economic Order Quantity (EOQ) Model?

the best amount to order each time. It balances the cost of ordering against the cost of holding inventory

What are order costs?

Costs incurred each time an order is placed, not including storage costs. ex: the cost of transporting an order to your warehouse

What are carrying costs?

Costs incurred for holding inventory, including insurance and storage expenses.

What is an ABC system?

A classification system that prioritizes inventory based on the degree of importance.

What is a 'Single-Period' Inventory Model?

An inventory system where inventory is only ordered for a one-time stocking.

What is procurement?

The overarching term for the action of purchasing materials, supplies, and services.

What is a Purchase Requisition?

An internal document that defines the need for goods or services.

When does a purchase order become a legally binding contract?

When it is accepted by the supplier.

What is a Request for Proposal (RFP)?

A detailed document used to determine a supplier's capability and interest in producing a product or service.

What are the primary objectives of purchasing?

Ensure an uninterrupted flow of materials at the lowest cost, improve quality, and optimize customer satisfaction.

What is the Profit-Leverage Effect?

A decrease in purchasing expenditures directly increases profits before taxes.

What is Total Cost of Ownership (TCO)?

The full cost of buying and using an item. Its four parts are QSDP: Quality, Service, Delivery and Price

What is the Make vs. Buy decision?

A strategic decision regarding whether to produce an item internally or purchase it from an external supplier.

What are qualitative factors in the Make vs. Buy decision?

Subjective factors including control over quality, reliability, and supplier reputation.

What are quantitative factors in the Make vs. Buy decision?

Objective factors such as incremental costs, availability of resources, and manufacturing capacity.

What does insufficient capacity imply for a firm?

The firm may need to subcontract from a supplier if it is at or near capacity.

What is co-sourcing?

Sharing a process or function between internal staff and an external provider.

What is backward vertical integration?

A company acquiring one or more of its suppliers.

What is centralized purchasing?

Purchasing decisions made by the corporate office's Purchasing Department.

What is decentralized purchasing?

Local purchasing departments make their own purchasing decisions.

What is the role of import brokers?

Agents licensed to conduct business on behalf of importers, handling paperwork and customs clearance.

What is a bid in procurement?

A proposal or quotation submitted in response to a solicitation from a contracting authority.

bid bond

protects against the winning bidder refusing to accept the contract

What is a payment bond?

A debt secured by a bidder to protect against third-party liens not fulfilled by the bidder.

What is strategic sourcing?

a complete approach to finding and choosing key suppliers. The company uses its combined buying power to get the best value and focuses on long-term relationships, not just the lowest price.

What is insourcing?

Producing goods or services using a company's internal resources.

What is outsourcing?

Purchasing an item or service externally that was previously produced internally.

What is a single-source strategy?

Purchasing from only one supplier despite multiple potential suppliers being available.

What is a multi-source strategy?

Purchasing goods or services from more than one supplier to create competition.

What are the reasons for using a single supplier?

To establish a good relationship, reduce quality variability, and achieve transportation economies.

What are the reasons for using multiple suppliers?

To spread the risk of supply disruption.

What characterizes innovative products?

Short product life cycles, volatile demand, high-profit margins, and less competition.

What are non-critical items in sourcing?

(low value, low risk) Routine items with low total spend and minimal supply risk. (3)

What are bottleneck items?

low company value, high supply risk, few suppliers (1)

What are leverage items?

(high value, low risk) Commodity items with many supply alternatives and low supply risk. (4)

What are strategic items?

(high value, high risk) High-value items that are vital to the firm's success and involve high supply risk. (2)

What is supply base rationalization?

Reduction of the supply base to the lowest number of suppliers without significantly increasing risk.

What are preferred suppliers?

Suppliers that best meet purchasing requirements and provide capacity and cost efficiency.

What is a strategic alliance in sourcing?

a buyer and supplier commit to work together over a long time for mutual benefit, sharing information and resources while staying separate companies

What are distributive negotiations?

Negotiations leading to a self-interested, one-sided outcome.

What are collaborative negotiations?

Negotiations where both sides work together to maximize outcomes or create win-win results.

What is a reverse auction?

A sourcing technique where suppliers compete to offer the lowest price.

What is Vendor Managed Inventory (VMI)?

A system where suppliers manage buyer inventories to reduce carrying costs and avoid stockouts.

What is ethical sourcing?

Considering the public consequences of buying behavior to promote fair treatment and sustainability.

What is the primary purpose of inventory management?

To balance the need for inventory as an asset while minimizing liabilities associated with excess inventory.

What is an example of raw materials in inventory?

Wood for a table.

What does WIP stand for in inventory management?

Work-in-process, which refers to partly finished items.

What is the purpose of finished goods inventory?

To have products ready to sell to customers.

What are MRO supplies?

Supplies that keep the plant running, such as glue, gloves, and light bulbs.

What are three reasons companies carry inventory?

To meet customer demand, buffer against uncertainty, and decouple steps in the supply chain.

What is the difference between fixed and variable costs?

Variable costs change with the number of units made, while fixed costs remain constant regardless of production levels.

What are carrying costs in inventory management?

The costs associated with holding inventory, including storage, insurance, and obsolescence.

What is the Fixed-Order Quantity system?

inventory is watched all the time. When it falls to the reorder point, the same quantity is ordered every time.

What does ABC analysis do?

Ranks inventory items by value, focusing resources on the highest-value items.

What is the single-period inventory model?

You order only once, because leftovers lose their value. Examples include a Christmas tree lot or a newspaper stand

What does RFID stand for and how does it work?

Radio Frequency Identification; it reads tags by radio without needing line of sight.

What is the Economic Order Quantity (EOQ) formula?

EOQ = √(2 × Order Cost × Annual Demand ÷ (Carrying Cost % × Unit Cost)).

What is the Reorder Point (ROP) formula?

ROP = D × LT + SS, where D is daily demand, LT is lead time, and SS is safety stock.

What does Inventory Turnover measure?

It measures how many times inventory is sold and replaced in a year.

What is the formula for Inventory Turnover?

Inventory Turnover = COGS ÷ ((Beginning Inventory + Ending Inventory) ÷ 2).

What is the goal of supply management?

To ensure materials flow without interruption at the lowest total cost while improving quality and customer satisfaction.

What is the purpose of a purchase order (PO)?

It is the buyer's official order to the supplier and becomes legally binding upon acceptance.

What is an RFI?

Request for Information; it gathers basic information about potential suppliers.

What is the 3-way match in purchasing?

three documents must agree: the purchase order, the invoice and the receipt.

What are the advantages of eProcurement?

Time savings, cost savings, accuracy, mobility, and trackability.

What is the fastest way a buyer can increase profit?

Getting a price reduction (profit-leverage effect)

What does Total Cost of Ownership (TCO) encompass?

The full cost of buying and using an item. Quality, Service, Delivery, and Price.

When does a company choose to buy instead of make?

When it lacks the capacity to meet demand.

What is forward vertical integration?

A company buys a business closer to its customer, such as a distributor.

What is an import broker?

An agent licensed by the government who clears imported goods through customs for a fee.

What does Return on Assets (ROA) indicate?

How much profit a company earns from what it owns.

What are the four sourcing categories in the Kraljic model?

Bottleneck, Non-Critical, Leverage, and Strategic.

What is a strategic alliance?

A long-term partnership between a buyer and supplier for mutual benefit.

What is the difference between distributive and collaborative negotiation?

Distributive negotiation is win-lose; collaborative negotiation is win-win.

What is sustainability in sourcing?

Meeting today's supply chain needs without compromising future needs.

What are the types of inventory held inside a company?

Cycle stock, safety stock, and strategic stock.

When is a Purchase Order (PO) legally binding?

Only when the supplier accepts it.

What is the first step in the purchasing process?

Understanding the need (the purchase requisition).

What is the fastest way purchasing can raise profit?

Get a price reduction (the profit-leverage effect).

What is the significance of the reorder point?

It indicates when to order.

What does EOQ tell you?

How much to order each time.

What is the difference between functional and innovative products?

Functional products have steady demand and low profit; innovative products have unpredictable demand and high profit.

CMI (Co-Managed Inventory)

The supplier only recommends an order. The buyer must

approve it. This is the key difference from VMI.

What is supplier co-location?

A supplier employee works inside the buyer's purchasing department to forecast, watch inventory and place orders.

what are the steps in the purchasing process?

1. Understand the need (a purchase requisition)

2. Identify and evaluate potential suppliers, using the approved supplier list or an RFI

3. Select the supplier, using an RFP or RFQ if needed

4. Create the purchase order (PO)