Chapter 6 Flashcards
Proactive approach to controlling inventory levels and aligning them with the demands of your supply chain
Strategic inventory management
A collection of stored goods where the primary rationale is rooted in the strategic interaction among involved parties within a supply chain
Strategic inventory
A crucial aspect of supply chain strategy, involving the careful planning, control and optimization of inventory levels to support the overall strategic goals of an organization
Strategic inventory management
It includes all the materials and goods that are purchased, partially completed materials and component parts, and the finished goods produced
Inventory
The two primary functions of inventory are
-To buffer uncertainty in the marketplace
-To decouple (break the dependencies between stages in the supply chain)
It can be used to cushion uncertainties due to fluctuation in supply, demand, and/or delivery lead time.
Safety stock or buffer stock
ToF. Planning the amount of inventory usually results to work center operation interruption, due to processing data and ensuring supplier-customer relationship.
False
ToF. Keeping the correct amount of inventory at each work center allows a faster work center to operate smoothly when it is constrained by slower upstream work centers
True
This concept is used by organizations in the developing countries to specialize in cheap labor and abundant raw materials whereas the manufacturing firms provide the technology and capital to produce goods
Geographical specialization
These are unprocessed purchased inputs or materials for manufacturing the finished goods
Raw materials
It becomes a part of the finished goods after the manufacturing process is completed
Raw materials
It describes materials that are partially processed but not yet ready for sales
Work in process
These are completed products ready for shipment
Finished goods
Are often kept to buffer against unexpected demand changes and in anticipation of production process downtime
Finished goods inventories
These are materials and supplies used when producing the products but are not parts of the products
Maintenance, Repair, and Operating (MOR) supplies
The two main reasons for storing MRO supplies are:
- to gain purchase economies
- to avoid materials shortage that may shut down production
It is the internal demand for parts based on the demand of the final product in which the parts are used
Dependent demand
What are the examples of dependent demand items
- subassemblies
- components
- raw materials
ToF. Independent demand may have a pattern of abrupt and dramatic change because of its dependency on the demand of the final product, particularly if the product is produced in large lot sizes
False
It can be calculated once the demand of the final product is known
Dependent demand
It is the demand for a firms and products that has a demand pattern affected by trends, seasonal patterns, and general market conditions
Independent demand
ToF. The customer demand for all-terrain vehicles is an independent demand
True
ToF. Batteries, headlights, seals and gaskets originally used in assembling all-terrain vehicles are also an independent demand
False
It cannot be derived using the material requirements planning logic from the demand for other items and, thus, must be forecasted based on the market conditions
Independent demand items
ToF. Independent demand and dependent demand is both uncertain
False
Types of strategic inventories
Safety stock
Anticipation inventory
Hedge inventory
Decoupling inventory
Cycle stock
It mitigates the effect of unexpected demand or supply shortage, prevents the stockouts and maintains customer satisfaction
Safety stock
It provides a consistent service amidst supply and demand uncertainties
Safety stock
This inventory caters to predictable often seasonal demand spikes to ensure the production process remains uninterrupted and customer needs are met during peak seasons
Anticipation inventory
It protects against price fluctuations and supply disruptions
Hedge inventory
It aids in price stabilization and ensure supply continuity against market uncertainties
Hedge inventory
It allows production stages to operate independently, reducing lead times and downtimes
Decoupling inventory
It enhances operational efficiency and timely product delivery
Decoupling inventory
It supports daily operations ensuring a steady products supply
Cycle stock
It facilitates in uninterrupted operations and consistent service delivery
Cycle stock
The importance of strategic inventory
Risk mitigation
Customer satisfaction
Cost efficiency
Operational efficiency
Market responsiveness
Strategic inventory guards against unexpected supply chain disruptions to ensure business continuity and prevent revenue losses
Risk mitigation
A well maintained inventory ensure product availability to enhance customer experience and build loyalty
Customer satisfaction
Strategic inventory helps in controlling cost to enable bulk purchasing and volume discounts
Cost efficiency
Decoupling inventory boost production efficiency and reduces lead times it ensures that production schedules are met and product and customer demands are addressed quickly
Operational efficiency
A strategy inventory ensures swift adaptation to market changes and trends it also provides a competitive edge and enhances market agility
Market responsiveness
Steps in strategic inventory process
- Demand forecasting
- Safety stock calculation
- Supplier relationships
- Order quantities
- Inventory turnover ratio
- Technology integration
- Continuous review
- Disaster preparedness
It is essential to predict the quantity of products required to meet customer demand
Forecasting
Forecasting is essential to predict the quantity of products required to meet customer demand. Accurate forecast aid in making informed decisions on ordering and stocking inventory
Demand forecasting
This step involves determining the optimal level of safety stock to handle unexpected demand spikes or supply delays, it serves as a buffer to mitigate stuck out and maintain customer service levels
Safety stock calculation
Building and maintaining relationship with suppliers ensures a steady, reliable supply of inventory. Good relationships can lead to favorable terms, quality assurance, and timely deliveries
Supplier relationships
Determine the optimal order quantities to minimize cost associated with ordering, holding, and stockouts. This involves a balance approach to avoid overstocking or understocking.
Order quantities
Analyze the frequency at which the inventory is sold and replaced a higher turnover ratio indicates efficient inventory management and sales processes
Inventory turnover ratio
Incorporating technology solutions for real time tracking data analysis and automation. This enhances the efficiency accuracy and speed of the inventory management
Technology integration
Regularly review inventory levels, demand forecast, and supplier performance. Adapt the strategy as needed to optimize inventory management
Continuous review
Prepare for unforeseen challenges like natural disasters, supply failures, or abrupt market changes. This involves in contingency planning and risk management strategies
Disaster preparedness
It can be broadly defined as “the activity of checking a shop’s stock”
Inventory control or stock control
Refers to the systematic location storage and recording of goods in such a way that desire degree of service may be rendered to operating shops at minimum ultimate cost
Inventory control
It is also concerned with the systematic receipt, storage disbursement, and recording of materials in such a way that provides the required degree of service in the firm at minimum possible cost
Inventory control
Is a discipline primarily about specifying the shape and placement of stock goods
Inventory management
It is required at different locations within a facility or within many location of the supply network to precede regular and planned course of production and stock materials
Inventory management
Involves the planning control and optimization of the storage movement in the availability of goods within an organization
Inventory management
It place a critical role in balancing the need to beat customer demand with the necessity of minimizing holding cost
Inventory management
ETD means
Estimated time of departure
ETA means
Estimated time of arrival
What are the two main concerns of inventory management
- Level of customer service
- Cost of ordering and carrying inventory
ToF. Inventory management is important to successful operation for most organizations because of the amount of money invested in inventory represents in the impact that inventories have on a daily operations of an organization
True
Requirements of effective inventory management
- A system to keep track of inventory
- A reliable forecast of demand
- Knowledge of lead times and lead time variability
- Reasonable estimates of holding cost, ordering cost, shortage cost
- A classification system
It includes the cost to order and hold inventory as well as to administer the related paperwork
Inventory cost
Discuss is examined by management as part of its evaluation of how much inventory to keep on hand
Inventory cost
Classification of inventory cost
Direct cost
Indirect cost
Fixed cost
Variable cost
Order or set up cost
Holding or carrying cost
Setup cost
Stock out cost
Those that are directly traceable to the unit produced such as the amount of materials and labor used to produce a unit of the finished goods
Direct cost
Those that cannot be traced directly to the unit produced and they are synonymous with manufacturing overhead
Indirect cost
Are independent of the output quantity
Fixed cost
Changes as a function of the output level
Variable cost
Are the direct variable cost associated with placing an order with the supplier
Order or setup cost
Are the cost incurred for holding inventory in storage
Holding or carrying cost
Are used in place for order cost to describe the cost associated with setting up machines and equipment to produce batch of product
Set up cost
Cost occur whenever insufficient stock exist to fulfill replenishment order
Stock out cost
Serves many important functions for manufacturing and service firms however excessive amount of it is detrimental to a firm’s financial health and competitive advantage
Inventory
It requires storage spaces and then cares other carrying cost
Inventory
It can also deteriorate quickly while it is in storage in addition it can become obsolete very quickly as new materials and technologies are
Inventory
A widely used measure to determine how efficiently a firm is using its inventory to generate revenue
Inventory turnover ratio or inventory turnovers
ToF. Higher turnovers are generally viewed as a negative trend because it indicates that the company loses more revenue per dollar in inventory investment
False
ToF. Higher turnovers allow the company to increase cash flow and reduce warehousing and carrying cost
Inventory turnover ratio
Model that is classic independent demand inventory system that provides many useful ordering decisions
Economic order quantity model
It is the sum of the annual order cost and the annual inventory holding cost
Total annual inventory cost
ToF. When the order size of an item is small orders have to be placed on a frequent basis causing low annual order cost
False
What are the assumptions of economic order quantity model
- The demand is known in constant
- Order lead time is known and constant
- Replenishment is instantaneous
- Price is constant
- Holding cost is known and constant
- Order cost is known and constant
- Stockouts are not allowed
TAIC
Total annual inventory cost
APC
Annual purchase cost
AHC
Annual holding cost
AOC
Annual order cost
R
Annual requirement or demand
C
Purchase cost per unit
S
Cost of placing one order
k
Holding rate
Q
Order quantity
EOQ formula
EOQ=sqrt((2RS)/(kC))
Formula for annual purchase cost
R × C
Formula for annual holding cost
Q×kC/2
Formula for annual order cost
R×S/Q
Formula for total annual inventory cost
Annual purchase cost + annual holding cost + annual order cost
Formula for reorder point
Daily demand × Lead time
