module 2

Inventory

The items that are owned by a company for the purpose of present or future sales or for in day-to-day operations

Lead time

The period of time between when an order is placed, and when the order is received by the customer

Lot size

An accepted order size. This sometimes also refers to a possible order size increment.

Stock keeping unit (SKU)

A specific product or services identification code used to track inventory or catalog sales.

MRO (Maintenance, repair and operations)

Items that are not intended as part of the finished goods, but are important to the daily operations of the company.

Why carry inventory?

Inventory act as insurance against risks and can buffer a company against unexpected shortages and supply or unexpected increases in demand

Inventory strategies

1. Insurance- manage risk and uncertainty

2. Market needs/expectations- meet customer needs

3. Managing costs- economies of scale, quality discounts, manufacturing efficiencies

Risks relationship to inventory

Caring inventory has risk, but not carrying inventory also has risk because the company may not be able to satisfy customer needs.

why inventory helps with risk

Inventory and it’s related cost or the cost of insurance against risks posed to a company, it suppliers, and it’s customers. Inventory can buffer against unexpected shortages and supply or unexpected increases in demand

Company risks

Theft or damage to inventory, late supplier shipments, Employee sickness, or strikes machine, malfunctions, harsh weather

Supplier risks

Employee sickness, or strikes, sudden increases in demand for supplies, Risks faced by their own suppliers

Customer risks

Sudden increases in demand, damage to the customers inventory

Inventory insurance risks (buy)

theft, damage, poor quality, late shipment, labor

Inventory insurance risks (make)

Labor, machine breakdowns, high demand

inventory insurance risk (move)

Theft, late shipments, distance/logistics problems

Inventory insurance risks (sell)

Theft, high demand, damaged items

Inventory insurance risks (service)

Defects, repair, warranties, maintenance

Risks of too much inventory

Higher holding costs, including damage, theft, and obsolescence

Seasonal inventory

Inventory kept because the man changes depending on the season or time of year

Perishable inventory

Inventory that has a limited useful life and can spoil, expire, or lose value over time.

Safety stock

Inventory cap to account for variation/uncertainty of demand.

Anticipation inventory

Inventory that is created and stored for future use

Pipeline inventory

Inventory and transit between two points in which the two points establish the beginning and the end of the pipeline.

Pipeline inventory calculation

Period demand* lead time

Pipeline inventory=dL

high inventory levels (higher customer service)

Having inventory will help accompany, addressed their immediate demand for a product

Higher inventory levels (quantity discounts)

Quantity discounts may be possible – lower per unit costs

Higher inventory levels (fewer orders)

Few orders will need to be placed – possibly Lower ordering costs and transportation cost

Higher inventory levels (security against demand changes)

Greater security against unexpected demand variability

Low inventory levels (less storage space)

Less storage space required – cost of holding inventory may be lower

Low inventory levels (less materials handling)

Less inventory typically means less materials handling requirements

Low inventory levels (more money available elsewhere)

Less money invested in inventory means more money available for other investment opportunities

High and low inventory trade off

Some decisions move towards satisfying consumer demand; Others move toward control controlling costs.

All four costs of inventory

Cost to purchase, holding cost, ordering cost, stockout cost

Cost to purchase

The cost to purchase the inventory

Holding cost

The cost of holding the inventory

Ordering cost

The costs Associated with placing an order for inventory

Stockout cost

The cost associated with not having enough inventory on hand to meet customer demand

Q

Lot size

D

Annual demand

C

Cost to purchase one unit of inventory

H

Cost to hold one unit of inventory for one year

S

Cost to place a single order

Average inventory

Q/2

Number of orders per year

D/Q

Tbo (time between orders)

(Q/D)*52

Total annual inventory costs

Tc=DC+(Q/2)H+(D/Q)*S

Tc=DC+AHC+AOC

Annual cost to purchase inventory

DC

Annual holding cost (AHC)

(Q/2)*H

Annual ordering cost (AOC)

(D/Q)*S

Economic order quantity (EOQ)

sqrt(2DS/H)

What happens to AOC when lot size Q increases

AOC decreases

what happens to AHC When lot size Q increases

AHC increases

Where is EOQ on the inventory cost graph?

EOQ is where AOC = AHC and total relevant inventory cost is minimized

Steps in the purchasing process

Requisition, place order, track order, receive order

Requisition

Someone discovers they need something. A material requisition (MR) Is sent to procurement to request it

Supplier selection

procurement searches for and chooses a supplier. An RFQ may be sent to get a price

Place order

Once a supplier And Price are agreed on, procurement issues a purchase order (PO) To formally order the item

Track order

Procurement tracks the order to make sure it arrives when promised

Receive order

The item arrives, is inspected, entered into inventory, and moved where needed

Material requisition (MR)

The document used to initiate the purchasing process

Request for quotation (RFQ)

Sent to potential suppliers to ask for a detailed quote. May Include Price, Delivery date, and payment terms

Purchase order (PO)

Used to formally order from the chosen supplier after the quote is accepted. It’s the terms and conditions of the order.

Proprietary technology (making)

Company does not want to tell anyone else how to make it

No competent supplier (make)

Others can make it, but not as good as we can

Better quality control (make)

We like it made a certain way and are concerned others will not be as detail oriented

Idle capacity (make)

We have the machines and people to make it. Why not take advantage of the idle capacity?

Control (make)

Company wants greater control over, cost, speed quality, or the supply chain

Insufficient capacity (buying/outsourcing)

Company knows how to make it, but doesn’t have enough time/resources

Lack of expertise (buying/outsourcing)

We don’t know how to make it

No competent supplier (buying/outsourcing)

We know how to make it, but not up to the standards we’d like. Our suppliers could definitely make it better

Better use of resources (buying/outsourcing)

We know how to make it, but outside suppliers can produce it to acceptable standards, faster, and/or at a lower cost

Advantages of centralized purchasing

A purchasing system where all corporate employees send material requisitions to a single purchasing department

Decentralized purchasing

A purchasing system where material requisitions are sent to a departmental purchasing department

Choosing a supplier

Consumer needs, cost, quality, speed, flexibility, technological capability, location, information technology system, ability to innovate

Supplier scorecard

A report card that can be used to communicate desires before a sales presentation or shipment and performance

Suppliers certification

Assessment that help ensure that a buyer suppliers all meet the minimum suppliers standards

Raw materials

Typically refers to a material, parts or components that will be used to create an end item or service

Work in process (WIP)

Items that have begun the manufacturing process, but are not yet completed

Finished goods (FG)

Items that are completed and ready for shipment at a manufacturing facility or assembly plant

Maintenance, repair and operations (MRO)

Items that are not intended as part of the finish goods, but important to the daily operations of the company

Market inventory

Inventory that is readily available on the shelf

Safety stock (buffer stock)

Inventory kept to account for a variation/uncertainty of demand

Anticipation inventory

Inventory that is created and stored for future use

Pipeline inventory

Inventory in transit between two points, in which the two points established the beginning and the end of the pipeline

Independent Demand

An item for which demand levels are not directly impacted by the demand of another related item

Dependent demand item

An item for which demand levels are directly impacted by the demand of another related item

Stockout cost

The cost associated with not having enough inventory on hand to meet customer demand

Total cost of ownership (TCO)

As the Name would imply, total cost of ownership is the cost of owning an item over the entire lifetime of the item

Vertical integration

The act of a company taking on additional supply chain responsibilities that were formally done by outside parties

Forward integration

Taking over supply chain responsibilities, formally performed by downstream supply chain partners

backward integration

Taking over supply chain responsibilities, formally performed by upstream supply chain partners

Supplier base

An established group of suppliers from which company makes most of its purchases

Single supplier

Quantity discount opportunities, lowest total cost, intellectual property advantages, quality control, relationship management is easier, easier collaboration

Multiple supplier

Competition breeds innovation, risk among multiple suppliers, capacity Flexibility, location advantages