Supply Chain Inventory Management: Stock, EOQ, and Control Systems

What are Maintenance, Repair and Operating (MRO) supplies?

Items used to support general operations and maintenance, such as spare parts and consumables that do not become part of the finished product.

How does inventory management differ in the service industry?

Service inventory involves activities carried out in advance of customer arrival, while services are produced and consumed immediately.

What are facilitating goods in the service industry?

Items used to help facilitate the service being provided, such as food and tableware in restaurants.

What is the strategic decision regarding finished goods inventory?

Companies must decide how much finished goods to maintain based on their supply chain model and customer demand.

What are the implications of holding excess raw material inventory?

It can increase costs but may be justified by fears of shortages or price increases.

What role does inventory play in customer satisfaction?

Adequate inventory ensures that customer orders can be fulfilled promptly, enhancing satisfaction.

What are the costs associated with holding inventory?

Costs include storage, security, insurance, taxes, and potential losses from obsolescence or spoilage.

What is inventory?

The quantities of goods and materials held in stock, including raw materials, work-in-process items, finished products, and supplies.

Why is inventory management essential for businesses?

It helps fill customer orders immediately, supports manufacturing operations, and prevents inefficiencies in the supply chain.

What can happen if inventory is not managed adequately?

It can lead to dissatisfied customers, lost sales and revenue, and higher costs.

What are the potential liabilities of holding too much inventory?

It ties up capital, incurs storage costs, and risks becoming unusable due to expiration, obsolescence, or damage.

What are the four main categories of inventory?

Raw Materials, Work-in-Process (WIP), Finished Goods, and Maintenance, Repair and Operating (MRO) supplies.

What are raw materials?

Purchased items or extracted materials converted into components and products through manufacturing.

What is Work-in-Process (WIP)?

Goods in various stages of completion, from raw materials released for processing to fully processed materials awaiting final inspection.

Why is WIP often viewed as the 'black hole' of inventory?

Because companies may lack good visibility into this part of their inventory due to its continuous transformation.

What are finished goods?

Items on which all manufacturing operations have been completed and are available for sale or shipment.

What is the difference between Make-to-Order and Make-to-Stock supply chains?

Make-to-Order produces finished goods only after receiving customer orders, while Make-to-Stock produces goods in advance based on forecasts.

What is the impact of inventory on a company's capital?

Excess inventory ties up capital that could be used for other business purposes like R&D or marketing.

Why is it important to minimize WIP inventory?

Too much WIP can clutter physical space and impede process flow, reducing efficiency.

What is the potential risk of inventory becoming a liability?

Inventory can become unusable due to expiration, obsolescence, damage, or spoilage.

How can companies manage the risk of inventory obsolescence?

By regularly reviewing inventory levels and adjusting purchasing strategies based on demand forecasts.

What is the relationship between inventory levels and operational efficiency?

Proper inventory levels support smooth operations and prevent delays in production and customer service.

What factors influence the decision on how much inventory to hold?

Factors include customer demand, supplier reliability, production lead times, and cost considerations.

What is the significance of having a demand plan in inventory management?

A demand plan helps forecast customer needs and align inventory levels accordingly.

How do companies balance the costs of holding inventory with the need for availability?

By analyzing trade-offs between carrying costs and the risk of stockouts to optimize inventory levels.

What is the purpose of cycle stock?

To immediately fill customer orders and satisfy immediate demand.

What is safety stock?

Inventory above what is needed to meet anticipated demand, used to buffer against fluctuations.

What does strategic stock refer to?

Additional inventory held for specific purposes, such as hedging against currency fluctuations or preparing for seasonal demand.

What is pipeline inventory?

Inventory in transit, held by suppliers or trading partners, influencing internal inventory management.

What are the four main reasons companies hold inventory?

To meet customer demand, buffer against uncertainty, decouple supply from demand, and decouple dependencies in the supply chain.

What is obsolete inventory?

Inventory that is expired, damaged, or no longer needed, which will never be sold at full value.

What are direct costs in inventory management?

Costs that are directly traceable to the unit produced, such as materials and labor.

What are indirect costs?

Costs that cannot be traced directly to the unit produced, such as overhead and maintenance.

What are fixed costs?

Costs that are independent of the unit volume produced, like rent and allocated overhead.

What are variable costs?

Costs that vary with the output level, such as materials and labor.

What are order costs?

Labor costs associated with placing an order for inventory and receiving it.

What are carrying costs?

Costs for physically having inventory on-site and maintaining the storage infrastructure.

What can happen if a company has too much inventory?

Financial resources may be tied up, quality problems may be hidden, and there may be no incentive for process improvements.

What are the risks of having too little inventory?

Production disruptions, longer delivery lead times, and reduced responsiveness.

What is the role of strategic stock in inventory management?

To prepare for specific future events or opportunities, such as seasonal demand or price discounts.

How does cycle stock replenish?

It depletes gradually as orders are received and is replenished cyclically when supply orders are received.

What is the impact of obsolete inventory on a company?

It takes up space, incurs maintenance costs, and may require difficult decisions regarding disposal.

What is the definition of inventory stock levels?

The various levels of inventory held to meet demand, buffer against uncertainty, and decouple supply from demand.

What does 'decoupling supply from demand' mean?

Separating operations in a process to smooth production and reduce peak capacity needs.

What is the significance of safety stock in a make-to-stock environment?

It is maintained to protect against fluctuations in demand or supply.

What is the relationship between cycle stock and actual demand?

The amount of cycle stock held depends on actual demand, supply lead time, and order quantities.

How can companies dispose of obsolete inventory?

They may write it off, donate it, or absorb the loss to avoid storage costs.

What does the term 'hidden costs of inventory' refer to?

Costs that arise from having too much or too little inventory, affecting financial resources and operational efficiency.

What is the purpose of holding safety stock?

To protect against unexpected increases in demand or supply disruptions.

What is the difference between internal and external inventory?

Internal inventory is held by the company, while external inventory is held by trading partners.

What is Absolute Inventory Value?

The value of the inventory at either its cost or its market value, generally found on the balance sheet.

What does Inventory Turnover indicate?

The number of times that an inventory cycles, or 'turns over,' during the year; more turns indicate better inventory management.

What are the three fundamental questions addressed by Inventory Policy?

When to review? When to order? How much to order?

What is a Continuous Review System?

An inventory management system where inventory levels are continuously monitored and replenishment orders are triggered when inventory falls below a predetermined level.

What is a Periodic Review System?

An inventory management system where inventory levels are reviewed at set intervals and orders are placed if stock is below a predetermined level.

What is the Reorder Point (ROP)?

The lowest inventory level at which a new order must be placed to avoid a stockout, calculated as ROP = Demand during Lead Time (dL).

How is ROP calculated?

ROP = Demand (d) per day multiplied by Lead Time (L) in days.

What is the formula for Reorder Point without Safety Stock?

ROP = Demand (D) x Lead Time (LT) + Safety Stock (SS), where SS = 0.

What is the formula for Reorder Point with Safety Stock?

ROP = Demand (D) x Lead Time (LT) + Safety Stock (SS).

What is the Fixed-Order Quantity System?

A continuous inventory review system where the same order quantity is used each time an order is placed when inventory reaches the reorder point.

What is the Fixed-Time Period System?

An inventory system where inventory is checked at fixed time intervals against a target level, ordering as necessary to reach that level.

What does the Economic Order Quantity (EOQ) Model aim to determine?

The optimal order quantity that minimizes total inventory costs, balancing order costs and carrying costs.

What are the assumptions of the EOQ Model?

Demand is known and constant, lead time is known and does not fluctuate, replenishment is instantaneous, and costs are constant.

How is Total Cost calculated in inventory management?

Total Cost = Purchase Cost + Order Cost + Carrying Cost.

What is the significance of Safety Stock?

Safety Stock acts as a buffer to prevent stockouts during lead time fluctuations or unexpected demand increases.

What is the impact of a Continuous Review System on safety stock?

It potentially requires less safety stock because inventory is constantly monitored and replenishment actions are taken more quickly.

What is a disadvantage of a Periodic Review System?

It may not provide accurate inventory counts for businesses with high sales and can make inventory accounting less accurate.

What is the formula for calculating EOQ?

EOQ = √((2 Order Cost Demand) / Carrying Cost).

What is the role of Lead Time in inventory management?

Lead Time is the time required to replenish inventory, which is critical for calculating the Reorder Point.

What happens when inventory drops below the Reorder Point?

A replenishment order is triggered to restock inventory before stockouts occur.

What is the relationship between Inventory Turnover and inventory management efficiency?

Higher inventory turnover indicates more efficient inventory management, as it reflects quicker sales and restocking.

What is the primary advantage of a Continuous Review System?

It allows for real-time updates of inventory, facilitating accurate accounting and timely replenishment.

What is a common disadvantage of implementing a Continuous Review System?

It can be more costly to implement due to the need for automated systems and technology.

What is the effect of high safety stock on inventory costs?

High safety stock increases carrying costs due to the expenses associated with holding excess inventory.

How does demand variability affect inventory management?

Increased demand variability can necessitate higher safety stock levels to prevent stockouts.

What is the primary assumption of stockouts in supply chain management?

Stockouts are not allowed.

What must supply chain managers do regarding the basic EOQ model?

They must make adjustments to the basic EOQ.

What is a volume discount in inventory management?

Discounts for ordering larger quantities that offset the added cost from carrying additional inventory.

What is a multiple-item purchase price discount?

A discount based on the total volume across all items purchased from a supplier.

How can transportation freight-rate discounts benefit inventory management?

Ordering larger quantities can lower the per unit costs through discounts.

What are some constraints that can affect the EOQ model?

Limited capital, storage capacity, transportation requirements, obsolescence, production lot size, and unitization.

What is the formula for calculating order quantity in a fixed-time period system?

Q = R - IP, where Q is order quantity, R is target inventory level, and IP is inventory position.

What does the ABC system in inventory management classify?

It classifies inventory based on the degree of importance.

What are the three categories in the ABC system?

A: Highest Value, B: Moderate Value, C: Least Valuable.

What is the '80/20 rule' in the ABC system?

A items account for approximately 20% of the total number of items but about 80% of the total inventory cost.

What is a bin system in inventory management?

An inventory system that uses one or two bins to hold quantities of items, mainly for small or low-value items.

What is the base stock level system?

An inventory system that issues an order whenever a withdrawal is made from inventory, maintaining a base stock level.

What is the single-period inventory model?

An inventory system where inventory is ordered for a one-time stocking to maximize profits.

What are some inventory control tools mentioned?

Barcode tracking and RFID tagging.

What is a linear barcode?

A series of alternating bars and spaces representing encoded information that can be read by electronic readers.

What are the limitations of linear barcodes?

They are one-dimensional, can only be read horizontally, and can hold a maximum of 85 characters.

What is a 2D barcode?

A graphical image that stores information both horizontally and vertically, capable of holding over 7,000 characters.

What is the purpose of a barcode reader?

To read barcodes and transmit data to a computer.

What is RFID?

Radio Frequency Identification, a technology that tracks individual units of goods without requiring direct line of sight.

How does RFID automate the supply chain?

By automatically counting and logging goods as they enter the warehouse and updating systems for inventory management.

What is the role of RFID tags in manufacturing?

They provide assembly instructions to computer-controlled devices.

What happens at a retail store using RFID technology?

Scanners link RFID tagged goods in shopping carts with buyers' credit cards, eliminating checkout lines.

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