Module 5: Inventory Management

inventory

stocks/items used to support production (raw materials/WIP), supporting activities (maintenance/repair/operating supplies) and customer service (finished goods/spare parts)

inventory management

branch of business management concerned with planning and controlling inventories

decoupling

amount of inventory maintained between entities in a manufacturing or distribution network to create independence between processes or entities

raw material

purchased items or extracted materials that are converted via MFG process into components and products

work in process

goods in various stages of completion throughout plant; includes all material from raw material that has been released for initial processing up to completely processed material awaiting final inspection and acceptance as finished goods inventory

finished goods inventory

items on which all MFG ops (including final test) have been completed; products are available for shipment to customer as either end items or repair parts

distribution inventory

inventory (usually spare parts/finished goods) located in distribution system

maintenance, repair and operating (MRO) supplies

items used in support of general ops and maintenance (ex. Maintenance supplies, spare parts, consumables)

service parts

modules, components and elements planned to be used without modification to replace an original part

safety stock

Quantity of stock planned to be in inventory to protect against fluctuations in demand/supply; additional inventory and capacity planned as protection against forecast errors and short-term changes in backlog

fluctuation error inventory

inventory carried as cushion to protect against forecast error

inventory buffer

inventory used to protect throughput of operation or schedule against negative effects caused by delays in delivery, quality problems, delivery of an incorrect qty, etc.

anticipation inventory

Additional inventory above basic pipeline stock to cover projected trends of increasing sales, planned sales promotion programs, seasonal fluctuations, plant shutdowns and vacations (sum of avg inventory level per time bucket x inventory carrying cost)

seasonal inventory

Inventory built up to smooth production in anticipation of peak seasonal demand

lot-size inventory

Inventory that results whenever qty price discounts, shipping costs, setup costs or similar considerations make it more economical to purchase or produce in larger lots than are needed for immediate purposes

cycle stock

Components or products that are received in bulk by a downstream partner, gradually used up, and then replenished again in bulk by the upstream partner.

transportation inventory

Inventory that is in transit between locations

transit inventory

inventory in transit between MFG and stocking locations

pipeline stock

inventory in transportation network and distribution system including flow through intermediate stocking points

in-transit inventory

material moving between 2+ locations, usually separated geographically (ex. Finished goods being shipped from a plant to distribution center)

hedge inventory

A form of inventory buildup to buffer against some event that may not happen; purchased in advance to lock in prices and reduce uncertainties about high prices in the future

balance sheet

financial statement showing the resources owned, the debts owed and the owner's share of a company at a given point in time

assets

resources owned by a business

current assets

assets that are cash or can be converted to cash quickly

fixed assets

assets that are relatively permanent, such as land, buildings, and equipment

liabilities

debts/obligations owed by a company to creditors (short-term or long-term)

owner's equity

Residual claim by company's owners/shareholders to the company's assets less its liabilities (sum of owner investment + retained earnings)

income statement

Financial statement showing the net income for a business over a given period of time (aka statement of profit and loss)

cost of goods sold

determines amount of direct materials, direct labor and allocated overhead associated with the products sold during a given period of time

direct labor

labor that is specifically applied to the good being manufactured or used in the performance of the service

direct material

costs incurred in the operation of a business that cannot be directly related to the individual goods or services produced; grouped in several pools and distributed to units of goods/services

fixed overhead

all MFG costs other than direct labor/materials that continue even if products are not produced, cannot be directly traced to the final product

gross margin

the amount of money the retailer makes as a percentage of sales after the cost of goods sold is subtracted

net income

the difference between total revenue and total expenses when total revenue is greater (gross profit - operating expenses - depreciation - interest expenses)

profit margin

Difference between sales and COGS sold for an organization

product cost

sum of the costs assigned to a product for a specific purpose

cash flow

net flow of dollars into or out of proposed project (cash proceeds, cash generated)

measure of velocity

rate of change of an item with respect to time; maximum velocity indicates higher asset turnover for stockholders and faster order-to-delivery response for customers

inventory turnover

Number of times that inventory cycles during the year
(annual cost of sales / avg inventory level)

days of supply

Inventory-on-hand metric converted from units to how long the units will last; financial measure of value of all inventory in the supply chain divided by the avg daily cost of goods sold rate

Generally Accepted Accounting Principles (GAAP)

accounting practices that conform to conventions, rules and procedures that are generally accepted by the accounting profession

FIFO

First unit put into inventory is the first unit removed from the ERP system's inventory records when a sale occurs

LIFO

Last unit put into inventory is the first removed from the ERP inventory records when there is a sale

average cost

Average of all costs paid for or internally invested in inventory for COGS and balance sheet inventory valuation

standard cost accounting

A method of accounting for manufacturing costs used for internal inventory valuation purposes (aka job costing)

standard cost

target costs of an operation, process, or product

job costing

A system for assigning costs to products or services that differ in the amount of materials, labor, and overhead required

variance

Difference between expected value and actual

statistics

measurement of dispersion of data

level of service

measure of satisfying demand through inventory or by the current production schedule in time to satisfy the customers' requested delivery dates and qtys

stockout percentage

A measure of the effectiveness with which a company responds to actual demand or requirements.

standard deviation

Calculates deviation from average result ⇒ measurement of stable vs dynamic demand

stock keeping unit (SKU)

a unique identification number that defines an item for ordering or inventory purposes

wall-to-wall inventory

An inventory management technique in which material enters a plant and is processed through the plant into finished goods without ever having entered a formal stock area.

stockout

a situation where a customer demand for an inventory item goes unfulfilled because the requested item is unavailable at the needed time and place

safety lead time

An element of time added to normal lead time to protect against fluctuations in lead time so that an order can be completed before its real need date.

item costs

Purchase price + other direct costs required to get the units to where they need to be

carrying costs

Cost of holding inventory ⇒ usually defined as a percentage of dollar value of inventory per unit of time; costs vary from 10-35% annually depending on type of industry (holding cost)

capital costs

cost of capital, reflects opportunity cost of carrying inventory

storage costs

Include the variable expenses for space, workers, and equipment related to the volume of inventory held.

risk costs

Include obsolescence, damage or deterioration, theft, insurance, and taxes associated with the volume of inventory held.

ordering costs

the costs of placing an order and receiving goods

production control costs

cost of issuing, closing, scheduling, loading, dispatching, moving and expediting open orders

setup costs

the costs involved in preparing equipment for a job

lost capacity cost

Cost incurred when a setup or teardown reduces the available capacity for other orders

stockout costs

The costs associated with a stockout. Those costs may include lost sales, backorder costs, expediting, and additional manufacturing and purchasing costs.

capacity-related costs

costs generally related to increasing (or decreasing) capacity in the medium- to long-range time horizon.

ABC classification

The classification of a group of items in decreasing order of annual dollar volume (price multiplied by projected volume) or other criteria

A class

10-20% by number of items and 50-70% by projected dollar volume

B class

about 20% of items and 20% of dollar volume

C class

60-70% of items and 10-30% of dollar volume

pareto's law

the rule that a small percentage of items account for a large percentage of sales, profit, or importance to a company

pull system

Inventory decision making exercised at each stocking location for SKUs at that location; distribution centre pulls inventory from suppliers; uses independent demand ordering systems

order point system

The inventory method that places an order for a lot whenever the quantity on hand is reduced to a predetermined level known as the order point.

push systems

Inventory decision making for all stock keeping units exercised from one office or department for an entire company; inventory is pushed out to the central distribution center

distribution requirements planning

Function of determining the need to replenish inventory at branch warehouses

time-phased order point

MRP like time planning logic for independent demand items, where gross requirements come from a forecast, not via explosion

replenishment lead time

The total period of time that elapses from the moment it is determined that a product should be reordered until the product is back on the shelf available for use.

perpetual inventory systems

computer record or manual document on which each inventory transaction is posted so that a current record of the inventory is maintained

two-bin inventory system

A method of inventory control based on the use of two containers for each item in inventory, one to meet current demand and the other to meet future demand

kanban system

a production control approach that uses containers, cards, or visual cues to control the production and movement of goods through the supply chain

fixed reorder cycle inventory model

A form of independent demand management model in which an order is placed every n time units.

periodic replenishment

method of aggregating requirements to place deliveries of varying qtys at evenly spaced time intervals rather than variably spaced deliveries of equal qtys

lot size

amount of a particular item that is ordered from the plant/supplier or issued as a std qty to the production process

lot-for-lot

lot-sizing technique that generates planned orders in qtys equal to the net requirements in each period

point of sale

relief of inventory and computation of sales data at the time and place of sale (generally using bar coding or magnetic media and equipment)

fixed order quantity

lot-sizing technique that will always cause planned/actual orders to be generated for a predetermined fixed qty or multiples if net reqs for the period exceed the fixed order qty

reorder quantity

the number of units that must be ordered in order to replenish the inventory to its maximum allowable level

min-max system

type of order replenishment system where min is the order point and max is the order up to inventory level

period order quantity

Lot-sizing technique under which the lot size is equal to the net requirements for a given \# of periods; \# of periods to order is variable with each order size equaling the holding cost and the ordering cost for the interval

economic order quantity

Fixed order qty model that determines amount of item to be purchased or manufactured at one time

sawtooth diagram

quantity vs time graphic representation of the order point/order qty inventory system showing inventory being received then used up and reordered

incoterms

set of rules established by International Chamber of Commerce that provides internationally recognized rules for interpretation of the most commonly used trade terms in foreign trade

free on board

terms of sale that mean the selling price of the product includes the cost of loading the exported goods into transport vessels at the specified place; identifies where title passes to the buyer

blockchain

continuously growing list of records (blocks) that are linked and secured using cryptography; data in any block cannot be altered retroactively without altering subsequent blocks ⇒ resistant to modification

recalls

step in reverse logistics process where parts or products are returned due to product defect or potential hazard resulting from gov. regulations or liability concerns

cold chain

storage, transfer and supply chain of temperature-controlled products; industries include food, agriculture, pharmaceuticals, chemicals

traceability

attribute allowing the ongoing location of a shipment to be determined; registering and tracking of parts, processes and materials used in production by lot or serial number

lot control

set of procedures used to maintain lot integrity from raw materials from the supplier through manufacturing to consumers

reverse logistics

A complete supply chain dedicated to the reverse flow of products and materials for the purpose of returns, repair, remanufacture and/or recycling