Supply Chain Exam 2

Chapter 4, 5, 6

4 main categories from inventory:

1) raw materials

2) work in process

3) finished goods

4) maintenance, repair, and operating (mro) supplies

raw materials

basic starting materials used to make a product

example: wood, metal, fabric

work in process

products that are currently being made

sometimes called a black hole

you want to minimize the amount of wip (work in process)

too much wip may clutter up physical space

finished goods

things that you are ready to sell to customers after the manufacturing process is complete

worth more

make to order/pull → little to no finished good inventory is maintained

make to stock/forecast/push → significant amounts of finished goods inventory are maintained

maintenance, repair, and operating (mro) supplies

helps facilitate the making of the good. does not go into the final product

example: machine oil, spare parts

service inventory

activities carried out in advance of the customer’s arrival

functions of inventory / why companies hold inventory?

1) to meet customer demand (cycle stock)

2) to buffer against uncertainty in demand and/or supply (safety stock)

3) to decouple supply from demand (strategic stock)

4) to decouple dependencies in the supply chain

to meet customer demand (cycle stock)

inventory kept to satisfy regular, everyday demand

buffer against uncertainty in demand and/or supply (safety stock)

extra inventory is kept to handle unexpected situations

to decouply supply from demand (strategic stock)

getting inventory earlier than needed so you can save money or avoid future problems.

to decouple dependencies in the supply chain:

using extra inventory between steps or over time to keep operations running despite disruptions and demand changes.

the goal of inventory management

help a company be more profitable by lowering the cost of goods sold and/or by increasing sales

pipeline inventory

inventory in transit

obsolete inventory

inventory that a company can’t use or sell at full value

• expired, damaged, outdated, or no longer needed

direct

directly traceable to unit produced

indirect

can’t be traced directly to the unit produced

variable costs

costs that change with how much you produce

fixed costs / sunk costs

costs that stay the same no matter how much you produce

carrying costs

costs of storing inventory

order costs

costs of ordering and receiving inventory

too much inventory

• financial resources tied up in inventory

• underlying problems are hidden

• no incentives for process improvement

too little inventory

• reduced responsiveness

• lost revenue

• longer delivery replenishment lead times

absolute inventory level

the value of inventory at its cost or market value

inventory turnover

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

• the more turns the better

inventory turnover ratio

cogs or cost of sales or cost of revenue / average inventory

two models for determining when to review inventory

1) periodic review system

2) continuous review system

when to review inventory?: periodic review system

review inventory every fixed period

• A: reduce the time spent analyzing inventory, less expensive

• D: can make inventory accounting less accurate, can make it difficult to determine best time to review

when to review inventory?: continuous review system

as soon as inventory falls below a reorder point, a replenishment order is automatically triggered

• A: allows for real time updates, accurate accounting

• D: need that type of system in place because it needs to be automated

when to order inventory?

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

• called the reorder point

ROP formula

ROP = demand during lead time (dL) = demand x lead time

• demand and lead time need to be the same units

how much inventory to order?: fixed time period system

you order at the same time every week

if the inventory is less than the target, a quantity necessary to bring inventory back up is ordered

how much inventory to order?: fixed order quantity system

you order inventory when it gets low

when it hits a certain level, you reorder

fixed time period system formula

q = r - ip

q = order quantity

r = target inventory level

ip = inventory position / current inventory

• if ip is less than r then q is ordered

eoq (economic order quanitity model)

based on the trade off between annual inventory order costs and annual inventory carrying costs

order cost

costs that are incurred each time an order is placed

• prep cost

• transportation cost

• material handling cost

• order reciept processing cost

carrying cost

costs that are incurred for holding inventory in storage

• storage

• taxes

• cost of capital

• insurance

• obsolescence

EOQ formula

• make sure percent is a decimal

Volume Economies of Scale Impact

Individual Item: Discount for ordering larger quantities

Multiple Item Purchase: If you purchase a combination of items from a supplier, you may be able to take advantage of a volume discount

Transportation Discount: Take advantage of transportation which would lower the cost

ABC system

a way to organize inventory based on how important an item is

A items → highest priority and so forth

single period model

only ordered for a one time stocking

• christmas trees

• valentines day decor

linear barcode

a row of black bars and white spaces that stores information only left to right (like a product number). holds up to 85 characters.

2d barcode

graphical image that stores information both horizontally and vertically. can store over 7000 characters

barcode reader

electronic device (handheld or built into a computer) that scans a barcode and sends the data to a computer

RFID (radio frequency identification)

a system that uses radio waves and tags to identify and track items automatically

week of supply

average on hand inventory / average weekly use

inventory turns

cost of goods sold / average inventory value

procurement

the process of selecting and vetting suppliers, negotiating contracts, establishing payment terms, and actually purchasing goods and services

purchasing

the action of obtaining merchandise, capital equipment, raw materials, services, or maintenance, repair, and operating supplies in exchange for money, or its equivalent.

• how goods and services are ordered

purchasing requisition

an internal document that defines the need for goods and/or services

purchase order

an external commercial document. an offer issued by a buyer to a seller to acquire goods

• only becomes legally binding once accepted by the supplier

eProcurement

b2b purchase and sale of supplies and services over the internet

• amazon

merchants

wholesale and retailers who purchase for resale

• walmart buys toys then sells them to you

• costco buys bulk products then sells them to you

industrial buyers

individuals within an organization who purchase raw materials for conversion into products

contracting

buying services

• hiring a law firm

• hiring a consultant

• hiring a construction company

Request for Information:

Asking people what they provide, how long they've been in business

Request for Proposal:

You ask for their plan for solving the problem/task at hand

Request for Quote:

Suppliers send back price + delivery date

primary objectives of purchasing

1) ensure an uninterrupted flow of materials and services at the lowest total cost

2) improve the quality of the finished goods produced

3) optimize customer satisfaction

Purchasing Process steps

1. A need is identified, and a Purchase Requisition is issued 

2. Obtain authorization as necessary 

3. Identify and evaluate potential suppliers 

4. Make supplier selection 

5. The Purchase Order is created and delivered to the supplier 

6. Supplier confirmation of the Purchase Order 

7. Fulfillment

8. Receipt of Goods

9. Invoice and Reconciliation

10. Payment

11. Close out Purchase Order

12. Analysis

purchasing contributes to these objectives by:

1) actively seeking reliable suppliers

2) working with the expertise of strategic suppliers to improve quality and materials

3) involving suppliers and purchasing personnel in new product design and development efforts

leading procurement

every step will be completed

will be completed via an automated system

e-Procurement

automation through web based tools

the e-procurement process consists of 

1. an electronic purchase requisition and/or purchase order 

2. an invoice 

3. Aapayment 

for high-dollar purchases, the process will also include 

• authorization of the purchase order 

• reconciliation of the invoice 

advantages to an e-procurement system

1. TIme Saving 

2. Cost Saving 

3. Accuracy 

4. Real time 

5. Management 

6. Mobility 

7. Trackability 

8. Benefits to the supplier 

proft leverage effect

a decrease in purchasing expenditure directly increases profits

return on assets

how good are you at making money with the stuff that you own?

inventory turnover effect

how many times does a company sell and replace its inventory in a year

inventory turnover = cogs / average inventory

return on assets formula

profit before tax / assets = ROA

a high turnover ratio

is beneficial

a low turnover ratio

is unfavorable

total cost ownership

the full price of buying something including every single cost from the moment you buy it until the moment you throw it away

total cost ownership

four elements of cost: quality + service + delivery + price

lower tco comes from

1) buying in bulk (quantity discount)

2) paying earlier (cash discount) l

3) letting the supplier do extra work for you (value-added service)

4) not having to put your team’s time (administrative expenses)

5) not using low-quality products (poor supplier quality costs)

components of tco

pre-transaction costs: money spent finding and approving a supplier before you ever plave an order

transaction costs: money spent on the actual buying process, from order to deliver to payment

post-transaction costs: money spent after you already have the product

make

producing it at home

buy / outsource

buying materials, components, or products from a supplier instead of making it at home

make vs. buy decision 3 pillars

1) business strategy: does making this thing fit with what your company wants to be known for

• is it crititcal to the company

2) risks: what could go wrong with each choice?

3) economic factor: which option actually costs less money?

in sourcing

reverting to in house production when external quality, delivery, and services do not meet expectations

co-sourcing

you and an outside company both work on the same task or process

make vs. buy qualitative vs. quantitative : qualitative

more subjective and includes control over quality, reliability, and reputation of the potential suppliers

make vs. buy qualitative vs. quantitative: quantitative

incremental costs of either making or purchasing the item

qualitative reasons for making

1) protect proprietary tech: you don’t want other people to steal it from you

2) no competent supplier: nobody out there can make the product well enoguh

3) control lead time: you believe you can make it faster

4) use existing idle capacity: machines and workers doing nothing then

5) better quality control

quantitative reasons for making

1) overall lower cost: yoy may be able to make it for cheaper

2) control of transportation and warehousing costs: avoid transportation costs, and keep warehousing costs down

backward vertical integration

a company buys one of its suppliers

• buying a wheat farm

forward vertical intergration

a company buys one of its customers

• buying grocery store chains

chief procurement officer

senior executive responsible for all buying, sourcing, and supplier relationships

centralized purchasing

one main team at the company's headquarters buys everything to all locations

decentralized purchasing

each local office, plant, or store buys its own supplies separately

hybrid approach

the company uses both systems depending on what is being bought

countertrade

paying for goods by trading other goods rather than using currency

import brokers

You hire them like a guide. They know all the government rules and forms. You tell them what you're importing, and they get it through customs so you don't have to figure out the paperwork yourself.

import merchants

They buy products from other countries with their own money, then sell those products to you at a higher price. You never deal with the foreign seller — just buy locally from the merchant.

trading companies

Large businesses that buy huge amounts of stuff (like oil, steel, or grain) from one country, then sell it to many different countries using their own warehouses and shipping networks.

government purchases

spending by local, state, or federal governments to buy goods and services from private companies

non profit purchases

spending by charities, churches, hospitals, and universities to buy what they need using donations

bid

your offer price

sealed bid

hidden until the deadline in a sealed envelope

competitive bidding

letting multiple sellers compete so you don’t overpay

• open competitive bidding: the sealed bids are open in full view to all

• closed competitive bidding: the sealed bids are opened in the presence only of authorized personnel

• does not allow negotiations

bid bond

a guarantee that if the bidder wins the contract, they will accept it and sign the agreement

performance bond

a guarantee that once the bidder accepts the contract, they will complete the work on time and as agreed