Supply and Demand Test 2

What is inventory?

A stock of products used to satisfy customer demand and/or the stock of materials used to make them.

Inventory Management

The planning and controlling of inventories to meet the competitive priorities of the organization.

Types of Inventory (from an Accounting Perspective)

Raw materials (RM)

Work-in-Process (WIP)

Finished Goods (FG)

How is inventory valued on the books?

At cost, typically made up of 3 components- direct materials, direct labor, and a portion of factory overhead

Physical Inventories

typically take place as a year end but can be more frequent. You stop all inventory movement while you physically count every item.

Cycle Counting

Involves physically counting a subset of your inventory every day and rotating the items so that all are counted eventually.

Types of inventory and reasons for having it

Cycle stocks

Safety Stock

Anticipation Inventory

Pipeline (in-transit) Inventory

Cycle Stocks

Based on batching

-Quantity discounts

-Long production runs

-Full-vessel transport

Safety Stock

Buffer variation in supply/demand

Anticipation Inventory

Seasonality

Risk hedging (i.e, preparation for a labor strike)

Different types of Inventory-related costs

-The cost of inventory itself

-The holding (or carrying) cost of inventory

-The ordering cost (if you buy it) or set-up cost (if you make it)

-The cost of lost sales if you don’t have the item when a customer wants to buy it (also known as stockout cost)

What are the components of holding costs?

Holding costs= Inventory value X ICC expressed as a decimal

ICC (Inventory Carrying Costs) Include:

Cost of capital (approx. 10-20%/yr.)

Storage and handling costs (approx. 3-5%/yr.)

Inventory service costs (approx. 2-3%/yr.)

-Property Taxes

-Property Insurance

Inventory risk or “shrinkage” (approx. 1-2%/yr.)

-Pilferage -Deterioration

-Obsolescence -Damage

What goes into ordering costs?

Preparation of the purchase order, placing the order, and receiving it

What goes into set-up costs

-Labor to clear the production line of one product and set it up for the next

-Line downtime (if capacity limit)

-Possible scrap in transitioning from one product to another

Make-to-stock

“pushes” its products into FG inventory assuming that customers will buy it as some point

Make-to-order

“pulled” through its manufacturing system by the initiation of an order from a customer.

Continuous Review System

For independent demand items

Periodic Review System

For independent demand items

Materials Requirements Planning (MRP)

For dependent demand items, such as components

Distribution Requirements Planning (DRP)

for finished goods in the distribution network

Just-in-Time (JIT)

For make-to-order manufacturing enviroments

Vendor Managed Inventory (VMI)

For purchased components managed by suppliers locally

Managing Independent Demand Inventories

Two decisions to make:

-How much to order

-When to order

Demand Rate

how much of the item we need per unit of time. It is represented on the sawtooth diagram by the downward sloping lines. The steeper the line, the greater the demand rate.

Lead time

is the length of the replenishment cycle- the time between ordering and receiving the item that is in demand

Reorder Point

is the inventory level corresponding to when you must place another order to avoid stockout. It is found by multiplying the demand rate by the lead time (must use same units of time for both)

Annual Holding Cost =

(Average cycle Inventory) x (Holding cost per unit/yr)

Annual ordering cost =

(Number of orders/Year) x (Ordering Cost)

Total annual cost (C) =

Annual holding cost + Annual ordering cost

C= Q (H) + D (S)

2. Q

C= Total annual cycle-inventory cost

Q= lot size (in units)

H= holding cost per unit per year= inventory value x ICC

D= annual demand (in units, per year)

S= ordering or set up costs (in dollars per lot)

What two conditions constitute the “Perfect Storm” when lost sales will most likely occur?

When lead time is longer than normal and demand rate is higher than normal at the same time

Continuous Review System (CR)- constant order quantity

You check the inventory level every time you make a withdrawal. When it hits the reorder point, you place an order for the same quantity every time.

Periodic Review System (PR)- constant order interval

You check the inventory level on the same pre-determined time interval and place an order each time for however much is needed to achieve a target inventory level

Enterprise Resource Planning (ERP)

A comprehensive software approach to support decisions concurrent with planning and controlling the business

What is ERP

ERP software is

-multifunctional

-Integrated

-Modular

-Able to facilitate Manufacturing Planning & Control (MPC) activities

Multifunctional

-Has the ability to track financial performance in monetary terms

-Can track purchasing activity in material units

-Follows sales in terms of products or services

-Reports manufacturing activity in terms of products, resources, or people

Price of a purchased component

Purchasing and Finance

Inventory of a finished item

Logistics, Sales, and Finance

Inventory of a raw material item

Production, Logistics, and Finance

Standard cost of a manufactured item

Logistics and Finance

Modular

-Functional Units (finance, sales, manufacturing, etc.) are narrowly focused and have their own ERP modules

-Functional unit modules can be linked together to create a single system

-Software from other sources can be connected as well.

Supply Chain Management Support

-Sales and operations planning

-Production planning and control

-Materials management

-Quality, maintenance and projects

Process Standardization

ERP requires standard terminology in order to make integration possible

Decision Support

ERP provides users with tools and information to help them make better decisions about running the business

Transaction Processing

-An ERP system is designed to process business transactions in real time, working from a single database

-Date warehouse software may be added to facilitate queries not built into the ERP system

Distribution Planning

The supply of product will rarely be initially located in the same place as the demand for it.

What is logistics?

the part of supply chain management that plans, implements, and controls the efficient, effective forward and reverse flow and storage of goods, services and related information between the point of origin and the point of consumption in order to meet customers’ requirements

3 approaches to moving/storing products

-Direct delivery

-Cross dock

-Distribution center

Direct Delivery

point-to-point service

Cross Dock

Product mixing service

Distribution Center

Storage and fulfillment service

The 7 rights of logistics

product, customer, time, place, condition, quantity, cost

Warehouse

Where the supply chain holds or stores goods

Distribution Center

Stores goods but also includes more complex operations

The role of Distribution Operations in SCM

1- Enhance customer service

2-Balance supply & demand

3-protect against uncertainty

4-Allow quantity purchase discounts (savings)

5- Support production requirements (savings)

6-Fulfill omni0channel demand

7- Promote transport economies (savings)

Sortation

-Focuses on assembling like products together for storage in the distribution facility, processing ot transfer to customers

-Proper sortation is essential for effective inventory & order fulfillment.

Allocation

-Focuses on matching available inventory to customer orders for an SKU

-This break-bulk capacity promotes availability for multiple customers and in desired quantities

Short-run or Static Analysis

Concentrates on a specific point in time or level of production output

Long-run or Dynamic Analysis

Examines a logistics sytem over a long time period or range of output

Distribution Requirements Planning

Provides the basis for integrating supply chain inventory information and physical distribution activities with the manufacturing planning and control (MPC) system.

DRP in the supply chain

-Links firms

-Integrates key linkages in the network

-Can be linked to the MPC systems of the manufacturer, customers, and suppliers

DRP Role

-Coordinates material flows through physical distribution system

-Provides infromation to the master scheduler in a format consistent with MRP records

DRP information is key to

developing logistics system management plans

DRP and Master Production Scheduling

-allows incorporation of records and information into the MPS system

-Can have political costs

-Collects detailed information in the field, summarizes it, and passes it along to the MPC system

Basic DRP Records

Extends to the bill of materials to define the SKU as a SKU in the field warehouse

Time-Phased Order Point

uses forecast information for requirements and a time-phased MRP approach to develop planned shipments

Linking Several Warehouse Records

Information about planned requirements from all field warehouses is passed along to the central facility

Implosion

process of bringing demand information back to the central facility