SCM Exam 2

Inventory

The quantities of goods and materials that are held in stock, including materials for production, finished products for customers, and business supplies.

Raw Materials

Purchased items or extracted materials that are converted into components and products via the manufacturing process. Example: Starting materials bought from a supplier.

Work-in-Process (WIP)

Goods in various stages of completion throughout the plant. Example: Material that has been released for initial processing up to fully processed material awaiting final inspection.

Finished Goods

Items on which all manufacturing operations, including final testing, have been completed and are available for sale to customers.

Maintenance, Repair and Operating (MRO)

Items used in support of general operations and maintenance that do not end up as part of the finished product. Example: Oil for manufacturing equipment, spare parts, or coffee for the break room.

Facilitating Goods

Items used to help facilitate a service being provided, since the services themselves cannot be inventoried. Example: Food and tableware inventoried by a restaurant.

Cycle Stock

Inventory built to satisfy immediate demand; it depletes gradually as orders are received and replenishes cyclically.

Safety Stock

Also known as buffer stock, this is inventory above and beyond what is actually needed to meet anticipated demand, protecting against fluctuations in supply and demand.

Strategic Stock

Additional inventory beyond cycle and safety stock used for a very specific purpose or future event. Example: Speculative buying in anticipation of a price increase or stocking up for seasonal demand.

Pipeline Inventory

Inventory in transit within the transportation network and distribution system, held by wholesalers, distributors, or retailers.

Obsolete Inventory

Stock that is expired, out-of-date, damaged, or no longer needed that will never be used or sold at full value.

Carrying Costs

Costs incurred for physically having inventory on-site and for maintaining the infrastructure needed to store, secure, and insure it.

Order Costs

Labor costs associated with placing an order for inventory and the cost of receiving the order.

Inventory Turnover

The number of times that an inventory cycles, or "turns over," during the year. Formula: Cost of Goods Sold (COGS) divided by Average Inventory @ Cost.

Periodic Review System

An inventory system where stock levels are reviewed at a set frequency (e.g., weekly or monthly), and orders are placed if the stock is below a predetermined level.

Continuous Review System

An inventory system where inventory levels are continuously reviewed, and a replenishment order is automatically triggered as soon as inventory falls below a reorder point.

Reorder Point (ROP) Formula

The lowest inventory level at which a new order must be placed to avoid a stockout. Formula: ROP = d * L + SS (Demand during Lead Time + Safety Stock).

Fixed-Time Period System

An ordering system where inventory is checked in fixed time periods; if it is less than the target, a varying quantity is ordered to bring it back up to the target level.

Fixed-Order Quantity System

A continuous review system where the same predetermined order quantity is placed whenever the inventory position drops to a predetermined reorder point.

Economic Order Quantity (EOQ)

A quantitative decision model based on the trade-off between annual inventory order costs and annual inventory carrying costs, finding the point where the sum of both is minimized.

ABC System

An inventory system that classifies items based on importance; A items represent about 20% of items but 80% of total cost, while B and C items make up the remaining 80% of items but only 20% of cost.

Bin System

An inventory system that uses one or two bins to hold items; when the first is depleted, an order is placed while the second bin covers demand during the replenishment lead time. Example: Primarily used for small or low value items.

Base Stock Level System

A type of inventory system that issues a replenishment order equal to the quantity withdrawn whenever a withdrawal is made. Example: Used primarily for very expensive items, like an airplane engine.

Single-Period Inventory Model

An inventory system where inventory is only ordered for a one-time stocking. Example: Christmas tree lots and newspaper stands.

Linear (1D) Barcode

A series of alternating bars and spaces representing encoded information that can only be read horizontally and holds a maximum of 85 characters.

2D Barcode

A graphical image that stores information both horizontally and vertically, capable of storing over 7,000 characters.

Radio Frequency Identification (RFID)

An inventory tracking tool that uses a microchip and an antenna to transmit information to a reader; it does not require direct line of sight and the tags are updatable.

Procurement

The process of selecting and vetting suppliers, negotiating contracts, establishing payment terms, and the actual purchasing of goods and services. It is the overarching term within which the action of purchasing can be found.

Purchasing

The action of obtaining merchandise, capital equipment, raw materials, services, or MRO supplies in exchange for money or its equivalent.

Supply Management

A newer term encompassing all acquisition activities beyond the simple purchase transaction.

Purchase Requisition

An internal document generated by a user department that defines the need for goods or services. It is the first step to buy a product and does not constitute a contractual relationship.

Purchase Order (PO)

An official external commercial offer issued by a buyer to a seller to acquire goods or services. It becomes a legally binding contract only when accepted and confirmed by the supplier.

e-Procurement

The business-to-business (B2B) purchase and sale of supplies and services over the Internet, automating non-strategic and transactional activities.

Merchants

Wholesalers and retailers who purchase items for resale.

Industrial Buyers

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

Request for Information (RFI)

A standard business process used to collect written information about the capabilities of various potential 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 used to solicit bids (price and delivery) from interested and qualified suppliers for routine or repeat purchased items.

Profit-Leverage Effect

A decrease in purchasing expenditures directly increases profits before taxes dollar for dollar. Example: A $15,000,000 decrease in costs increases profit by $15,000,000.

Return on Assets (ROA) Effect

A metric indicating managerial prowess in generating profits with lower spending. A 10% cost reduction generates a significantly higher ROA than a 10% sales increase.

Inventory Turnover

The number of times the company sold through inventory in a given time period, calculated as Cost of Goods Sold divided by Average Inventory.

Total Cost of Ownership (TCO)

The sum of all the costs associated with every activity in the supply stream of a product, including Quality, Service, Delivery, and Price.

Make versus Buy Decision

The strategic act of deciding whether to produce an item internally (make) or buy the item from an outside supplier (buy/outsource).

In-sourcing

Reverting to in-house production when external quality, delivery, and services do not meet expectations.

Co-sourcing

The sharing of a process or function between internal staff and a dedicated external provider that works exclusively under your control.

Backward Vertical Integration

A company acquiring one or more of their suppliers. Example: A manufacturer buying the key supplier of a critical material.

Forward Vertical Integration

A company acquiring one or more of their customers. Example: A manufacturer buying a wholesaler or distributor.

Centralized Purchasing

An organizational structure where a purchasing department located at the firm’s corporate office makes all the purchasing decisions.

Decentralized Purchasing

An organizational structure where individual, local purchasing departments (like at the plant level) make their own purchasing decisions.

Tariffs

Duties, taxes, or customs imposed by the host country for imported or exported goods.

Non-tariff barriers

Quotas, licensing agreements, embargoes, laws, and regulations imposed on imports and exports.

Countertrade

International trade conducted by the exchange of goods rather than by currency.

Import Brokers

Agents licensed by the government to conduct business on behalf of importers for a fee, clearing products through customs barriers.

Import Merchants

A person or company that buys and takes title to imported goods and then sells them domestically for a profit.

Trading Companies

Entities that buy products in one country and sell them in different countries where they have their own distribution network.

Competitive Bidding

A procurement process requesting bids from competing suppliers to obtain the lowest prices and prevent favoritism.

Bid Bond

A debt secured by a bidder providing a guarantee that the successful bidder will accept the contract once awarded, or else the bond is forfeited.

Performance Bond

A debt secured by a bidder providing a guarantee that the work will be on time and meet specifications.

Payment Bond

A debt secured by a bidder to provide protection against 3rd party liens not fulfilled by the bidder.

Benchmarking

The process of measuring performance against a business considered to be the best in the industry to identify internal opportunities for improvement.

Sourcing

The process of identifying a company that provides a needed good or service.

Strategic Sourcing

A comprehensive approach for locating and sourcing key material suppliers, which often includes the business process of analyzing the total-spend for material spend categories.

Spend Analysis

Collecting, cleansing, classifying, and analyzing expenditure data for the purpose of decreasing costs, improving efficiency, and monitoring compliance.

Non-Critical (Routine) Items

Items that involve a low percentage of the firms' total spend and involve very little supply risk. Example: Office supplies.

Bottleneck Items

Items with unique specifications that are physically hard to get, resulting in high supply risk, but having low impact on the firm's total spend.

Leverage Items

Commodities where many alternatives of supply exist and supply risk is low, but spend is high. Example: Standardized packaging materials.

Strategic Items

Strategic items and services that involve a high level of expenditure, carry a high supply risk, and are vital to the firm's success.

Supply Base Rationalization

Reduction in the supply base to the lowest number of suppliers possible without increasing risk. Also known as supply base reduction or supply base optimization.

Single Sourcing

A sourcing strategy where there are multiple potential suppliers available for a product or service, but the company decides to purchase from only one supplier.

Multiple Sourcing

Purchasing a good or service from more than one supplier to create competition, ensure capacity, and reduce supply risk.

Sole Sourcing

A sourcing strategy where there is only one supplier for a product or service, meaning the buyer has no choice but to use that specific supplier.

Vendor Managed Inventory (VMI)

An arrangement where suppliers directly manage buyer inventories to reduce the buyer's inventory carrying costs and avoid stockouts.

Co-Managed Inventory (CMI)

An arrangement where a specific quantity of an item is stored at the buyer's location, but the inventory is jointly managed by the buyer and the supplier.

Supplier Co-location

A situation where a supplier's employee is permanently housed in the purchasing department of the buyer's organization to act as the buyer and manage the inventory of their own products.

Strategic Alliance

An agreement between a buyer and a supplier to pursue some agreed upon objectives, sharing resources and benefits, while remaining independent organizations.

Supplier Code of Conduct

A document that translates the company's ethical stance to supplier requirements, often covering areas like labor practices, environmental impact, and safety.