SCM 3301 Exam 3 Miller

inventory

Those stocks or items used to support production (raw materials and work-in-process items), supporting activities (maintenance, repair, and operating supplies) and customer service (finished goods and spare parts).

Types of Inventory

1. Cycle Stock (Inventory)

2. Safety Stock (Inventory)

3. Anticipation Inventory

4. Hedge Inventory

5. Transportation (or Pipeline) Inventory

6. Smoothing (or Buffer) Inventory

Cycle Stock Cycle Inventory

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

Cycle Stock Cycle Inventory- Assumptions and Implications

At the beginning of a cycle, Inventory is Q.

At the end of a cycle, Inventory is 0.

Inventory is replenished at the end of a cycle of a Lot Size, Q

The longer the time between orders (cycle) the greater the Cycle Stock must be.

When the demand rate is constant, the average Inventory level over time is half of Q....or Q/2

Chick Fila A uses cycle inventory.

safety stock/safety inventory

Extra inventory that a company holds to protect itself against uncertainties in either demand or replenishment time.

Safety Stock Safety Inventory- Assumptions and Implications

Safety Stock is extra inventory held "just-in-case"

At the beginning of the cycle, Inventory is Q + S

At the end of the cycle, Inventory is S

Inventory is replenished at the end of each cycle in quantities of a lot size, Q

The more unpredictable variation in demand or replenishment, the greater Safety Stock must be.

When the demand rate is constant, the average Inventory level over time is Q/2 + S

Anticipation Inventory

Inventory that is held in anticipation of customer demand. allowing instant availability of items when customers want them. For example: creating finished goods in advance of a major sport event.

Hedge Inventory

A form of inventory buildup to buffer against some event that is speculated to happen. For example: in advance of a hurricane.

Transportation (Pipeline) Inventory

Inventory that is moving from one link of the supply chain to another. For example: raw materials that have been ordered but have not yet arrived.

Smoothing (Buffer) Inventory

Inventory that is used to smooth out differences between and fluctuations of upstream production rates and downstream demand rates.

Flucations in demand and scrap rates

Forces to Increase or Hold Inventory

1. Supply Uncertainty

2. Purchase Discounts

3. Production Uncertainty

4. Demand Uncertainty

Forces to Increase or Hold Inventory -Supply Uncertainty

The risk of interruptions in the flow of components/materials from upstream suppliers; unreliable supply management.

Forces to Increase or Hold Inventory-Purchase Discounts

Purchasing extra inventory to receive a price discount or transportation discount. For example: 10% discount if you buy a truckload.

Forces to Increase or Hold Inventory-Production Uncertainty

The risk of interruptions in the flow of production due to unreliable or highly variable process outcomes; unreliable productivity & quality.

Forces to Increase or Hold Inventory-Demand Uncertainty

The risk of significant and unpredictable fluctuations in downstream demand; unreliable forecasting.

Forces to Decrease Inventory

1. Tied Up Cash

2. Additional Related Purchases

3. Additional Non-Productive Activity

4. Opportunity for Mistakes

Forces to Decrease Inventory-Tied Up Cash

There is an "opportunity cost" when we choose to have money in inventory instead of productive activities that generate Return on Investment

Forces to Decrease Inventory- Additional Related Purchases

The more we spend on inventory, the more we MUST spend on storage shelving, racks, floor space, building space, warehouses, material handling, inventory management, insurance, taxes, heating, cooling, workers, management

Forces to Decrease Inventory-Additional Non-Productive Activity

More inventory means more movement of materials, repackaging of materials, reconfiguration of storage locations

Forces to Decrease Inventory-Opportunity for Mistakes

More inventory sitting for longer periods of time present more opportunities for damage, errors, rework, theft, obsolescence

Independent demand inventory

Inventory items whose demand levels are beyond a company's complete control.

Example: Finished Goods

Dependent demand inventory

Inventory items whose demand levels are tied directly to a company's planned production of another item.

Example: Materials and Sub-Assemblies needed to create Finished Goods

Periodic Review Systems - BasicWhen Demand Rate is Constant & Known

An inventory system that is used to manage independent demand inventory (Finished Goods).

The inventory level (I) for an item is checked at regular time intervals (RP) and restocked to some predetermined "order-up-to" level (R).

Inventory Position: Items on Hand + Items on Order

If restocking order-up-to level is not set high enough, the firm will experience a stockout before the next order arrives.

Continuous Review Systems

An inventory system used to manage independent demand inventory where the inventory level for an item is constantly monitored and when a predetermined reorder point is reached, an order is released.

Key Features of Continuous Review Systems

Inventory levels are monitored constantly, and a replenishment order is issued only when a pre-established reorder point has been reached.

Continuous Review Systems-How much to order

The size of a replenishment order (Economic Order Quantity) is typically based on the trade-off between holding costs and ordering costs.

Continuous Review Systems-When to order

The reorder point is based on both demand and supply considerations, as well as on how much safety stock (corresponding to a Service Level) managers want to hold.

Basic Continuous Review Systems Assumptions for Calculations

Assumptions for Calculations:

These assumptions are rarely met completely, but real business systems can approximate these conditions:

Assumptions for Calculations: (D) Demand

The inventory item we are interested in has a constant demand per period (d). There is no variability in demand from one period to the next. Demand for the year is D.

Assumptions for Calculations:(L) Lead time

L is the lead time, or number of periods that must pass before a replenishment order arrives. L is also constant.

Assumptions for Calculations: (H) Holding a single unit in inventory for a year

H is the cost of holding a single unit in inventory for a year. It includes the cost of the space needed to store the unit, the cost of potential obsolescence, and the opportunity cost of tying up the organization's funds in inventory. H is known and fixed.

Assumptions for Calculations:(S) Setup Cost

S is the cost of placing an order or the setup cost, regardless of the order quantity. S is also known and fixed.

Assumptions for Calculations: Stockouts and customer perceptions

Cost of stockouts and customer perceptions is NOT included.

Assumptions for Calculations: (P) Price

P, the price of each unit, is fixed.

Continuous Review Systems Effect of System Changes- (D) Demand Rate

When Demand INCREASES, Economic Order Quantity Increases

When Demand DECREASES, Economic Order Quantity Decreases

Continuous Review Systems Effect of System Changes- Holding Costs, H

When Holding Costs INCREASE, Economic Order Quantity Decreases

When Holding Costs DECREASE, Economic Order Quantity Increases

Continuous Review Systems Effect of System Changes- Ordering or Setup Costs, S

When Ordering or Setup Costs INCREASE, Economic Order Quantity Increases

When Ordering or Setup Costs DECREASE, Economic Order Quantity Decreases

The decision of how much safety stock to hold depends on five factors:

1. The variability of demand

2. The average length of lead time

3. The average demand

4. The desired service level

5. The variability of lead time

Push System

A Push System is a method of producing, transporting, and storing inventory that is based upon anticipating (forecasting) supply and demand and optimizing production capabilities. Most supply chains involve some combination of push and pull.

Example of Push System

EXAMPLE:

A manufacturer produces a product mix based upon approximate demand and production optimization

Retailers request shipments based upon an approximate forecasted demand

Contractual agreements specify

Retailer must accept shipments within a percentage of their request (both higher and lower than requested)

Provisions for return and reimbursement for excess inventory

What happens during allocation in a push system

During allocation, actual production (and inventory) might be more or less the demand

When supply is less than demand, the existing inventory is allocated proportionally to distribution points based on individual demand distribution.

When supply is more than demand, the excess inventory is allocated proportionally to the distribution points based on individual demand distribution.

Inventory Allocation (When Demand Exceeds Supply)-Possible Causes

Producer under-forecasts demand

Supply disruption

Equipment breakdown

Unexpected increase in demand

Inventory Allocation (When Demand Exceeds Supply)- Putting customers on Allocation

Internal Allocation: Allocation to warehouses or distribution centers owned by the producer

External Allocation: Allocation to customers

Inventory Allocation-Quantity Shipped

Exact quantity shipped is allocated based upon equitable distribution:

Determined by relative quantity required

Determined by relative revenue generated

Determined by relative importance to corporate strategy

Determined by some other factor(s) determined by the producer

Inventory Allocation When Supply Exceeds Demand: (Possible Causes)

1. Producer over-forecasts demand

2. Products produced or purchased in bulk

3. Excess production is the result of production efficiencies

Inventory AllocationWhen Supply Exceeds Demand: (Putting Customers on Allocation)

Putting Customers on Allocation: Deliberately shipping MORE than required

Internal Allocation: Allocation to warehouses or distribution centers owned by the producer

External Allocation: Allocation to customers

Inventory AllocationWhen Supply Exceeds Demand: (Quantity Shipped)

Exact quantity shipped is allocated based upon equitable distribution:

Determined by relative quantity required

Determined by relative revenue generated

Determined by relative importance to corporate strategy

Determined by some other factor(s) determined by the producer

Inventory in the Supply Chain- Bullwhip Effect

An extreme change in the supply position upstream in a supply chain generated by a small change in demand downstream in the supply chain. This creates excessive inventory throughout the supply chain.

Causes of the bullwhip effect

Upstream firms tend to over-react to subtle demand and mix changes.

Downstream firms tend to over-react to subtle shipment and delivery disruptions.

How to minimize bullwhip effect

Reduce communication and delivery time delays

Inventory Positioning

- Deciding where in the supply chain to hold inventory.

The cost and value of inventory increases as materials move downstream in the supply chain.

The flexibility of inventory decreases as materials move downstream in the supply chain.

Geographic Inventory Pooling

holding safety stock in a single location instead of multiple locations

Postponement

Holding partially assembled components that can be configured in various ways.

Transportation, Packaging and Material Handling Considerations- Holding Costs and Real Costs

1. These considerations are often not included in the "holding costs" of inventory.

2. These considerations represent real costs to the organization that can be reduced through continuous improvement and inventory reduction efforts.

Transportation, Packaging and Material Handling Considerations- Space and Transportation

3. More inventory requires more space (and costs associated with that space)

4. More inventory requires more transportation over longer distances

Transportation, Packaging and Material Handling Considerations-

5. More inventory requires more and larger material handling equipment

6. More inventory requires more and more bulky packaging (pallets, crates)

Transportation, Packaging and Material Handling Considerations- motion and people

7. More inventory requires more motion and transportation throughout the supply chain (moving large quantities from place to place, reconfiguring storage spaces).

8. More inventory requires more people and associated costs to manage that inventory (employees, managers, software, technicians, human resources).

Transportation, Packaging and Material Handling Considerations- theft

9. More inventory provides more opportunities for damage, theft, obsolescence.

Logistics management

That part of supply chain management that plans, implements, and controls the efficient, effective forward and reverse flow and storage of goods, services, and related information between the point of origin and the point of consumption in order to meet customers' requirements.

Logistics Management Activities Include:

1. Transportation

2. Warehousing

3. Material Handling

4. Packaging

5. Inventory Management

6. Logistics information systems

7. Order Fulfillment

8. Demand Forecasting

9. Material Storage

10. Customer Service

11. Facility Location

Logistics related costs contribute significantly to global economies

1. Logistics costs typically represent 8-10% of U.S. Gross Domestic Product (GDP)

2. Logistics costs are more significant in foreign economies

Transportation

Involves the physical movement of goods between origin and destination points.

Transportation system

Transportation system links geographically separated partners, facilities and customers in a company's supply chain.

Transportation- Time

Transportation facilitates the creation of time and place utility in the supply chain.

Transportation (Financial Performance)

Transportation has a major impact on company financial performance and efficiency promotes the competitiveness of a supply chain

Transportation- Organizational Competitiveness

Improved Transportation and Logistics capabilities enhance organizational competitiveness (Example: Amazon)

Modes of Transportation - Highway

Widely used mode of transportation in the domestic supply chain (73% of the total value of goods moved)

Economic structure of the motor carrier industry contributes to the vast number of carriers in the industry

Comprised of for-hire and private fleet operations

Truckload carriers > 15,000 lbs

Less-than-truckload (LTL) - 150 to 15,000 lbs

Small package carriers up to 150 lbs

Point to point service

Flexible and fast

Modes of Transportation Highway- (logistics infrastructure)

Dominates the U.S. logistics infrastructure due to:

-Geographic extension of supply chains

-Greater emphasis on delivery speed and flexibility

Modes of Transportation Highway- (flexibility)

Continues to grow because it is one of the most flexible modes of transportation

-Very few goods are moved without highway transportation at some point in transit

Modes of Transportation Highway- (cost effectiveness)

Has become more cost effective over time due to:

-Better scheduling and use of vehicle capacity

-More efficient and reliable vehicles

-Increased cost competition due to deregulation

Modes of Transportation Highway- (different types of shipments)

Involves different types of shipments

Direct truck - Shipment made with no stops

Less than truckload (LTL) - Smaller shipment combined with other loads

Modes of Transportation - Water

Lowest costs and large capabilities

Major facilitator of international trade

81% international freight movement

Best for high weight-to-value products

Mass movement of bulk commodities

Low-valued (domestic shipment)

High-valued (international shipment)

Cost effectively move large quantities

Petroleum, coal, iron ore, chemicals etc.

Container ships

Bulk carriers

Tankers

Roll-on, roll-off (RO-RO) vessels

Modes of Transportation - Air

High-valued, time-sensitive products

Best for low weight-to-value ratio products

Fastest for fast delivery over long distances

Broad service range

88 air cargo carriers (22 major ones)

Combination carriers

Air cargo carriers

Modes of Transportation - Rail

Mass movement of low valued goods

Large capacities

Railroads are "natural monopolies"

Seven Class I railroads

Four "majors" - BNSF, Union Pacific, CSX, Norfolk Southern

Two carrier types:

Linehaul freight carriers

Shortline carriers

Modes of transportation - Pipeline

Unique mode of transportation as the equipment is fixed in place

and the product moves through it in high volume .

Three primary types

Gathering lines

Trunk lines

Refined product pipelines

Mass movement of liquids and gasses

Multiple liquids or gasses can be transported within a single pipe:

Pig - a plug that separates liquids within a pipe (also used to clean pipes)

Transmix - the blend of liquids that occurs at the interface of two different liquids

Highway Strengths

• Flexibility to deliver where and when needed

• Often the best balance among cost, flexibility, and reliability/speed of delivery

Highway Weaknesses

Neither the fastest nor the cheapest option for long distance transportation.

Water strengths

- highly cost effective for bulky, heavy, and large volume items

- most effective when linked to a multimodal system

Water weaknesses

Limited accessibility.

Relatively poor delivery reliability and speed.

Air strengths

Quickest mode of delivery for long distance transportation

- Flexible, especially when linked to the highway mode.

Air Weaknesses

Often the most expensive mode on a per-pound basis

Rail Strengths

Highly Cost-Effective for heavy items.

Rail network in the US is continuing to improve.

Rail Weaknesses

Limited accessibility (but accessibility can be easily installed).

Not as fast as highway.

Pipeline Strengths

Most efficient mode of transportation for liquids.

Pipeline Weaknesses

Relatively slow, with limited accessibility.

Multimodal/Intermodal Transportation

1. Use of two or more different modes in movement

2. Greater accessibility and overall cost efficiency

3. Facilitates global trade

4. Development of standardized containers that are compatible with multiple modes.

5. Containerized freight

-Hauls only the container.

-Eliminates the dead weight of understructure and wheels of a trailer.

-Standardized containers allow flexibility.

Owning versus Outsourcing-Company Owned Transportation

Effective when demand is high and stable to predictable markets

Good for maximizing flexibility within a stable geography

Outsourcing- (Common Carriers)

transportation service provider that does not require long-term agreements or contracts

Outsourcing (Contract Carriers)

transportation service providers negotiated for long-term agreements or contracts

Outsourcing- (3PL (Third Party Logistics))

a service firm that negotiates and coordinates all logistics services

Carrier/Purchase Considerations

Accessibility to both supplier and customer

Speed of transport required

Reliability of transport

Product safety and regulations

Cost of transport

Freight and Transportation- Origin

Seller

Supplier

Factory

Freight and Transportation- Destination

Buyer, Customer, and Retailer

Terms of Sale (ownership, insurance, transportation):

Free-on-board or Freight-on-board (FOB) Origin and FOB destination

Free-on-board or Freight-on-board (FOB) Origin:

Buyer is responsible for all costs until item is received

FOB Destination:

Seller is responsible for all costs until item reaches its destination

Bill of Lading

originates the shipment

provides all the information the carrier needs to deliver the item

stipulates the contract terms, including carrier's liability for loss and damage

acts as a receipt for the goods the shipper tenders to the carrier

in some cases, shows certificate of title to the goods

Freight Bill

Carrier's invoice for carrier charges includes:

Shipment Description

Origin and Destination

FOB

Total Weight

Total Charges

Freight Claims Form

Documenting claims of Loss, Damage & Delay

Documents costs and reimbursement of these claims

Warehousing

Any operation that stores, repackages, stages, sorts, or centralizes goods or materials