Chapter 6 Flashcards by Harvie Morcilla

Proactive approach to controlling inventory levels and aligning them with the demands of your supply chain

Strategic inventory management

How well did you know this?

Not at all

Perfectly

A collection of stored goods where the primary rationale is rooted in the strategic interaction among involved parties within a supply chain

Strategic inventory

How well did you know this?

Not at all

Perfectly

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

How well did you know this?

Not at all

Perfectly

It includes all the materials and goods that are purchased, partially completed materials and component parts, and the finished goods produced

Inventory

How well did you know this?

Not at all

Perfectly

The two primary functions of inventory are

-To buffer uncertainty in the marketplace
-To decouple (break the dependencies between stages in the supply chain)

How well did you know this?

Not at all

Perfectly

It can be used to cushion uncertainties due to fluctuation in supply, demand, and/or delivery lead time.

Safety stock or buffer stock

How well did you know this?

Not at all

Perfectly

ToF. Planning the amount of inventory usually results to work center operation interruption, due to processing data and ensuring supplier-customer relationship.

False

How well did you know this?

Not at all

Perfectly

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

How well did you know this?

Not at all

Perfectly

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

How well did you know this?

Not at all

Perfectly

These are unprocessed purchased inputs or materials for manufacturing the finished goods

Raw materials

How well did you know this?

Not at all

Perfectly

It becomes a part of the finished goods after the manufacturing process is completed

Raw materials

How well did you know this?

Not at all

Perfectly

It describes materials that are partially processed but not yet ready for sales

Work in process

How well did you know this?

Not at all

Perfectly

These are completed products ready for shipment

Finished goods

How well did you know this?

Not at all

Perfectly

Are often kept to buffer against unexpected demand changes and in anticipation of production process downtime

Finished goods inventories

How well did you know this?

Not at all

Perfectly

These are materials and supplies used when producing the products but are not parts of the products

Maintenance, Repair, and Operating (MOR) supplies

How well did you know this?

Not at all

Perfectly

The two main reasons for storing MRO supplies are:

to gain purchase economies
to avoid materials shortage that may shut down production

How well did you know this?

Not at all

Perfectly

It is the internal demand for parts based on the demand of the final product in which the parts are used

Dependent demand

How well did you know this?

Not at all

Perfectly

What are the examples of dependent demand items

subassemblies
components
raw materials

How well did you know this?

Not at all

Perfectly

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

How well did you know this?

Not at all

Perfectly

It can be calculated once the demand of the final product is known

Dependent demand

How well did you know this?

Not at all

Perfectly

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

How well did you know this?

Not at all

Perfectly

ToF. The customer demand for all-terrain vehicles is an independent demand

True

How well did you know this?

Not at all

Perfectly

ToF. Batteries, headlights, seals and gaskets originally used in assembling all-terrain vehicles are also an independent demand

False

How well did you know this?

Not at all

Perfectly

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

How well did you know this?

Not at all

Perfectly

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

1. Demand forecasting 2. Safety stock calculation 3. Supplier relationships 4. Order quantities 5. Inventory turnover ratio 6. Technology integration 7. Continuous review 8. 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

1. A system to keep track of inventory 2. A reliable forecast of demand 3. Knowledge of lead times and lead time variability 4. Reasonable estimates of holding cost, ordering cost, shortage cost 5. 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

1. The demand is known in constant 2. Order lead time is known and constant 3. Replenishment is instantaneous 4. Price is constant 5. Holding cost is known and constant 6. Order cost is known and constant 7. Stockouts are not allowed

TAIC

Total annual inventory cost

APC

Annual purchase cost

AHC

Annual holding cost

AOC

Annual order cost

Annual requirement or demand

Purchase cost per unit

Cost of placing one order

Holding rate

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

Chapter 6 Flashcards

(99 cards)