Supply Chain Chapter 4: Inventory Management

Inventory is usually one of a company's

Largest Assets

Inventory

The quantities of goods and materials held in stock

Inventory is an ____, however carrying too much can be a ____

Asset, Liability

What ways can too much inventory cause liabilities?

Increased storage costs, Paying more to hold inventory (Tax, Security, Insurance), Can become unusable (Expiration, Damage, Obsolescence)

4 Main categories of inventory

Raw Materials, Work In Process, 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.

Why might a company choose to hold more raw materials despite increased costs?

There may be a potential shortage in the future or an upcoming price increase of that raw material

Work In Process Inventory (WIP)

Goods that have started the manufacturing process and are in various stages of completion

Why do some companies view Work in Process as a "Black Hole?"

It's hard to get good of timely visibility into this inventory due to the continuous transformation

It's suggested to ____ the amount of Work in Process Inventory as it can ____ physical space

Minimize, Clutter

Finished Goods Inventory

Items that have completed every manufacturing process, including final inspection, and are ready for shipment and sales

Maintenance, Repair and Operating (MRO)

Items used to support general operations and maintenance but DO NOT end up as part of the finished good

Examples of items in MRO

Spare parts, Maintenance supplies, Office Supplies (Administrative)

Service Inventory

Activities carried out in advance of the customer's arrival

What is the goal of Inventory Management?

Helping a company be more profitable by lowering Cost of Goods Sold and/or Increasing Sales

What are the 2 Competing Considerations that must be effectively balanced?

Reducing the amount of inventory in stock WHILE Ensuring there is enough inventory to satisfy demand

Cycle Stock

Inventory that a company builds to satisfy its immediate demand

Safety Stock

Extra inventory that a company holds to protect itself against fluctuations in supply or demand

Pipeline Inventory

Inventory already out in the market, held by wholesalers, distributors, retailers, and even consumers

Who has the ownership of Pipeline Inventory?

The trading partners it was transferred to

Obsolete Inventory

stock that is expired, damaged, or no longer needed

Obsolete Inventory will ____ be used or sold at full value

Never

Direct Cost

Easily traceable to the unit produced

Indirect Cost

Not easily traceable to the unit produced

Variable Cost

Cost that is dependent on the amount of units produced

Fixed Cost

Cost that is independent from the amount of units produced

Carrying Cost

Cost for physically holding onto inventory

Order Cost

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

Financial resources being tied up in inventory is a result of too ____ Inventory

Much

Underlying problems being hidden is a result of too ____ Inventory

Much

No incentive for process improvements is a result of too ____ Inventory

Much

Production disruptions resulting in additional costs is a result of too ____ Inventory

Little

Longer delivery replenishment lead times is a result of too ____ Inventory

Little

Reduced responsiveness is a result of too ____ Inventory

Little

Lost Revenue is a result of too ____ Inventory

Little

Absolute Inventory Value

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

Inventory Turnover

The number of times that inventory cycles or turns over

Inventory Turnover Ratio

Cost of Goods Sold/Average Inventory

What are the 3 questions when setting inventory levels?

1. When to review inventory

2. When to order inventory

3. How much inventory to order

Periodic Review System

inventory levels are reviewed at a set frequency (Weekly, Monthly)

Reducing time spent analyzing inventory is an advantage of the ____ review system

Periodic

Being less expensive is an advantage of the ____ review system

Periodic

Difficulty determining review/reorder intervals is a disadvantage of the ____ review system

Periodic

Inventory being less accurate is a disadvantage of the ____ review system

Periodic

Inventory levels being more likely to drop below the reorder point is a disadvantage of the ____ review system

Periodic

Continuous Review System

Inventory levels are continuously reviewed.

As soon as inventory falls below a pre-determined level, a replenishment order is triggered.

Real-time updates of inventory is an advantage of the _____ review system

Continuous

Facilitating accurate accounting is an advantage of the ____ review system

Continuous

Requiring less safety stock is an advantage of the ____ review system

Continuous

High costs due to software implementation is a disadvantage of the ____ review system

Continuous

Reorder Point (ROP)

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

Fixed Time Period System

Inventory is checked in fixed time periods against a target inventory level and an order is placed if below that level

Fixed-Order Quantity System

A continuous review system where the same quantity is used for each order when inventory falls below a predetermined inventory level

Orders costs are incurred _______ ______ an order is placed

Each Time

Carrying costs are incurred for ____ ____

Holding Inventory

Economic Order Quantity (EOQ) Model

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

Economic Order Quantity Assumptions

-Calculated for one product at a time

-Demand rate is known and constant

-Lead time and delivery known and constant

-Constant unit price

-Ordering and carrying costs are known and constant

Individual Item Purchase Price Discounts

Discounts for ordering larger quantities.

Multiple-Item Purchase Price Discounts

Purchasing a combination of of items to take advantage of a volume discount

Transportation Freight-Rate Discounts

Ordering a larger quantity to take advantage of Transportation Freight-Rate Discounts

Limited Capital (EOQ Constraints)

The model may generate a quantity that's too expensive for the company to buy

Storage Capacity (EOQ Constraints)

The model may generate a quantity that's too much for the company to hold at one time

Transportation (EOQ Constraints)

The item may need specialized transportation, impacting the quantity per order

Obsolescence (EOQ Constraints)

The model may generate a quantity that can create spoilage or obsolescence

Production Lot Size (EOQ Constraints)

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

Unitization (EOQ Constraints)

The supplier may require the company to order an item in full item packs, cases, or pallet configurations

ABC System

Classifies inventory based on the degree of importance

A Items

Highest priority. Accounts for 20% of total items, but 80% of inventory costs

B and C Items

Account for 80% of total items, but only 20% of inventory costs

B Items

-Require closer management due being more expensive per unit

-More effort to purchase

-More prone to obsolescence

C Items

Have the lowest value and therefore have the lowest priority

Bin System

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

How does the bin system work?

It uses the second bin to cover demand while the inventory of the first is being replenished

Base Stock Level System

Inventory system that issues an order as soon as there's a withdrawal in inventory. It's mainly used for expensive items

Single Period Inventory Model

inventory is only ordered for a one time stocking (Like Christmas trees)

Linear (1D) Bar Codes

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.

2D Bar Codes

A graphical image that stores information both horizontally and vertically.

Radio Frequency Identification (RFID)

Uses electronic tags and labels to identify objects wirelessly over short distances