Rutgers Supply Chain Management Chapter 4 DUP

Inventory

the quantities of goods and materials that are held in stock. One of the largest and most important assets, however, too much is a liability.

4 main categories of inventory

Raw materials

Work-in-process or progress

Finished goods

Maintenance, repair and operating supplies

Raw Materials

Purchased iterms or extracted materials that are converted via the manufacturing process into components and products.

2 strategies. 1. buy form a supplier and have it delivered to the operation just in time for when it is needed. Or buy and hold a larger quantity.

Work in process

a good in various stages of completion throughout the plant, spanning form raw materials that has been released for initial processing up to fully processed material awaiting final inspection and acceptance as finished goods. Often considered black hole of inventory. Best practice suggests minimizing wip since it can impede work flow

Finished goods

items on which all operations have been completed and are available for sale. Worth the most

Make-to-Order

supply chain where the finished goods are not produced until a customer order is received and raw materials may not even be ordered in adavnced

make to stock

supply chain where product is produced prior to receipt of a customer order.

Maintenance Repair and Operating

Items used in support of general operations and maintenance. do not end up as part of the final product

Service Inventory

Activities carried out in advance of the customer's arrival. Companies in the service industry do not maintain inventory of services since services are produced and consumed immediately upon demand. Do maintain inventory of facilitating goods. Ex. Restaurant inventory food and tableware as they are facilitating goods

Why hold inventory

To meet customer demand

To buffer against uncertainty in demand or supply

To decouple supply from demand - supply pattern is different from demand. Achieve economies of scale, take advantage of discounts. Speculation in anticipation of price increase. Seasonal

Decouple dependencies in Supply chain - seperating operations in a process. smoothing production and reducing peak period capacity needs

Inventory management

the function of planning and controlling invetories. The goal is to help a company be more profitable by lowering cogs or increasing sales

Balance reducing inventory instock while ensuring there is enough inventory to satisfy demand.

Cycle Stock

Inventory that a company builds to satisfy immediate demand.

Safety Stock

aka buffer stock. inventory beyond what is needed to meet anticipated demand. Protects against fluctuation in demand or supply.

Strategic stock

additional inventory beyond cycle and safety stock genrally used for a very specific purpose or future event and for a defined period of time. Carries strategic stock to hedge curreny fluctuations, take advantage of discount, protect against short term disruptive event in supply, take advatnage fo a business opportunity, for life cycle changes, aka anticipations tock, build stock, or seasonal stock

Pipeline Invetory

inventory in the transportation network and the distribution system. Already out in the market being held by wholesalers, distributors, retailers and even customers.

Obsolete Inventory

stock that is expired, damaged or no longer needed. will never be used or sold at full value

Direct Costs

directly traceable to unit produced. Materials, labor etc

Indirect Costs

cannot be traced directly, overhead, MRO, buildings equipment

Fixed costs

aka sunk costs- independent of unit volume

Variable costs

dependent on unit volume

Order Costs

labor costs associated with placing an order for inventory and the cost of receiving the order

Carrying costs

costs for physically having inventory on site and for maintaining the infrastructure needed ot store the inventory

Absolute Inventory Value

the value of the inventory at either its cost or market value

Inventory Turnover

the number of timnes that an inventory turns over during the year. the more the better. Inventory Turn over= COGS/Average inventory at cost

Continuous Review System

Inventory levels are continually reviewed. More costly but potentially requires less safety stock bc inventory is constantly monitored and action can be taken more quickly

Periodic Review System

Set at a frequency. Less inexpensive but less accurate

Reorder Point

The lowest inventory level at which a new order must be placed to avoid a stockout

ROP=Demand during Lead TIme(dL)

GIven Demand(d)= 600/month d=600/30days=20/day

Lead time = 6 days

ROP=dL= 20*6=120

ROP=D*LT+SS

Fixed Order Quantity System

A continuous inventory review system in which the same order quantity is used form order to order. Time varies between orders.

Two variables to consider- ROP and quantity

Assumptions: Constant demand. Inventory Position is reduced by a rate of D. Replenish when ROP is reached. When inventory is received IP ingreases by Q. Calculate Q using Economic order quantity model (EOQ).

L is known and constant

Fixed Time Period System

Inventory is checked at fixed time periods

Amount varies time doesnt

EOQ model

A quantittavie decision model based on the trade off between annual inventory carrying costs and anual order costs. Fixed order model

Total Cost= Purchase cost+Order Cost+Carrying Cost

Annual Carrying Cost

Q/2*H

Ordering Costs

Demand(units)/Order quantity(units)*Ordering costs (per order)

EOQ Equation

SQRT of 2Demand in unitsOrdering costs per order/ Handing costs

Fixed Time period equation

Q=R-IP

R=target inventory level

IP=Inventory postion

ABC System

classifies inventory based on the degree of importance

1. Determine annual usage or sales

2. Determine % of total usage or sales that each item represents

3. Rank items from highest to lowest%

4. Classify items into groups

A items are given highest priority - general A items accoutn for 20% of inventory but 80% of cost

B&C items: 80 % of amount but 20% of cost

Bin System

Inventory system that uses either one or two bins to hold a quantity of the item being inventoried. Mainly used for small or low value iterms. when invenotry in the first bin has been depleted an order is placed to refill. The second bin is set up to hold enough inventory ot cover demand during replenishment time

Base Stock Level System

Issues an order whenever a withdrawal is made from inventory. Replenishment order quantity is equyal to the quantity withdrawn from inventory

Form of just in time

Single Period Model

inventory is only ordered for a one time stocking. EX christmas trees, newspaper stands