Ch 04 - Inventory Management

inventory

quantities and value of goods and materials that are held in stock

raw materials

purchased items or extracted materials converted via the manufacturing process into components and products

work in process

goods in various stages of completion throughout the plant, spanning from raw material that has been released for initial processing up to fully processed material awaiting final inspection and acceptance as finished goods

finished goods

those items on which all manufacturing operations, including final testing, have been completed - products are available for sale and shipment to the customer

maintenance, repair, and operating - MRO

items used to support general operations and maintenance, such as maintenance suppliers, spare parts, and consumables, and are used in manufacturing and supporting operations

service inventory

activities carried out in advance of the customer’s arrival

inventory management

function of planning and controlling your inventories

cycle stock

inventory that a company builds to satisfy its’ immediate demand

safety/buffer stock

inventory above and beyond what is needed to meet anticipated demand

strategic stock

additional inventory beyond cycle and safety stock generally used for a specific purpose or future event and a defined period

pipeline inventory

inventory in the transportation network and the distribution system being held by wholesalers, distributors, retailers, or consumers

obsolete inventory

inventory items that have met obsolescence criteria established by the company

direct cost

directly traceable to unit produced (ex - materials, labor)

indirect costs

cannot be traced directly to the unit produced (ex - overhead, MRO, buildings, equipment)

variable cost

dependent on the unit volume produced, varies with output level

fixed cost

independent of the unit volume produced

carrying costs

costs for physically having inventory onsite and maintaining the infrastructure needed to store the inventory and secure and insure it over time

order cost

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

absolute inventory value

value of the inventory at either its cost or market value

inventory turnover

number of times an inventory cycles, or “turns over” during the year

periodic review system

inventory levels reviewed at a set frequency (ex - weekly/monthly)

continuous review system

inventory levels are continuously reviewed

reorder point - ROP

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

fixed time period system

inventory is checked in fixed periods against a target inventory level

fixed order quantity system

when the inventory position drops to a predetermined reorder point, a predetermined fixed order quantity is placed

order quantity

difference between on-hand stock on the review day and the predetermined target inventory level

economic order quantity model - EOQ

a quantitative decision model based on the trade-off between annual inventory order costs and annual inventory carrying costs

constraints of EOQ - limited capital

model may generate an order quantity that the company does not have sufficient available funds to purchase at one time

constraints of EOQ - storage capacity

model may generate an order quantity that the company does not have sufficient storage capacity to handle at one time

constraints of EOQ - transportation

item being ordered and transported may require specialized or dedicated transportation, impacting the quantity per order

constraints of EOQ - obsolescence

model may generate an order quantity that would create spoilage or obsolescence

constraints of EOQ - production lot size

supplier may require the company to order an item in full production lot sizes

constraints of EOQ - unitization

supplier may require the company to order an item in full pack, case, or pallet configurations

ABC system

a method to determine which inventories should be counted and managed more closely than others - groups inventory A, B, or C based on a set criterion

A items

80/20 - account for approx 20% of the total number of items, but about 80% of the total inventory cost

B and C items

account for other 80% of total number of items but only 20% of total inventory cost

bin system

inventory system that uses one or two bins to hold a quantity of the item being inventoried

base stock level system

an inventory system that issues an order whenever a withdrawal is made from inventory

single period model

an inventory system in which inventory is only ordered for a one-time stocking

linear barcode

1D barcodes - series of alternating bars and spaces printed/stamped on parts, containers, labels, or other media, representing encoded info that electronic readers can read

2D barcodes

graphical image that stores horizontal and vertical information

barcode reader

electronic reader that reads barcodes and transmits the data to a computer

• handheld cordless devices

• corded devices attached to PC’s USB port

• computers with integrated laser scanners

radio frequency identification - RFID

successor to the barcode for tracking individual units of goods