Chapter 2

Question 1

What raw materials classifications are there?

Answer 1

Opening stock - Inventory held at start of accounting period

Stock take - audit check of physical stock on site. volume and value

Finished goods - Products ready to use or sale

Works in progress - Expression given to stock part way through manufacturing process. Service industry refer to this between order and delivery

Closing stock - inventory held at the end of an accounting period. it then become the next periods opening stock

Raw material - basic inputs to manufacturing a product, usually un processes for example, metal, wood

Components - manufactured items elsewhere which are included in larger final product manufactured. For example, cars

Question 2

What is Redundancy?

Answer 2

State of being no longer required or surplus to requirements

The stock is still in good condition will likely be used elsewhere so effort to sell the the right person is key. Once person losing interest in a good make it redundant. But it may not be redundant to someone else

Linked to the word over supply/ surplus

What causes redundancy:
Poor forecasting
Weak customer relationships
Over stocking / poor stock control 
Changes to internally polices such as making items more eco friendly, discontinuing a product,

Question 3

What is Obsolescence?

Answer 3

The process of becoming outdated

Obsolescence stock is typically finished goods in good condition whereby declining demand for them is irreversible falling toward zero. Once it reaches zero it is then obsolete.

Obsolescence stock will need to be written off or reworked into a demand product e.g. old smart phone with updated software

The idea of the term obsolescence and obsolete is based on demand never returning

What causes obsolescence:
Technological change
Cultural change
Legislation

Question 4

What is Safety Stock, also known as Buffer Stock?

Answer 4

Stock held as a contingency against disruption or unexpected demand

Question 5

What is Stock out?

Answer 5

Have no or sufficient material to continue production and meet an order/ demand

Question 6

What is Working Capital?

Answer 6

Current assets - current liabilities.

A measure of a company ability to cover short term debts

Linked to meaning extend your working capital

Question 7

What does Written off/ to write off mean?

Answer 7

Accepting that cost can not recouped, thus marking the assets value down to near zero showing that the asset is of no value i.e obsolete stock. Essentially revaluing assets

Question 8

What is Just In Time?

Answer 8

Production methodology where stock is acquired literally just in time to be incorporated into production process. It is a means to reduce stock holding

Question 9

What is Book Value?

Answer 9

The notional value of stock as set in a companies accounts. It is an estimate of value which can go up or down

Question 10

What is S&OP?

Answer 10

Sales and Operations Planning

Question 11

What is the difference between direct and indirect supplies?

Answer 11

Direct - supplies which are integrated into the finished product

Indirect - Supplier not incorporate into finished product which keep the business/ factory operating. e.g. maintenance and machinery parts, MRO stock

Question 12

What is MRO?

Answer 12

Maintenance, repair and operations

Cleaning stock, machinery/ equipment parts stock etc

Question 13

What is Stock Turn/ Stock Turnover?

Answer 13

How any stock is is being used over a given time. Could refer to stock being bought or sold

Question 14

Can you explain ABC classification of stock?

Answer 14

Starts with pareto principle of 80% of outcomes result from 20% of inputs. e.g. 80% of inventory spend come from just 20% of the inventory items. Also expressed as the term “significant few and insignificant many”

In absence of detailed data it serves well to understand the trend of 80/20 rule will likely be the answer.

Helps prioritise which stock should be more closely managed and allocate resources allocated to managing it. May as well focus effort on products causing the highest expenditure to understand if its really necessary to help challenge it and reduce cost of hold expensive stock. A is the focus

B is a middle ground

C is where complication ocurrs in managing the vast array of stock codes but little effort applied as the value is too low to care. This is known as Tail spend - spend that is not actively managed, low spend, high volume, many suppliers

Question 15

What is Stock Profile?

Answer 15

Description of stock from description, codes, value, volume, size etc stock turnover/ usage

Question 16

What is the difference between Dependent Demand & Independent Demand?

Answer 16

Dependent demand - turnover of stock directly related to rate of production i.e. raw materials, energy

Independent demand - turnover of stock which is not directly related to the rate of production, this not dependent on the rate of production i.e. machine spares, office equipment consumables

Question 17

What is Bill of Materials?

Answer 17

List of all components including the quantities required to produce a unit or many

Question 18

What is Liquidity?

Answer 18

The ease with which assets can be converted into cash.

Question 19

What is EDI?

Answer 19

Electronic Data Interchange - a computer exchange of business documents in a standard format between different organizations

Question 20

What is an ERP?

Answer 20

Enterprise Resource Planning - Business process management software integrated many function activities i.e stock management, purchasing, HR, finance etc.

Question 21

Which three groups are Acquisition Costs broken down into?

Answer 21

Preliminary cost - costs associated with activity before raising purchase order

Placement costs - cost of raising the purchase order and ensuring the supplier receives it

Post placement costs - cost after order placement which are commonly transport of goods, receiving, warehousing, supplier payment

Question 22

What are Purchasing Cards (Procurement Cards)?

Answer 22

Essentially a corp credit card to pay for low value transaction to avoid formal requisitions and purchase orders

Remember, this is common for ‘C’ classification stock

Question 23

Remember, every part of the Procure 2 Pay process incurs a cost. They all add up to the total cost of acquisition

Question 24

What are Holding Costs/ Carrying Costs?

Answer 24

Cost associated with the storage and handling of physical stock

There are two different types of holding costs:

Cost related to the value of the goods - interest payments on equipment eating into working capital, working capital being tied up in having stock there, cost of insurance, loss due to deterioration, loss due to obsolescence or redundancy, loss due to theft, accidental damage

Costs related to the physical characteristics of this inventory - size affecting storage space needed and additional cost of renting space, rates, storage racking, IT systems needed, maintenance and repair cost of facility, power heat lighting, equipment movement, forklifts, handling equipment, labour costs of additional man hours through inspection, audit etc. admin cost of record keeping

Question 25

What is SRM?

Answer 25

Supplier Relationship Management - the strategic management of supplier interactions.

Question 26

How does an organisation determine what levels of stock should be held as a buffer/ safety stock?

Answer 26

Produce a cost benefit analysis of each stock type:

What is the probability of a stockout occurring?
What are the cost impacts if it does?
What are the costs of holding safety stock in different levels at different locations?

This is similar to usual risk management approaches:

Assess the risk, which is the combination of likelihood and severity of impact
Assess the cost of mitigating the risk

Question 27

What is TCO?

Answer 27

Total Cost of Ownership - total cost of an asset from purchase price to operation costs over its life cycle

Question 28

Which 6 questions do Lysons & Farrington state should be considered when creating a forecast?

Answer 28

What is the purpose of the forecast?
What is the time horizon?
What techniques are most appropriate?
What must the data be based on and how should it be analysed?
In what form should the forecast be presented?
How accurate is the forecast?

Remember, forecast techniques can be either subjective or objective

Question 29

What is the Delphi method?

Answer 29

Structured forecasting technique using a panel of experts and a number of rounds of questioning. Responses are shared anonymously and attendees are asked to reconsider their own responses based on new info. It is intended to reach a consensus by reduces number of options put forward

Question 30

What’s the difference between subjective and objective forecasting?

Answer 30

Subjective - uses qualitative information based on human opinion/ insights which are based on opinion or experience. It is not data driven. Examples include expert opinion, market surveys, employee surveys and structured questioning method such as a the Delphi method. Someone data is not available such as when launching a new product with no record of customer trend. This approach is often associated with concepts where customers didn’t know they needed the product until it launched.

Objective - uses quantitative techniques which are based on data, facts and figures. They remove the human element of the subjective approach. They are often supported by time series data - collection of the same data point over equally spaced periods of time. This historic data is thought to help improve prediction of future habits/ trends.

5 elements are used to do this:

Averages - mean, median points
Trends - increase or decrease in average over time
Short term cyclical movements - seasonal influences
Long term cycles - often unpredictable and unexplained
Random errors - variation which can’t be explained or cyclical effects to short for the time series to pick up

Question 31

Which 3 statistical techniques are used in inventory forecasting?

Answer 31

Moving average - analysis of data by creating series of averages of subsets of the full data. For example, the average based on past 20 day (short term) and 200 day (long term) timeseries of average sales, extended out in to the future. The idea of combining the two is to smooth out short term fluctuation to giver insight into long term forecast

Weighted average - a calculation which attaches more importance to some elements than others

The most common is a combination of these two called the Exponential Weighted Average Method (EWAM) - is is based on using a moving average series but each time series is given a reducing weight the older the data is. This is to support the idea that the older data is not as accurate as the most recent data, but should still be included as it has relevance. thus, the newer the dat the more important it is and so gets a higher weighting.

it is important to take note that the data series is likely to include anomalies created by past sales promotions, sales team incentives, over ordering by customers before find more effective stock level themselves, cancelling of orders and any bulk demand created by indirect causes

Any distortion/ anomalies created at the start of a supply chain is said to become amplified the further up the supply chain. This is known as the Bullwhip affect or Forrester affect. It explains how the small movement at the wrist creates a series of increasing large movement towards the end.

Question 32

Which reorder techniques are used for independent demand?

Answer 32

Fixed quantities
Economic order quantities
Time and periodic review

Question 33

Which reorder techniques are used for independent demand?

Answer 33

Fixed quantities
Economic order quantities
Time and periodic review

Question 34

Which reorder techniques are used for independent demand?

Answer 34

Fixed quantities - same amount ordered each time/ predetermined. An amount to be used during the order lead time plus margin for safety - formula = maximum usage x maximum lead time. Could be a complex MRP/ERP system or a simple 2 bin system that triggers the reorder. best for items with inconsistant demand.

Economic order quantities - refers to the optimum amount to order. it is supposed to reduce ordering and holding costs by not order too much to keep stored and not too much to waste time and resource making the orders too often. It assumes the following:
Same quantity is reordered at each reorder point
Demand is known
ordering and holding costs remain certain
Purchase lead time is known
Price is fixed with no volume discounts
Demand is closely controlled to manage safety stock and avoid stock out
There are no quality costs

It then uses 3 variables to calculate:

Demand
Ordering costs - note, it is based on per order
Holding costs - note, is it based on per unit

Periodic Review - based on the relative importance of one stock item vs another, stock will be replenished based on a period of time, not a stock level trigger point. A variable amount of stock is then reordered to reestablish a stock level. This is referred to as topping up stock. For example, item A is most critical to the business than C, so A is checked daily and C is checked monthly. Item is is more expensive then A, s the daily check will ensure not too much expensive stock is being held thus impacting working capital. As item C is lower in value, more stock can be justified to keep in stores, thus less regular checks. The variable amount to reorder can only be calculated is there is a maximum stock level of the item made in advance to maintain. Best used where supplier deliver on a regular basis

CIPS suggest A = daily, B = Weekly & C= Monthly

Due to number of assumption made by EOQ, it does not hold true in the real world. Therefore, Fixed and Periodic are the preferred options

Question 35

Which reorder techniques are used for dependent demand?

Answer 35

MRP, MRP 2

Question 36

What is MRP & MRP2 ?

Answer 36

For dependent demand Material Requirement Planning and Manufacturing Resource Planning are used.

These systems use the following equation to calculate stock needed for ordering:

Net requirements = total requirements - available inventory

Total requirement = gross requirements

Available inventory = inventory on hand + units on order

Both MRPs are suitable for dependent demand, non uniformed or lumpy demand, job/ batch/ flow production which is basically batch sizes rather than continuous production because MRPs flexibility

Both MRPs are driven by Master Production Schedules

MRP2 has additional inputs from various departments such as engineering, finance, HR and so on

Question 37

What is What if Analysis?

Answer 37

Analysis of whether scenarios will happen or not

Question 38

What is the difference between MRP and MRP 2?

Answer 38

Both are driven by Master Production Schedule, however, MRP2 collates data from wider sources including other department such as engineering, HR procurement, finance and so on. It also enable What if Analysis functions

MRP is still only concerned with manufacturing. The input of other departments are only concerned with direct manufacturing needs, not the individual needs of each department for their own gain.

Question 39

What is Silo Working?

Answer 39

Restricting information to the department which produced it

Question 40

What is ERP?

Answer 40

Enterprise Resource Planning - a further leap to MRP 2 whereby the system facilitates the resource planning of multiple functions/ departments. It can either sync department resource planning or simply be left to focus on one department resource planning and other functions of data entry and analysis. By linking information flow across multiple department the system can focus on the resource need of the company as a whole and not in silos

It can automate processes such as generating POs

The most popular ERP systems are ERP, SAP, Oracle and Microsoft Dynamics NAV

Question 41

What is JIT?

Answer 41

Just in Time - ensuring the supply chain and its partners ensure the correct stock is in the right place of production at the right time, but just in enough. For example, stock is delivered just in time so there is no need for production organization to hold stock on site. This save money on stock cost and holding costs.

JIT can only work effectively is machine changeovers are dramatically reduce. This is where one machine can used for production of multiple items with little retooling.

JIT can only work effectively is the production process has been levelled. Schedule levelling or Heijuka is the practice of smoothing out production that results in producing a consistent level of output per day, despite demand fluctuating

Levelling demand is easier if you have reliable data to forecast demand. Failure to level production lead to:

Downstream - failure to deliver leads to reputational and financial cost
Upstream - to avoid a repeat of mistake more safety stock will be required

Question 42

What is Lean?

Answer 42

Manufacturing systems based on minimisation of waste

This forms part of Total Quality Management - improve outputs through continuous improvement of internal practices/ processes

Question 43

What are the 5 zeros of JIT?

Answer 43

This refers to the objectives of JIT:

Zero defects - aims to have all product meet or exceed customer quality requirements (deming)

Zero set up times - zero or near zero time spent setting up production lines and equipment i.e. retooling. Techniques used to support set up times include single minute exchange of dies (SMED) and the teachings of Shigeo Shingo - this is where machinery retooling such take less than 10 mins and can be helped by making as many set up changes as possible before turning machine off, thus reducing impact to production out put.

Zero inventories - JIT aims to reduce batch sizes to a quantity of one (single piece flow). Although a batch size of one is unrealistic that is set as the mantra for it.

Zero handling - process mapping to highlight any duplicated operations. Processes are then redesigned to reduce/ eliminate it

Zero lead time - this is the ultimate goal of JIT

Question 44

What is Kanban?

Answer 44

Signal to move to the next process. Forms part of JIT. It translate signboard or billboard in Japanese. Its anything which enables a trigger to move to next process or inventory management needs to be literally visible

the most common example of Kanban is the 2 bin system, whereby when one is emptied it signal restock is needed. 3 is also popular whereby 1st is sat in production, 2nd is in stores, 3rd is at supplier location. It creates a pull system

When first implemented Kanban used color coded cards.

Question 45

What are the 6 rules of implementing Kanban?

Answer 45

Each process issues requests to its suppliers as it consumes the supplies

Each process produces according to incoming request downstream

No items are made or transported without request

The request associated with a item is always attached to it

Processes must not send out defective items

limit the number of pending requests make the process more sensitive and reveals inefficiencies

Question 46

What are disadvantages of JIT?

Answer 46

Suppliers inability to move quickly to changes in demand

such low levels of stock means everyone in the supply chain is vulnerable to to supply failures. Think of recent supply chain shortages on global scale, natural disaster etc

No use to type C stock where holding cost of stock are too low to bother

lose out on bulk buying savings

Not efficient for product with short life cycles due to need to constantly change/ retool machines

Small batch production

Culture and goals need to be shared by all functions

Geographical closeness of supplier to customer. Further the distance the greater the opportunity of disruption

Question 47

What two things are essential for JIT to work?

Answer 47

Zero defects, due to such low stock levels deliveries cannot afford to be defective as no safety stock exists to keep production going

Delivery of items to all various stage s of production process must be 100% OTIF KPI

Question 48

Some suppliers implement JIT with it supplier by a fully fledge Partnership relationship whereby they implement a supplier rep into the customer procurement team to process engineers, provide input to design, production planning and analysis. This is referred to do as in-plant. CIPS suggest this often happen where the supplier contract is evergreen - renewed automatically from year to year - no specified end date

Question 49

How does CIPS describe Waste?

Answer 49

anything that does not add value to a product

Question 50

What are the 7 wastes?

Answer 50

Defects
Inventory 
Movement 
Waiting 
Over production
Over processing 
Transportation

Question 51

What is 6 Sigma?

Answer 51

linked to lean thinking, it is a powerful antidote to the 7 wastes.

Its a statistical technique for measuring variation in production process and aim to eliminate them.

The 5 principles of Lean are:

Specify value- specified by the ultimate customer
Identify value stream - set of specific actions mapped/ required to bring a product or service to the customer.
Flow
Pull
Perfection

Value stream involves 3 critical management tasks:

Problem solving
Information
Physical transformation

Question 52

What 7 Value Stream Mapping tool exist?

Answer 52

Process activity mapping - change sequence of, simply, or eliminate

Supply chain response matrix - reduce Leadtime and inventory levels

Production variety funnel - target processing of products with varying activity patterns

Quality filter mapping - locate the area of defect, scrap or other inefficiencies

Demand amplification mapping - identify time buckets (periods of time) fluctuation in demand cause by exceptions or promotion periods

Decision point analysis - define the point between pull demand cause by live demand or push demand created by forecasts

Physical structure - overview from an industry perspective leading to review and redesign