supply chain chapter 4

inventory

how much a company keeps of products in stock for sale/use

• biggest asset company has

• if managed poorly = lost sales, unhappy customers, higher costs

examples of inventory

• raw materials

• work in progress

• finished goods

• supplies to run business

inventory assets

• help meet demand

• keep operations running

liability

if too much inventory

• ties up money

• needs extra storage

• extra costs like insurance, tax, security

• can expire break or become outdated

categories of inventory

• raw materials

• work in process

• finished goods

• MRO

raw materials

• basic inputs used to make products

• Just In Time JIT

• buy and holding

work in process/progress

• items made but not finished

• hard to track

• black hole - hard to track or see clearly

• ex: half built car on assembly line

finished goods

• product ready to sell

• overhead

• make to order

• make to stock

overhead

extra costs like utilities, rent, equipment

make to order

sell first, make later

make to stock

sell first, make later

MRO

maintenance, repair, operating supplies

• consumables, items that are used up like oil

service inventory

activities carried out in advance of customers arrival

• services are produced and consumed immediately

• facilitating goods

facilitating goods

items that help deliver service

why hold inventory

• to meet customer demand

• buffer against uncertainty

• to decouple supply from demand

• to decouple dependencies in supply chain

cycle stock

regular amount of snacks a store stocks to sell a day

lead time

time between ordering something and receiving itafes

safety stock

extra inventory kept in case demand is higher

buffer stock

extra inventory used to protect against any uncertainty

internal inventory

stuff the company already has in it’s own warehouse

external inventory

outside of the warehouse but still in supply chain, like goods held by suppliers or stores

pipeline inventory

stuff that is currently being shipped from one place to another

obsolete inventory

items that cant be sold anymore because they are outdated or not in demand

direct costs

costs you can clearly tie to one product

indirect costs

costs that help make products but aren’t linked to one item, factory electricity, rent

variable cost

costs that go up or down depending on how much you produce

fixed/sunk cost

costs that stay the same no matter what (in the short term)

ex: rent if you make 1 item or a 100 it will be the same

carrying costs

costs of holding and storing inventory over time, insurance, security, and the risk items get damaged

order costs

costs every time you place and receive an order

inventory turnover ratio

cost of goods sold/average inventory at cost

inventory investment

• absolute inventory value

• inventory turnover

absolute inventory value

value of inventory at either its cost or market value

models for determining when to review inventory

• periodic review system

• continuous review system

periodic review system

check inventory at fixed times

continuous review system

inventory tracked all the time automatically

reorder point (ROP)

• lowest inventory level at which new orders must be placed

• ROP = demand during lead time (dL)

• D x LT + SS = ROP

2 standard ordering system categories

fixed time period system

fixed order quantity system

fixed time period formula

Q = R - IP

order quantity - target inventory level = inventory position

economic order quantity model

• fixed order quantity model

• way to figure out best order size that minimizes cost

• balances order and carrying costs

EOQ formula

= square root of (2 x order cost x annual demand volume)/(annual carrying % x unit cost)

constraints of EOQ

• limited capital

• storage capacity

• obsolescence

• production lot size

• unitization

obsolescence

risk items become outdated, expire, or spoil

unitization

supplier required orders in specific packaging units

abc system

classifies inventory based on degree of importance ie. sales

bin system

when the first bin is empty → reorder, and the second bin keeps things running in the meantime

base stock level system

use 1 order 1, used for expensive or critical items

single period model

inventory system where inventory is only ordered for a one time stocking like christmas trees

linear 1d barcodes

vertical lines, the ones on retail products, 85 characters

2d barcodes

QR code square patterns, 7,000 characters

barcode reader/scanner

handheld, usb scanner, built in

RFID radio frequency identification

doesn’t require direct line of sight, updatable, helps with managing supply chain