Rutgers Supply Chain Management Chapter 4

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 items 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

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 ____________ industry do not maintain inventory of _________ since ____________ 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 (marketplace)

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 (safety stock)- separating operations in a process. smoothing production and reducing peak period capacity needs

Maintaining adequate finished product inventory allows a company to fill customer orders immediately

Maintaining adequate materials inventory allows a company to support manufacturing operations and the production plans.

Failing to manage inventory adequately can lead to significant issues and inefficiencies throughout the supply chain, including dissatisfied customers, lost sales and revenues, poor cash flow and higher costs.

Inventory management

The goal of inventory management is to meet customer expectations while also meeting the company's financial targets.

-Enable Sales

-Increase profitability

-Improve Cash Flow

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 / Setup Costs

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

Holding / 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.

Formula= 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

Advantages & Disadvantages of Continuous Review System

Advantages:

Allows for real-time updates of inventory, which can make it easier to know when to replenish.

Disadvantage:

Cost of implementation. Generally requires an automated system. The hardware and software necessary to run the system can be expensive to purchase, install, and maintain.

Periodic Review System

Inventory levels are reviewed at a set frequency, e.g., weekly, monthly

At the time of review, all stock is counted and verified to book records.

Since items are only reviewed periodically, there is a greater risk of physical inventory being out of sync with book inventory and, therefore, a greater need for safety stock.

Advantages & Disadvantages of Periodic Review System

Advantages:

Reduces the time spent analyzing inventory.

Less expensive than a Continuous Review System.

Disadvantages:

Inaccurate inventory levels are not uncovered until the next review.

Can be difficult to determine the reasons for the inaccuracy.

It can make inventory accounting less accurate.

Reorder Point

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

ROP=Demand (D) during Lead Time(LT)=D*LT

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

Lead time = 6 days

ROP=dL= 20*6=120

ROP [w/ Safety Stock (SS)]=D*LT+SS

Fixed Order Quantity System

-An order for a pre-defined quantity for that item is used from order to order.

-When the inventory position drops to a predetermined reorder point, a predetermined ______________ is placed

-The time between orders (i.e., order period) varies from order to order.

Fixed Time Period System

-Inventory is checked in fixed time periods against a target inventory level.

-If the inventory is less than target, a quantity necessary to bring inventory back up to the target level is ordered.

-The amount of inventory ordered will potentially vary from period to period based on the remaining inventory at each time interval checked.

EOQ model

A quantitative 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

Order Costs

-Order preparation costs

-Order transportation costs

-Order receipt processing costs

-Material handling costs

Carrying Costs

-Cost of capital - specified by senior management

-Taxes - on inventory held in warehouses

-Insurance - based on estimated risk or loss over time and facility characteristics

-Obsolescence - deterioration of product during storage, and shelf-life

-Storage - facility expense related to product holding rather than product handling

EOQ Equation

SQRT (2 Order Cost Annual Demand Volume/

Annual Carrying Cost % * Unit Cost)

Assumptions of the EOQ Model

-The model must be calculated for one product at a time.

-The demand must be known and constant throughout the year.

-The delivery replenishment lead time is known and does not fluctuate.

-Replenishment is instantaneous.

-There is no delay in the replenishment of the stock, and the order is delivered in the quantity that was demanded, i.e. in one whole delivery.

-The purchase price (i.e., unit cost) is constant and no discounts or price breaks are factored into the model.

-Carrying cost is known and constant.

-Order cost is known and constant.

-Stockouts are not allowed

EOQ Example with Quantity discounts

-The Quantity Discount Model or price-break model

-Relaxes the constant price assumption by allowing purchase quantity discounts.

-Considers the tradeoff between purchasing in large quantity to take advantage of the price discount and issuing fewer orders, against holding higher inventory.

-Due to the step-wise shape of the total inventory cost curve, the optimal order quantity lies on either one of the feasible EOQs or at the price break point.

Inventory Management Systems

-ABC System

-Bin System

-Base Stock Level System

-"Single-Period" Inventory Mode

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 account 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

Physical Inventory Management

-Order quantity & ROP models assume that the physical inventory is precisely known at every point in time

-Reality shows that stock records and actual quantity are different & requires review of inventory to determine discrepancies

-A Continuous Review System (verifying inventory levels after each movement) is more costly but requires less safety stock

-The Periodic Review System (reviews physical inventory at specific points in time) is less costly and requires higher level of safety stock

Facts about inventory

A key decision in any product-based supply chain is how much inventory to keep on hand.

-Inventory is often one of the company's largest assets, so careful management of that asset is an essential business requirement.

-Management must reduce inventory levels yet meet revenue and customer service targets

-Inventory must be secured, tracked and verified (counted).

Why companies hold internal inventory

-meet customer demand

-buffer against uncertainty in demand and/or supply

-decouple supply from demand

-decouple dependencies in the supply chain

external inventory

inventory which is held to the company by downstream supply chain channel partners

Facts about obsolete inventory

-Obsolete inventory will never be sold at full value.

-Obsolete inventory must be valued at the lower market value to correct the financial records. This will reduce the company's profit.

-Unusable inventory takes up space and costs money to store. So it may be better to absorb the loss as soon as an item has been deemed obsolete.

-There is a cost associated with the actual disposal of the inventory which must follow recycling and disposal regulations.

-Some companies donate this inventory to non-profit organizations, which not only helps the non-profit but also avoids disposal costs and may result in a tax benefit for the company.

Units

the number of units owned

Days / Weeks of Supply

(on-hand inventory) / (avg. daily / weekly usage)

Inventory Control Tools

-Linear Barcode

-2D Barcode

-Radio Frequency Identification (RFID)

Barcodes

help businesses track products and stock levels for inventory management.

Linear (1D) Barcodes

are "a series of alternating bars and spaces printed or stamped on parts, containers, labels, or other media, representing encoded information that can be read by electronic readers.

-have some limitations: they are one-dimensional, can only be read horizontally, and can only hold a maximum of 85 characters.

2D Bar Codes

are a graphical image that stores information both horizontally and vertically.

-can store over 7,000 characters, allowing transmission of almost two paragraphs of information.

A barcode reader (or barcode scanner)

an electronic device that can read barcodes and transmit the data to a computer. These might be handheld cordless devices, corded devices that attach directly to a PC's USB port, or computers with integrated laser scanners

Radio Frequency Identification (RFID)

Successor to the barcode for tracking individual unit of goods.

-does not require direct line of sight to read a tag, and the information on the tag is updatable.

Materials Management

goods automatically counted and logged as they enter the supply warehouse

Manufacturing

assembly instructions encoded on RFID tag provide information to computer controlled assembly devices

Distribution Center

shipment leaving DC automatically updates ERP to trigger a replenishment order and notify customer for delivery tracking

Retail Store

no check out lines as scanners link RFID tagged goods in shopping cart with buyers credit card