EXAM 3 Flashcards
6 Types of Inventory
- Cycle Stock (Inventory) 2. Safety Stock (Inventory) 3. Anticipation Inventory 4. Hedge Inventory 5. Transportation (or Pipeline) Inventory 6. Smoothing (or Buffer) Inventory
Components or products that are received in bulk by a downstream partner, gradually used up, and then replenished again in bulk by an upstream partner.
CYCLE STOCK or CYCLE INVENTORY
§Extra inventory that a company holds to protect itself against uncertainties in either demand or replenishment time.
SAFETY STOCK or SAFETY INVENTORY
Inventory that is held in anticipation of customer demand, allowing instant availability of items when customers want them. For example: creating finished goods in advance of a major sport event.
§Anticipation Inventory –
A form of inventory buildup to buffer against some event that is speculated to happen. For example: in advance of a hurricane.
§Hedge Inventory –
Inventory that is moving from one link of the supply chain to another. For example: raw materials that have been ordered but have not yet arrived.
§Transportation (Pipeline) Inventory –
Inventory that is used to smooth out differences between and fluctuations of upstream production rates and downstream demand rates.
§Smoothing (Buffer) Inventory –
4 Forces to Increase or Hold Inventory
- Supply Uncertainty
- Purchase Discounts
- Production Uncertainty
- Demand Uncertainty
The risk of interruptions in the flow of components/materials from upstream suppliers; unreliable supply management.
•Supply Uncertainty:
Purchasing extra inventory to receive a price discount or transportation discount. For example: 10% discount if you buy a truckload.
•Purchase Discounts–
The risk of interruptions in the flow of production due to unreliable or highly variable process outcomes; unreliable productivity & quality.
•Production Uncertainty:
The risk of significant and unpredictable fluctuations in downstream demand; unreliable forecasting.
•Demand Uncertainty:
4 Forces to Decrease Inventory
- Tied Up Cash
- Additional Related Purchases
- Additional Non-Productive Activity
- Opportunity for Mistakes
There is an “opportunity cost” when we choose to have money in inventory instead of productive activities that generate Return on Investment
•Tied Up Cash:
The more we spend on inventory, the more we MUST spend on storage shelving, racks, floor space, building space, warehouses, material handling, inventory management, insurance, taxes, heating, cooling, workers, management
•Additional Related Purchases:
More inventory means more movement of materials, repackaging of materials, reconfiguration of storage locations
•Additional Non-Productive Activity:
More inventory sitting for longer periods of time present more opportunities for damage, errors, rework, theft, obsolescence
•Opportunity for Mistakes:
Inventory items whose demand levels are beyond a company’s complete control.
§Example: Finished Goods
§Independent demand inventory –
Inventory items whose demand levels are tied directly to a company’s planned production of another item.
Example: Materials and Sub-Assemblies needed to create Finished Goods
§Dependent demand inventory –
§An inventory system that is used to manage independent demand inventory (Finished Goods).
Periodic Review Systems
(MRL) STANDS FOR
minimum restocking level
§An inventory system used to manage independent demand inventory where the inventory level for an item is constantly monitored and when a predetermined reorder point is reached, an order is released.
CONTINUOUS REVIEW SYSTEM
H
Holding Cost Per Year Per Unit
S
Ordering/Setup Cost Per Order
D
Demand Rate per Year
•When Demand ___, Economic Order Quantity Increases
INCREASES
•When Demand INCREASES, Economic Order Quantity___
Increases
•When Holding Costs ___, Economic Order Quantity Decreases
INCREASE
•When Holding Costs INCREASE, Economic Order Quantity ___
Decreases
•When Holding Costs ___, Economic Order Quantity Increases
DECREASE
•When Holding Costs DECREASE, Economic Order Quantity ___
Increases
•When Ordering or Setup Costs ___, Economic Order Quantity Increases
INCREASE
•When Ordering or Setup Costs INCREASE, Economic Order Quantity ___
Increases
•When Ordering or Setup Costs ___, Economic Order Quantity Decreases
DECREASE
•When Ordering or Setup Costs DECREASE, Economic Order Quantity ___
Decreases
ROP STANDS FOR
Reorder Point,
CYCLE STOCK Reorder Point, ROP
CYCLE STOCK Total Annual Inventory Cost FORMULA
Economic Order Quantity, EOQ =
(EOQ) STANDS FOR
economic order quantity
EOQ occurs when Holding Cost =
Ordering Cost
___ occurs when Holding Cost = Ordering Cost
EOQ
EOQ occurs when ___ = Ordering Cost
Holding Cost
TBO STANDS FOR
Time Between Orders
Time Between Orders (TBO) =
FORMULA TO CALCULATE Z
SERVICE LEVEL FORMULA
§The decision of how much safety stock to hold depends on five factors:
§The variability of demand
§The average length of lead time
§The average demand
§The desired service level
§The variability of lead time
SAFETY STOCK FORMULA
SAFETY STOCK REORDER POINT, ROP FORMULA
SAFETY STOCK Total Annual Inventory Cost FORMULA
SAFETY STOCK Average Inventory Level FORMULA
z =
Number of Standard deviations corresponding to a service level
a method of producing, transporting, and storing inventory that is based upon anticipating (forecasting) supply and demand and optimizing production capabilities.
§A Push System
An extreme change in the supply position upstream in a supply chain generated by a small change in demand downstream in the supply chain. This creates excessive inventory throughout the supply chain.
§Bullwhip Effect
Deciding where in the supply chain to hold inventory.
§Inventory Positioning
Holding safety stock in a single location instead of multiple locations.
§Geographic Inventory Pooling –
Holding partially assembled components that can be configured in various ways.
§Postponement –
Shipment made with no stops
§Direct truck –
Smaller shipment combined with other loads
§Less than truckload (LTL) –
§Two railroad carrier types:
§Linehaul freight carriers
§Shortline carriers
2 types of air cargo carriers
§Combination carriers (people and goods)
§Air cargo carriers
2 types of ship Mass movement of bulk commodities
§Low-valued (domestic shipment)
§High-valued (international shipment)
•Truckload carriers > ___ lbs
15,000
•Less-than-truckload (LTL) – ___lbs
150 to 15,000
2 types of trucking ownership
- for hire
- private fleet
•Small package carriers up to ___ lbs
•Small package carriers up to 150 lbs
§Three primary types of pipelines
§Gathering lines
§Trunk lines
§Refined product pipelines
the blend of liquids that occurs at the interface of two different liquids
§Transmix –
transportation service provider that does not require long-term agreements or contracts
•Common Carriers –
transportation service providers negotiated for long-term agreements or contracts
•Contract Carriers –
a service firm that negotiates and coordinates all logistics services
•3PL (Third Party Logistics) –
smaller pipelines to bring crude into a plan
§Gathering lines
long distance pipelines to final customer or distribution points
§Trunk lines
•Buyer is responsible for all costs until item is received
§Free-on-board or Freight-on-board (FOB) Origin:
(FOB)
Free On Board
•Seller is responsible for all costs until item reaches its destination
§FOB Destination
§originates the shipment
§provides all the information the carrier needs to deliver the item
§stipulates the contract terms, including carrier’s liability for loss and damage
§acts as a receipt for the goods the shipper tenders to the carrier
§in some cases, shows certificate of title to the goods
§Bill of Lading
§Shipment Description
§Origin and Destination
§FOB
§Total Weight
§Total Charges
§Freight Bill: Carrier’s invoice for carrier charges includes
§Documenting claims of Loss, Damage & Delay
§Documents costs and reimbursement of these claims
§Freight Claims For
A form of warehousing that pulls together shipments from a number of sources in the same geographic area and combines them into larger and more economical loads
§Consolidation warehousing –
A form of warehousing in which large incoming shipments are received and then broken down into smaller outgoing shipments to demand points in a geographic area
§Cross-docking –
Incoming sources are from a single source or manufacturer.
§Break-bulk warehousing –
A form of warehousing in which strategically placed hubs are used as sorting or transfer facilities
§Hub-and-spoke system –
A form of warehousing that combines classic warehouse operations with light manufacturing and packaging duties to allow firms to put off final assembly or packaging of goods until the last possible moment
§Postponement warehousing –
A form of warehousing in which a wide array of goods is held close to the source of demand in order to assure short customer lead times
§Assortment warehouses –
A form of warehousing that attempts to position seasonal goods close to the marketplace
§Spot stock warehouses –
involves consolidating safety stock for stores into one centralized location to provide same-day service to any store as needed
§Inventory Pooling
A system that includes the equipment and procedures needed to move goods within a facility, between a facility and a transportation mode, and between different transportation modes
§Material handling system –
The way goods and materials are packed in order to facilitate physical, informational, and monetary flows through the supply chain
§Packaging –
A complete supply chain dedicated to the reverse flow of products and materials for the purpose of returns, repair, remanufacture, and/or recycling.
§Reverse logistics system –
A logistics decision modeling technique that attempts to identify the “best” location for a single warehouse, store, or plant given multiple demand points that differ in location and importance.
§Weighted center of gravity method –
