Inventory and Purchasing Strategies in Supply Chain Management (Peavey Exam 2)

Inventory

The quantities of goods and material that are held in stock.

Raw Materials

Purchased items that are converted via the manufacturing process into components and products.

Work in Process (WIP)

A good or goods in various stages of completion; called the 'black hole of inventory' due to lack of timely visibility.

Finished Goods

Goods available for consumer purchase; the manufacturing process is completed.

MRO (Maintenance, Repair and Operating) Supplies

Materials used in manufacturing and supporting operations but do not end up as part of the finished product (e.g., maintenance supplies, spare parts).

Service Inventory

Activities carried out in advance of customer arrival; instead of inventory of services, it is an inventory of facilitating goods.

Functions of Inventory

Meet customer demand (cycle stock), buffer against uncertainty (safety stock), separate supply from demand (strategic stock), separate dependencies in supply chain (strategic stock).

Inventory Management

Helps a company be more profitable by lowering COGS and/or increasing sales.

Cycle Stock

Internal inventory used to meet immediate demand.

Safety Stock

Internal inventory used to protect against short-term fluctuations.

Strategic Stock

Internal inventory used for a specific purpose or event for a defined period of time (e.g., pencils during back-to-school).

Pipeline Stock

External inventory out in the market held by wholesalers, distributors, retailers, and consumers, or in transit.

Obsolete Inventory

Expired, out of date, or no longer needed inventory; never sold at full value.

Direct Costs

Costs directly traceable through units produced.

Indirect Costs

Costs not directly traceable.

Variable Costs

Costs dependent on unit volume.

Fixed Costs

Sunk costs; independent of unit volume.

Carrying Costs

The cost of having inventory on-site.

Order Costs

Labor associated with placing and receiving an order.

Hidden Costs (Too Much Inventory)

Financial resources tied up; no incentive to improve.

Hidden Costs (Too Little Inventory)

Production disruptions, longer delivery time, reduced responsiveness, and lost revenue.

Absolute Inventory Value

The value of inventory at either its cost or market value.

Inventory Turnover

The number of inventory cycles; the more, the better. Ratio = Cost of Goods Sold / Avg. Inventory Cost.

Periodic Review System (Fixed-Time Period System)

Inventory levels reviewed at set frequency (manual). Order quantity = Target Level - Current Inventory.

Continuous Review System

Inventory levels are continuously reviewed (automatic). Uses a Reorder Point (ROP).

Reorder Point (ROP)

The lowest inventory level at which a new order must be placed. ROP = d × L (demand × lead time). With safety stock: ROP = d × L + SS.

Economic Order Quantity (EOQ)

Baseline metric; trade-off between annual inventory order costs and annual inventory carrying costs. EOQ = √(2 × order costs × annual demand / (annual carrying cost % × unit cost)).

ABC Inventory System

A = highest importance (80/20 budget to inventory); B = more expensive; C = lowest value (combined 20/80 budget to inventory).

Bin Inventory System

Two bins; once bin 1 is depleted, move to bin 2 while bin 1 replenishes. Used for small, low-value items.

Base Stock Level System

Issues an order whenever a withdrawal from inventory is made.

Single Period Inventory Model

Inventory ordered for a one-time stocking (e.g., Christmas trees, newspapers/magazines); items are not restocked.

Procurement

Umbrella term covering selecting suppliers, negotiating contracts, establishing payment terms, and actually buying goods and services.

Purchasing

Obtaining capital equipment, raw materials, services, and MROs in exchange for money; a transactional function.

Supply Management

Encompasses all acquisition activities beyond just a purchase transaction.

Purchase Requisition (PR)

An internal document that defines the need for goods/services; like a 'grocery list.'

Purchase Order (PO)

An external document; official offer issued by buyer to seller. Legally binding when accepted by the supplier.

eProcurement

The purchase and sale of goods and services online.

Merchants

Wholesalers or retailers who purchase goods for resale.

Industrial Buyers

Individuals who buy raw materials for conversion into products, services, and MROs.

Contracting

The acquisition of resources.

Request for Information (RFI)

Document used to collect written information about the capabilities of suppliers.

Request for Proposal (RFP)

Detailed capabilities document used to determine a supplier's capabilities and interest.

Request for Quote (RFQ)

Document used to solicit bids from interested/qualified suppliers.

Purchasing Process Order

1. PR → 2. RFI, RFP, RFQ → 3. PO → 4. Receipt of Goods → 5. Invoice.

Advantages of eProcurement

Time savings, cost savings, accuracy, real-time communication, better management, mobility, and trackability.

Profit Leverage Effect

A decrease in costs directly increases profits dollar for dollar; decreasing costs is more substantial than increasing sales. A 10% reduction in costs generates more profit before tax than a 10% sales increase.

Return on Assets (ROA) Effect

A higher ROA indicates managerial ability to generate profit with lower spending. ROA = Profit Before Taxes / Assets.

Inventory Turnover Effect

Higher inventory turnover indicates optimal use of space and inventory levels, increased sales, and no obsolescence. Calculated as COGS / Avg. Inventory.

Total Cost of Ownership (TCO)

Sum of all costs from each step of making a product; includes Quality, Delivery, Service, and Price (QDSP).

Components of TCO

Pre-transaction (finding sources, training), Transaction (negotiation, transport, payment), Post-transaction (returns, repair, disposal).

Make/Buy Decision

Strategic decision on whether to produce internally (insource) or buy externally (outsource). Based on business strategy, risk, economic factors, and quantitative/qualitative factors.

Insourcing

Producing a product or service internally; reverting means going back to internal production when external sources don't meet expectations.

Outsourcing

Producing a product or service externally.

Co-Sourcing

Sharing a process or function between internal staff and an external provider.

Vertical Integration (Backward)

A manufacturer acquires its suppliers.

Vertical Integration (Forward)

A manufacturer acquires its customers.

Centralized Purchasing

Corporate office makes all purchasing decisions for everyone. Advantages: leverage purchase volume, common supply base.

Decentralized Purchasing

Local purchasing departments make their own decisions. Advantages: knowledge of local requirements and sourcing.

Hybrid Purchasing

Corporate makes decisions for themselves while local departments make their own decisions.

Global Sourcing

Sourcing internationally to improve quality, cost, and delivery performance.

Tariffs

Duties, taxes, or customs on imported/exported goods.

Non-Tariff Barriers

Trade barriers including quotas, licensing agreements, embargoes, and laws/regulations.

Counter Trade

Trading goods instead of currency.

Import Broker

Agents licensed by the government to conduct business on behalf of importers.

Import Merchant

Purchases and sells imported goods.

Trading Companies

Buy products in one country and sell in a different country.

Bid

A proposal or quotation in response to a solicitation from a contracting authority.

Competitive Bidding

A procurement process where suppliers compete for the right to supply through bids; can be open or closed with no negotiations.

Bid Bond

A debt secured by a bidder to guarantee that the successful bidder will accept the contract ('deposit to accept bond').

Performance Bond

Provides a guarantee of work (instead of money).

Payment Bond

Provides guaranteed payment to workers; a third party steps in so no one is left unpaid.

Benchmarking

Identifying internal opportunities for improvement.

Sourcing

The process of identifying suppliers.

Strategic Sourcing

A comprehensive approach for locating key suppliers to find possible values; requires analysis. Goals: reduce costs, improve quality, faster time to market.

Goals of Strategic Sourcing

Improve value-to-price relationship, understand category buying/management, examine supplier relationships, develop multi-year contracts, and leverage organization spend.

Single-Source

Using one supplier (risky); better for strong relationships, lower costs, and optimal for innovative products (technology).

Multi-Source

Using many suppliers to create competition for higher quality and lower cost; better for spreading risk and optimal for functional products (MROs).

Spend Analysis

Decreases cost, improves efficiency, and monitors compliance.

Bottleneck Items (Kraljic Matrix)

High difficulty to find alternative, less options, unique/specialized, can stop operations, not as expensive.

Strategic Items (Kraljic Matrix)

Absolutely necessary/critical, expensive (high spend), business cannot succeed without them.

Non-Critical Items (Kraljic Matrix)

MRO items, standard, easy to find, many suppliers.

Leverage Items (Kraljic Matrix)

Necessities with many suppliers; prices can be negotiated down.

Supplier Base

The group of suppliers a company uses.

Supply Base Rationalization

Reducing the number of suppliers to the lowest possible without increasing risk.

Preferred Suppliers

Trusted partners with higher value.

Strategic Alliance

Sharing information/resources to achieve mutual benefit; preferred suppliers are ideal candidates.

Distributive Negotiations

Self-interested, one-sided outcome; counterproductive (lose/lose) or competitive (win/lose).

Collaborative Negotiations

Working together to maximize outcome; cooperative (work together + share info) or collaborative (work together to create new opportunities).

Reverse Auction

Suppliers compete to win over buyers (suppliers bid against each other for the buyer's business).

Vendor Managed Inventory (VMI)

Suppliers directly manage buyers' inventories (automatic).

Co-Managed Inventory (CMI)

Item is stored at the buyer's location; supplier recommends an order but buyer must approve it.

Co-location

A representative from the supplier is embedded in the buyer's purchasing group.

Corporate Social Responsibility (CSR)

The practice of business ethics.

Utilitarianism

Greatest good for the greatest number of people.

Rights and Duties

Ethical principle: Do the right thing.

Ethical Sourcing

Selective buying behavior that takes into account the public consequences of organizational buying.

Sustainability

Meeting the needs of the supply chain without hindering future ability to meet future needs.