SCM Test 2

Opportunity Cost

What you pay to hold inventory (money tied up, storage, etc., not earning interest).

Stockout Costs

Costs that occur when you run out of inventory (back orders, lost sales, lost customers); typically substantial but hard to quantify.

Inventory Turnover

Annual Cost of Goods Sold divided by Average Value of Inventory (COGS / Inventory); measures how many times inventory is depleted and replenished in a year.

Dwell Time

Days inventory sits idle divided by Days inventory moves in the supply chain; measures how efficiently inventory moves through the supply chain.

In-Stock Rate

Percentage of order cycles without any stockout occurrences; measures frequency of in-stock occurrences (customer service).

Fill Rate

Percentage of customer demand filled from on-hand inventory; measures magnitude of customer demand satisfied without stockouts.

Pareto Principle (80/20 Rule) Applied to SKUs

The principle that approximately 80 percent of inventory costs are driven by your most important 20 percent of SKUs.

ABC Classification

Classifying inventory SKUs into categories (A, B, C) based on annual dollar usage to tailor ordering, replenishment, and control policies.

Class A Items (ABC Analysis)

High-value, low-variety SKUs that account for the highest percentage of inventory value; tightly monitored and ordered in small quantities.

Class C Items (ABC Analysis)

Low-value, high-variety SKUs that account for a small percentage of inventory value; ordered infrequently and in large quantities.

Basic EOQ Model Assumptions

Demand is constant and known, lead time is zero days (orders received instantaneously), and we look at one product and one market.

Sawtooth Model

The graphical inventory consumption and replenishment pattern shaped like saw teeth, where inventory is depleted at a constant rate and replenished instantly.

Economic Order Quantity (EOQ)

The order quantity that minimizes the sum of annual holding costs and annual ordering costs.

EOQ Formula (Q*)

The square root of (2DK / h), where D is annual demand, K is order cost, and h is annual holding cost per unit (c * i).

EOQ Cost Tradeoff

At the optimal economic order quantity (Q*), total annual ordering costs equal total annual holding costs.

Holding Costs

Costs of holding inventory consisting of financial opportunity costs and physical storage/handling costs (typically 15% to 40% of unit value per year).

Ordering Costs (Setup Costs)

The fixed costs associated with placing an order or initiating a production run (administrative, transport, tooling).

Reorder Point (ROP)

The inventory level that triggers the placement of a new order, calculated as demand during lead time plus safety stock.

Cycle Service Level (CSL)

The probability that demand will not exceed supply during lead time (i.e., no stockouts during the order cycle).

Dependent Demand

Demand for parts, components, or raw materials that is driven by and dependent on the demand for finished products.

Independent Demand

Finished goods demand that comes directly from consumers and retailers and must be forecasted.

Bill-of-Materials (BoM)

An illustration and hierarchical list of components, ingredients, and quantities required to build a finished good item across production levels.

Material Requirements Planning (MRP)

A structured inventory management tool used by manufacturers to determine when and how many parts and components are needed for production based on end-item forecasts and BoM.

Strategic Profit Model (SPM)

A financial model illustrating how inventory management, asset turnover, and margins directly impact Return on Assets (ROA).

Profit-Leverage Effect

Demonstrates how purchasing savings directly impact net profit, showing that a dollar saved in purchasing equals a much larger increase in sales to achieve the same profit.

The Seven Rights of Purchasing

Getting the right quality, quantity, time, place, source, price, and service.

Strategic Sourcing Matrix Categories

The four categories based on importance/spend and market complexity: Routine, Leverage, Bottleneck, and Critical (Strategic).

Routine Items

Low importance, low market complexity; items bought in small volumes from competitive markets where the goal is to keep things simple and automated (e.g., using p-cards and web catalogs).

Leverage Items

High importance, low market complexity; items bought in large volumes from competitive markets where you use spend power to negotiate best deals.

Bottleneck Items

Low importance, high market complexity; unique items bought in small volumes where failure to appear causes major disruptions.

Critical Items

High importance, high market complexity; high-volume/value items requiring close, long-term partnerships, trust, and cross-functional teams.

Procurement Card (P-Card)

A company credit card issued to employees to reduce the cost and hassle of traditional purchasing for small-dollar routine buys.

Web Catalog

A self-service online portal set up by procurement where end-users click to buy pre-approved items under pre-negotiated terms.

Single Sourcing

Buying from only 1 supplier; allows volume consolidation for best price/service, encourages close relationships, and lowers freight costs, but increases dependency risk.

Multi-Sourcing

Buying from 2 or more suppliers; provides risk mitigation if one fails, ensures price competition, and avoids over-dependence.

Four Steps of the Supplier Selection Process

1) Identification, 2) Evaluation, 3) Approval, and 4) Monitoring.

Top Sources of Supplier Information

Current suppliers, purchasing databases, previous experience, personal contacts, purchasing consortiums, directories (e.g., ThomasNet), trade publications, trade shows, sales reps, and the internet.

Supplier Selection Criteria (The Big 3 + Others)

Price, quality (PPM defective), delivery (on-time % / lead time), technical capability, responsiveness, financial stability, cost structure, reach/scalability, management strength, and cultural fit.

Order Loser

A performance dimension (like price, quality, or delivery) where failure to meet minimum requirements results in immediate disqualification.

Supplier Visit / Audit

A direct, on-site inspection of top-rated suppliers' processes, management, and workers to separate fact from fiction and gauge true capabilities.

Supplier Approval Methods

Competitive bidding, reverse auctions, and negotiation.

Supplier Performance Monitoring

Proactive tracking of actual order performance using a scorecard (price, delivery, quality) and quarterly business reviews.

Multi-Criteria Analysis (Weighted Factor Modeling)

A tool that brings discipline, intuitiveness, and quantifiability to comparing distinctly different supplier options across subjective and objective criteria.

Five Steps of Multi-Criteria Analysis

1) Decide on criteria, 2) Set weights (totaling 1.0), 3) Define scoring system (e.g., 1-100), 4) Evaluate options, 5) Calculate results.

Sensitivity Analysis

Testing the robustness of a decision (in outsourcing, multi-criteria, or EOQ) by asking "what if" regarding changes to weights, volumes, or assumptions.

Customer of Choice Matrix

A supplier's evaluation framework categorizing customers into Core, Exploitable, Development, and Nuisance based on business value and relationship attractiveness.

Core Customer

A high-value, highly attractive customer who gets preferred service and is a great match for strategic partnerships.

Nuisance Customer

A low-attractiveness, low-value customer who experiences supply disruptions or friction and should either change behavior or be dropped.

Make-Versus-Buy Decision (Outsourcing)

The choice to buy an item from a supplier instead of producing it internally; reversing course once outsourced is often very difficult.

Make-or-Buy Rules

1) Don't outsource strategic activities, 2) Don't outsource activities you do better than suppliers, 3) Consider outsourcing when a supplier does it better.

Hollowing Out

The risk of losing control of a critical capability or compromising company intellectual property through outsourcing.

Total Cost of Ownership (TOC) Analysis

A comprehensive cost analysis capturing all lifecycle and landed costs associated with a purchase, including shipping, packaging, handling, and inspection beyond just unit price.

Total Landed Cost Analysis

A limited TCO view used for simpler, standard purchases including purchase price plus transportation, duties, and handling costs.

Present Value of Lifecycle Costs

An analysis required for capital acquisitions (equipment, buildings) capturing purchase price, repairs, and maintenance based on anticipated use.

Process Management

The art and science of designing work to get repeatable tasks done efficiently and effectively.

Silo Mentality

A condition caused by organizing by functional areas where managers make decisions for short-term functional goals without accounting for impacts on other functions.

Strategic Processes

Processes that define and deploy business strategies and involve the business vision (e.g., strategic planning, market research).

Operational Processes

Processes that deliver value to internal and external customers and carry out the mission of the business (e.g., sourcing, production, innovation).

Enabler Processes

Processes that support strategic and operational processes involving maintenance and control (e.g., administration, accounting, technical support).

Product-Process Matrix

Links a product's lifecycle and volume/variety to Operations and Supply Chain Management (OSCM) capabilities, depicting five process structures along the diagonal.

Project Process Structure

A process used for one-of-a-kind, customized outputs with high flexibility and individual project plans (e.g., custom home, software app).

Job Shop Process Structure

A process used for distinct, low-volume orders where each job follows a unique route requiring general-purpose equipment and high employee flexibility (e.g., machine shop).

Batch Process Structure

A process used to customize basic models by producing items in batches with moderate flexibility and similar flows (e.g., bakery).

Assembly Line Process Structure

A repetitive process used for high demand of standardized products using specialized equipment and a fixed sequence of activities (e.g., auto production).

Continuous Flow Process Structure

A capital-intensive, highly automated process running 24/7 where units cannot be distinguished from one another (e.g., energy plant, petroleum refinery).

Capacity

The maximum output your process can consistently produce over a period of time under normal operating conditions.

Design Capacity

The maximum output rate that a process can achieve under ideal conditions.

Effective Capacity

The output rate of a process during normal conditions, calculated as Design Capacity minus Lost Production.

Process-Improvement Trio

The three foundational continuous improvement methodologies: Lean Management, Six Sigma, and Theory of Constraints.

Lean Management

Maximizing customer value by eliminating process waste wherever it is found (redundancies, excess movement, waiting, defects, overproduction).

Six Sigma

A disciplined, data-driven approach to reducing process variation using the DMAIC roadmap (Define, Measure, Analyze, Improve, Control).

Theory of Constraints (TOC)

A process improvement methodology focusing attention on constraints (bottlenecks) that limit operations to efficiently improve throughput.

Throughput (TOC Metric)

The rate at which the entire organization generates money through sales for a product or service.

Inventory (TOC Definition)

All the money tied up by an organization in things it intends to sell, including facilities, equipment, obsolete items, raw materials, WIP, and finished goods.

Operating Expense (TOC Metric)

All the money an organization spends turning inventory into throughput (direct labor, utilities, supplies, depreciation).

Bottleneck

An activity or resource in a process with the lowest capacity that limits the overall throughput of the system; always busy with work piling up in front of it.

Five Focusing Steps of TOC

1) Identify the current constraint, 2) Exploit the constraint, 3) Subordinate non-bottleneck activities, 4) Elevate the constraint, 5) Repeat the continuous improvement cycle.

Process Mapping

A tool used to create process visibility, hold fact-based conversations, and conduct blameless autopsies.

Six Steps in Process Mapping

1) Define the Process, 2) Identify the Process Trigger, 3) Identify Key Activities, 4) Show Flows, 5) Define the Ending Point.

Process Mapping Symbols (Oval)

Shows input to start the process or output at the end.

Process Mapping Symbols (Double Arrow)

Indicates arrival into the process or process triggers.

Process Mapping Symbols (Box/Rectangle)

Shows tasks or activities performed in the process.

Process Mapping Symbols (Triangle)

Indicates waiting.

Process Mapping Symbols (Diamond)

Shows decision points where yes/no questions are asked.

Process Mapping Symbols (Single Arrow)

Shows the direction of process flow and precedence.

Four Steps of Bottleneck Analysis

1) Map the Process, 2) Calculate Activity Times, 3) Determine Target Values, 4) Determine Bottleneck Impact.

Process Improvement Trio Proven Path

1) Apply Theory of Constraints to find the bottleneck, 2) Implement Lean to reduce waste at the bottleneck, 3) Employ Six Sigma to reduce variation and control the process moving forward.