L4M7- Chapter 2- Understand the key elements of effective inventory control Flashcards
What is the difference between opening stock and closing stock?
Opening stock is the inventory held at the start of an accounting period whereas the closing stock is what is at the end of the period (and becomes the opening stock of the next period)
What is cycle counting?
A cyclical process of counting inventory to check system to actual balances
What is the difference between surplus stock and dead stock?
Surplus stock is excess stock that is used by an organisation. Dead stock is stuff that will never be used by an organisation
What is the difference between obsolete and redundant stock?
Obsolete: No longer used or heading to a position where there will be no demand at all- Food that has gone out of date for example
Redundant: Superfluous, surplus, unnecessary- example could be getting a new smart phone meaning your old one is no longer useable but still has value
What could cause stock to become obsolete?
Technological change
Cultural change
Legislation
What could cause stock to become redundant?
Poor forecasting
Poor demand
Weak customer relationships (leading to cancellations)
Overstocking
Change in internal policy (e.g. more environmentally friendly)
Too much variety
How can you avoid redundant or obsolete stock?
Good market knowledge
Accurate forecasting
Clear communication
JIT supply chains
Reduced batch production
Good sales and planning teams
Reduced variety
What is the difference between surplus, obsolescent, obsolete and redundant stock?
Surplus= Excess stock over what is required
Obsolescent = in the process of becoming outdated or obsolete
Obsolete= No longer used, outdated
Redundant= surplus or unnecessary, but can be used and there is potential demand, just not in the current form
What is the difference between direct and indirect supplies?
Direct are integrated into the finished product
Indirect are not incorporated into the finished product but keep the business functioning
What is the ABC product classification?
Using the pareto principle to calculate high value/frequency of use of a product to find the percentage of parts that:
A- make up 20% of parts that make 80% of costs
B- the next 30% of products that make up 20% of costs
C- the final 50% of products that make 5% of costs
What is liquidity?
Ultimately, does the organisation have cash resources to pay its liabilities when they are due? (liabilities are short term debts)
What is stock profile?
The description of stock items in terms of value, rate of turnover, storage characteristics etc
What are the 3 summary groups of costs for acquisition? (hint they all begin with P)
Preliminary costs- Actions before raising a PO
Placement costs- Raising the PO and ensuring the supplier receives it
Post placement costs- Costs after the PO has been raised to get the goods to the requester and make payment
Naturally you also have the actual cost of the item you are acquiring.
What is the purpose of a PIMS system? (purchase invoice matching system)
Automatically checking a PO against the delivery note and the supplier invoice
Often used for approval of low value invoices
What are holding/carrying costs?
What are the 2 types of holding cost?
Costs for storage and handling of physical stock
1. Costs related to the value of goods (product cost, insurance, theft)
2. Costs related to the physical characteristics (storage space, power, equipment)
What is a stockout?
What costs are incurred if there are stockouts?
When an inventory item is not available when required.
Can cause costs through:
- Loss of production output as need to focus on the stockout first
- costs of machine downtime
- costs of dealing with the stockout e.g. more expensive from another supplier, urgent delivery costs, switching production or using alternative parts
What is consignment stock?
Used particularly for MRO.
A technique of acquiring stock from a supplier and only paying when used or sold
How would an organisation determine what levels of stock should be held as buffer or safety stock?
This is stock in excess of what is expected to be required and provides a safety margin. The optimal amount requires statistical analysis of orders and lead times.
1) What are the average orders and normal lead times
2) Cost benefit analysis- what is the probability of a stockout occurring, what are the cost implications if it does happen, what are the costs of having a variety of safety stock levels?
3) Once the expected demand inventory falls below the cost line set from a stockout is the reorder point
Effectively a risk analysis- what is the risk, likelihood and severity. What is the cost in mitigation.
What is vendor managed inventory (VMI)?
Inventory owned by the buying organisation that is monitored and managed by the supplier to ensure adequate supply in line with usage and future demand (think about a supplier going to a shop and topping up the stock themselves so the retailer can sell the stock)
What is the difference between subjective and objective forecasting? Give some examples of each
Subjective= qualitative- expert opinion, market research, surveys, structured questioning like delphi method.
Objective= quantitative- hard data, often using what has happened in the past to direct the future forecast. Averages, trends, time series data, graphs
What is the delphi method and when would it be used?
Subjective forecasting tool.
Involved a structured technique using a panel of experts and rounds of questioning. Responses are shared after each round and the experts encouraged to reconsider their own responses (aim to get a consensus view)
What is the difference between independent and dependent demand?
Dependent demand relies directly on another product or the rate of production for its requirement e.g. the number of tyres required is directly dependent on the number of cars ordered
Independent demand is not related to anything e.g. demand for the car itself. This is influenced by market conditions or external factors.
What are the 3 main ways of reordering for independent demand?
When should each method be used?
What are the methods?
1) Fixed quantity- predetermined amount every time
2) Economic order quantity- formula that allows you to calculate the ideal quantity of inventory to order for a given product. Includes demand, ordering costs and holding costs
3) Time or periodic review- uses the ABC classification to review when to replenish stock based on time rather than quantity signals (e.g. A stock is checked daily, B stock checked weekly, C stock checked monthly)
When should they be used?
1) FQ- when stock is used at an inconsistent rate and you require a reliable trigger and consistent lead times
2) EOQ- highly technical and rely on assumptions, so not often used
3) Periodic- good when suppliers have regular delivery intervals
What reorder methods would be used for dependent demand?
MRP, MRPII, ERP or JIT models are used for dependent demand (ie products demand are directly related to production)
What is an MRP system?
MRP is materials requirement planning. Computerised systems for inventory flows and management. It looks at the known demand, the forecast demand, the BOM and the inventory but is focussed on materials, modernisation has developed the systems.
Has been modernised by MRPII= Materials RESOURCE planning
Then modernised by ERP= enterprise resource planning
What is the difference between MRP and MRPII
Materials Requirement Planning
Materials Resource Planning
MRP only looks at the materials that go into the production process
MRPII coordinates data from wider sources including engineering, procurement, marketing, sales, production, inventory, HR and finance.
How is ERP different from MRP and MRPII?
ERP is the latest version of MRP/MRPII. It is a system for business wide coordination planning and execution. It will look at resources required across the whole organisation including teams like HR, IT, procurement, SC, operations, finance etc.
What is JIT?
Just In Time
It is an inventory control system for producing the right components, in the right quantities, at the time in which they are required.
What are the five zeros of eliminating waste? (and part of JIT model)- Acronym DILSH
The objective of JIT is ‘muda’ aka the elimination of waste
Zero defects
Zero set up times (or reduced production lines)
Zero inventories
Zero handling
Zero lead times
What is Total Quality Management (TQM)?
Organisation wide efforts to improve processes, products and services across all departments
What are some advantages and disadvantages of JIT?
Adv:
- Low inventory costs
- reduced scrap and waste costs
- Reduced rework
- Reduced back office costs
- reduced financial requirements
Disadv:
- Rigid supply chain
- no safety stock
- No savings from bulk buying
What does the term ‘lean’ mean in manufacturing?
A management process of reducing waste and thereby creating more value in activities.
What types of waste exist? (specifically when thinking about Lean principles)
Transportation- Movement of machinery unnecessarily
Inventory- Holding too much stock
Movement- moving people or things that do not contribute to production
Waiting- idle time
Over production- too much
Over processing- too many processes
Defects- faults
Skills- Under utilised talent/knowledge
What is six sigma?
A quality management approach that focusses on improving processes, products or services through the identification and elimination of defects
What are the 5 principles of Lean?
- Specify Value- does it meet customer need at the right time
- Identify the value stream- a set of activities or actions coordinated to deliver the final output
- Flow- transitions from concept to launch, sale to delivery and raw materials to customers fall dramatically
- Pull- Customers pull product from suppliers as needed rather than the supplier pushing product into inventory
- Perfection
What is a value stream?
A collection of value bearing activities or actions that are coordinated to deliver the final output
What are some of the factors to consider with inventory optimisation?
Inventory optimisation is the management of stock levels to ensure that sufficient inventory is available to meet demand whilst minimising the costs and risk of excess stock.
Costs/factors within inventory optimisation:
- Storage costs
- Insurance costs
- Risk of obsolescence or redundancy
- Opportunity cost (what did you miss by having cost tied up in capital)
- Spoilage cost
- Wasted resources
What is an evergreen contract?
One that is renewed automatically year to year until cancelled by either party
What is the bullwhip effect?
The distorted demand that occurs down a supply chain. Also called the forrester effect. Think about how a small move of the wrist can cause large movement at the other end of the whip
What is a master production schedule?
what products a manufacturer will produce, when and in what quantities. An MPS links sales demand with manufacturing capacity.
Forms a foundation of MRP systems.
An MRP system is an electronic system for combining what?
Known demand
Forecast demand
inventory
BOM
This will determine what inventory is required and when, and trigger orders/in house production as necessary.
What can MRPII systems do that MRP cannot?
- Builds in resource requirements across teams (e.g. engineering, procurement, finance, HR)
- It can run what if analysis (scenarios exploring whether something will happen or not)
- Removes silo working as all teams involved are in communication.
Both MRP and MRPII only look at the manufacturing element that these teams play in.
What is rate of stock turn?
The rate at which inventory stock is sold, used or replaced. It is calculated by dividing the cost of goods by average inventory for the same period.
IE sales/ average inventory
Appropriate stock turn may vary, in food it needs to be fast, in cars it may be much slower.
What is the value stream?
A collection of value bearing activities and actions to deliver the final output.
It includes problem solving, information management and physical transformation.
How is value stream identified?
Process activity mapping- helps identify unnecessary activities and simplification opportunities.
Supply chain response- Reducing lead time and inventory
Production variety funnel- inventory reduction and process changes
Quality filter mapping- Location of products, service defects, internal scrap and inefficiencies
Demand amplification- reduce fluctuations in demand by understanding the supply chain
Decision point analysis- when do you stop making things for demand and start making to forecast? Identifies push and pull activities
Physical structure- Overviewing the industry and seeing if redesign is required
What is net present value?
Gives a future value adjusted for today.
Effectively does cash inflow subtracted by cash outflow over a period of time.
A discount rate is applied because money now is worth more than money in the future (as money is devalued over time)
What is EOQ? How is it calculated?
EOQ is an accounting term. It is a formula that tries to order the optimal amount of inventory to order.
It assumes:
- Same quantity is ordered at each reorder point
- Customer demand is known
- Ordering and holding costs are certain
- Lead time is known
- Cost per unit is fixed
- No quality costs
It then uses demand, ordering cost and holding cost. It multiplies demand by ordering cost divide by the carrying/holding cost
What is the calculation for stock turn?
Sales/inventory
Measures the number of times a stock item has been sold or consumed then replaced in a given period
What are the 3 critical management tasks in the value stream?
Problem solving task
Information management task
Physical transformation
Which KPIs can be measured for inventory management?
OTIF
Lead times
Service level
Stock turn
Stockouts
Stock cover
Costs
What is inventory optimisation?
Managing stock levels to ensure there is availability when required but not so much to increase waste or handling costs.
Give examples of inventory costs other than just the cost of product?
Insurance
Storage
Risk of obsolescence
Opportunity cost
Spoilage cost
Wasted resources
What methods can be used for inventory optimisation?
Good forecasting methods
Reorder limits
Periodic stock reviews
ABC classification
MRP/MRPII/ERP systems
JIT
Kanban
Lean
Safety/buffer used effectively
Give the examples of mapping tools in the value stream? p.126
Process activity mapping
SC
Production variety- reviewing processing with varying activity
Quality- e.g. defect identification
Demand- where are issues in demand across SC
Decision point- when is there push and pull moments
Physical structure- are redesigns required
Give examples of objective forecasting techniques
Averages
Trends
different cycle periods (think seasonality and growth)
random errors
Two main methods of statistical measures are:
1) Moving average
2) Weighted average
Give examples of subjective forecasting techniques
Surveys- market or employee
Expert knowledge
Test marketing
What is an exponentially weighted moving average?
This is a calculation where older data has a lower weight than newer, because new data is likely to be recent and therefore a better predictor
What is inventory optimisation?
Stock levels to ensure sufficient inventory is available to meet demand but minimising the costs and risks associated with holding too much.
What techniques can be used for inventory optimisation?
Forecasting effectively
ABC classification of stock
JIT
MRP/ERP systems
Kanban
Lean
Periodic stock checks
When is opening stock measured?
It is at the start of an accounting period so could be a new financial year, a different reporting period or an ad hoc stock take
What is safety/buffer stock?
This is stock held for contingency or insurance against unexpected demand or disruption in the SC.
It reduces the risk of stockouts
How can you mitigate against negative impact of service levels?
Using lead times and cost as part of the price evaluation
Increased overall inventory
Safety/ buffer stock
Consignment stock
VMI
Robust SRM
How is the level of safety stock calculated?
Needs to be a balance of increased holding costs vs risk of stockouts
Involves:
Statistical analysis of orders and lead times data to understand normal range of deviation
Cost benefit analysis for each type of stock
Risk management
Give different ways that stock can be classified
1) Raw materials, WIP, Finished goods
2) Obsolete, redundant, surplus, dead, obsolescent
3) Indirect, direct
4) ABC classification
How are direct supplies different different to indirect, generally?
Direct are incorporated into the finished product
A higher overall value as greater quantity used
Less variety vs MRO
Quicker turnover (aka higher stock turn)
When understanding the costs of inventory, what could be included in the acquisition cost?
Cost of requisition
PO raising
Supplier selection and approval
Time
IT platform
ERP system costs
Printed stationary
Processing
Handling
Inspection
Invoice matching
Approval
site preparation
Can be bucketed into:
Preparation
placement
Post placement
What are the categories of cost associated with inventory?
Acquisition
Holding
Stockouts
Reducing costs whilst maintaining service (e.g. VMI, understanding lead time as a cost, safety stock)
How does an MRP system used MPS?
An MPS uses known demand and forecast demand to set out the scale and rate or production required to meet demand
What are the advantages of ERP over MRPII?
Customer service levels
Reduced inventory levels
Better accuracy
Improved cash flow
Factory efficiencies
Rework/scrap included
