Chapter 12: Managing Inventory in Supply Chains

Inventory

any asset held for future use or sale

Inventory Management

involves planning, coordinating, and controlling the acquisition, storage, handling, movement, distribution, and possible sale of raw materials, component parts and subassemblies, supplies and tools, replacement parts, and other assets that are needed to meet customer wants and needs.

Raw materials, component parts, subassemblies and supplies

inputs to manufacturing and service-delivery processes.

Work-in-process (WIP) inventory

consists of partially finished products in various stages of completion that are awaiting further processing

Finished goods inventory

completed products ready for distribution or sale to customers.

Environmentally preferable purchasing (EPP)

the affirmative selection and acquisition of products and services that most effectively minimize negative environmental impacts over their life cycle of manufacturing, transportation, use, and recycling or disposal.

Fundamental decisions that inventory managers deal with

1. When to order items from a supplier or when to initiate production runs if the firm makes its own items.

2. How much to order or produce each time a supplier or production order is placed.

Ordering costs/setup costs

are incurred as a result of the work involved in placing orders with suppliers or configuring tools, equipment, and machines within a factory to produce an item.

Inventory-holding/inventory-carrying costs

are the expenses associated with carrying inventory

Shortage/stockout costs

are costs associated with inventory being unavailable when needed to meet demand.

Unit cost

the price paid for purchased goods or the internal cost of producing them

Stock-keeping unit (SKU)

a single item or asset stored at a particular location.

Independent demand

demand for an SKU that is unrelated to the demand for other SKUs and needs to be forecasted.

Dependent demand

demand is directly related to the demand of other SKUs and can be calculated without needing to be forecasted.

Static demand

stable demand

Dynamic demand

demand that varies over time

Lead time

the time between placement of an order and its receipt.

Stockout

the inability to satisfy the demand for an item.

Backorder

occurs when a customer is willing to wait for the item

Lost Sale

occurs when the customer is unwilling to wait and purchases the item elsewhere.

A item

account for a large dollar value but a relatively small percentage of total items.

C item

account for a small dollar value but a large percentage of total items.

B items

between A and C

Fixed-quantity system (FQS)

the order quantity or lot size is fixed; that is, the same amount, Q, is ordered every time.

Inventory Position

defined as the on-hand quantity (OH) plus any orders placed but which have not arrived (called scheduled receipts, SR), minus any backorders (BO)

Reorder point

the value of the inventory position that triggers a new order

Economic order quantity

model is a classic economic model developed in the early 1900s that minimizes the total cost, which is the sum of the inventory-holding cost and the ordering cost

Safety stock

planned on-hand inventory that acts as a buffer to reduce the risk of a stockout

Service level

the desired probability of not having a stockout during a lead-time period

Fixed-period system

sometimes called a periodic review system—in which the inventory position is checked only at fixed intervals of time, T, rather than on a continuous basis.