Ch 4 Supply Chain Study Guide

Raw materials

What you start with
Wood for a table

Work-in-process (WIP)

Partly finished items

A table without legs

Finished goods

Ready to sell to the customer

The finished table

MRO (maintenance, repair and operating)

Supplies that keep the plant running

Glue, gloves, light bulbs

Capital equipment, such as a machine

is not inventory

Three reasons companies carry inventory

1. Meet customer demand

2. Buffer against uncertainty, for example a late supplier

3. Decouple (separate) steps in the supply chain so one delay does not stop everything

Investing cash for growth

is not a reason to carry inventory

Cycle stock

Covers normal, immediate customer demand. Inside the company

Safety stock

Extra cushion in case demand rises or supply is late. Inside the company

Strategic stock

Separates supply from demand, for example: building ahead of a busy season. Inside the company

Pipeline inventory

In transit, or sitting in the supplier or customer network. NOT inside the company

Variable costs

change with the number of units made, like materials

Fixed costs

stay the same no matter how many units are made, like rent

Carrying (holding) costs

the cost of keeping inventory.
Insurance, storage and warehouse space, taxes, damage, and obsolescence, and money tied up in inventory

Order costs

the cost of placing and receiving an order
Order preparation, transportation, material handling, receiving and receipt processing

Fixed-Order Quantity (continuous review)

Inventory is watched all the time. When it falls to the reorder point, the same quantity is ordered every time

Fixed-Time Period (periodic review)

Inventory is checked on a set schedule, such as every two weeks. You order whatever amount brings stock back up to a target level

ABC analysis

ABC analysis ranks items by value: A items are few but expensive, and C items are many but cheap. Companies use it to focus limited time and resources on the highest-value items

Single-period inventory model

You order only once, because leftovers lose their value. Examples include a Christmas tree lot or a newspaper stand

RFID (Radio Frequency Identification)

reads a tag by radio, so it does not need line of sight. Barcodes, both 1D and 2D, must be seen by the scanner

EOQ

the best amount to order each time. It balances the cost of ordering against the cost of holding

inventory
FORMULA: EOQ = √ (2 × Order Cost × Annual Demand

÷ (Carrying Cost % × Unit Cost))
Common mistakes: forgetting to multiply monthly demand by 12, or forgetting to multiply the carrying cost % by the unit cost.

Reorder Point (ROP)

the inventory level that tells you when to order.

D= Daily demand, LT= Lead Time and SS= Safety Stock

D x LT + SS

Inventory Turnover

how many times inventory is sold and replaced in a year
COGS ÷ ((Beginning Inventory + Ending Inventory) ÷ 2)