Part I Terminology

Question 1

ABC classification

Answer 1

The classification of a group of items in decreasing order of annual dollar volume (price multiplied by projected volume) or other criteria. This array is then split into three classes, called A, B, and C. The A group usually represents 10 percent to 20 percent by number of items and 50 percent to 70 percent by projected dollar volume. The next grouping B, usually represents about 20 percent of the items and about 20 percent of the dollar volume. The C class contains 60 percent to 70 percent of the items and represents about 10 percent to 30 percent of the dollar volume. The ABC principle states that effort and money can be saved through applying losses controls to the low-dollar-volume class items than to the high-dollar-volume class items. The ABC principle is applicable to inventories, purchasing, and sales.

Question 2

advanced planning and scheduling (APS)

Answer 2

Techniques that deal with analysis and planning of logistics and manufacturing during short, intermediate, and long-term time periods. APS describes any computer program that uses advanced mathematical algorithms or logic to perform optimization or simulation on finite capacity scheduling, sourcing, capital planning, resource planning, forecasting, demand management, and others. These techniques simultaneously consider a range of constraints and business rules to provide real-time planning and scheduling, decision support, available-to-promise, and capable-to-promise capabilities. APS often generates and evaluates multiple scenarios. Management then selects one scenario to use as the “official plan.” The five main components of APS systems are (1) demand planning, (2) production planning, (3) production scheduling, (4) distribution planning, and (5) transportation planning.

Question 3

advance ship notice (ASN)

Answer 3

An electronic data interchange (EDI) notification of shipment of product.

Question 4

andon

Answer 4

A sign board with signal lights used to make workers and management aware of a quality, quantity, or process problem.

Question 5

anticipation inventories

Answer 5

Additional inventory above basic pipeline stock to cover projected trends of increasing sales, planned sales promotion programs, seasonal fluctuations, plant shutdowns, and vacations.

Question 6

assemble-to-order (ATO)

Answer 6

A production environment where a good or service can be assembled after receipt of a customer’s order. The key components (bulk, semi-finished, intermediate, subassembly, fabricated, purchased, packing, and so on) used in the assembly or finishing process are planned and usually stocked in anticipation of a customer order. Receipt of an order initiates assembly of the customized product. This strategy is useful where a large number of end products (based on the selection of options and accessories) can be assembled from common components.

Question 7

assembly line

Answer 7

An assembly process in which equipment and work centers are laid out to follow the sequence in which raw materials and parts are assembled.

Question 8

assignable cause

Answer 8

A source of variation in a process that can be isolated, especially when its significantly larger magnitude or different origin readily distinguishes it from random causes of variation.

Question 9

available inventory

Answer 9

The on-hand inventory balance minus allocations, reservations, backorders, and (usually) quantities held for quality problems. Often called beginning available balance.

Question 10

available-to-promise (ATP)

Answer 10

(1) In operations, the uncommitted portion of a company’s inventory and planned production maintained in the master schedule to support customer-order promising. The ATP quantity is the uncommitted inventory balance in the first period and is normally calculated for each period in which an MPS receipt is scheduled. In the first period, ATP includes on-hand inventory less customer orders that are due and overdue. Three methods of calculation are used: discrete ATP, cumulative ATP with look-ahead, and cumulative ATP without look-ahead. (2) In logistics, the quantity of a finished good that is or will be available to commit to a customer order based on the customer’s required ship date. To accommodate deliveries on future dates, ATP is usually time-phased to include anticipated purchases or production receipts.

Question 11

average inventory

Answer 11

One-half the average lot size plus the safety stock, when demand and lot sizes are expected to be relatively uniform over time. The average can be calculated as an average of several inventory observations taken over several historical time periods; for example, 12-month ending inventories may be averaged. When demand and lot sizes are not uniform the stock level versus time can be graphed to determine the average.

Question 12

back scheduling

Answer 12

A technique for calculating operation start dates and due dates. The schedule is computed starting with the due date for the order and working backward to determine the required start date and/or due dates for each operation.

Question 13

backflush

Answer 13

A method of inventory bookkeeping where the book (computer) inventory of components is automatically reduced by the computer after completion of activity on the component’s upper-level parent item based on what should have been used as specified on the bill of material and allocation records. This approach has the disadvantage of a built-in differential between the book record and what is physically in stock.

Question 14

backhauling

Answer 14

The process of a transportation vehicle returning from the original destination point to the point of origin. The 1980 Motor Carrier Act deregulated interstate commercial trucking and thereby allowed carriers to contract for the return trip. The backhaul can be with a full, partial, or empty load. An empty backhaul is called deadheading.

Question 15

backlog

Answer 15

All the customer orders received but not yet shipped. Sometimes refereed to as open orders or the order board.

Question 16

backorder

Answer 16

An unfilled customer order or commitment. A backorder is an immediate (or past due) demand against an item whose inventory is insufficient to satisfy the demand.

Question 17

balance sheet

Answer 17

A financial statement showing the resources owned, the debts owed, and the owner’s share of a company at a given point in time.

Question 18

bar code

Answer 18

A series of alternating bars and spaces printed or stamped on parts, containers, labels, or other media, representing encoded information that can be read by electronic readers. A bar code is used to facilitate timely and accurate input of data to a computer system.

Question 19

batch

Answer 19

(1) A quality scheduled to be produced or in production. (2) For discrete products, the batch is planned to be the standard batch quantity, but during production, the standard batch quantity may be broken into smaller lots. (3) In nondiscrete products, the batch is a quantity that is planned to be produced in a given time period based on a formula or recipe that often is developed to produce a given number of end items. (4) A type of manufacturing process used to produce items with similar designs; it also may cover a wide range of order volumes. Typically, items ordered are of a repeat nature, and production may be for a specific customer order or for stock replenishment.

Question 20

batch picking

Answer 20

A method of picking orders in which order requirements are aggregated by product across orders to reduce movement to and from product locations. The aggregated quantities of each product are then transported to a common area where the individual orders are constructed.

Question 21

bias

Answer 21

A consistent deviation from the mean in one direction (high or low). A normal property of a good forecast is that it is not biased.

Question 22

bill of lading (uniform)

Answer 22

A carrier’s contract and receipt for goods the carrier agrees to transport from one place to another and to deliver to a designated person. In case of loss, damage, or delay, the bill of lading is the basis for filing freight claims.

Question 23

bill of material (BOM)

Answer 23

(1) A listing of all the subassemblies, intermediates, parts, and raw materials that go into a parent assembly, showing the quantity of each required to make an assembly. It is used in conjunction with the master production schedule to determine the items for which purchase requisitions and production orders but be released. A variety of display formats exists for bills of material, including the single-level bill of material, indented bill of material, modular (planning) bill of material, transient bill of material, matrix bill of material, and costed bill of material. (2) A list of all the materials needed by a contract manufacturer to make one production run of a product’s piece parts/components for its customers. The bill of material may also be called the formula, recipe, or ingredients list in certain process industries.

Question 24

bonded warehouse

Answer 24

Buildings or parts of buildings designated by the U.S. Secretary of the Treasury for storing imported merchandise, operated under U.S. Customs supervision.

Question 25

bottleneck

Answer 25

A facility, function, department, or resource whose capacity is less than the demand placed upon it. For example, a bottleneck machine or work center exists where jobs are processed at a slower rate than they are demanded.

Question 26

break-bulk

Answer 26

(1) Dividing truckloads, railcars, or containers of homogeneous items into smaller, more appropriate quantities for use. (2) A distribution center that specializes in break-bulk activities. (3) Unitized cargo in bales, boxes, or crates that is placed directly in a ship's holds rather than in containers.

Question 27

break-even point

Answer 27

The level of production or the volume of sales at which operations are neither profitable nor unprofitable. The break-even point is the intersection of the total revenue and total cost curves.

Question 28

buffer

Answer 28

(1) A quantity of materials awaiting further processing. It can be refer to raw materials, semifinished stores or hold points, or a work backlog that is purposely maintained behind a work center. (2) In the theory of constraints, buffers can be time or material and support throughput and/or due date performance. Buffers can be maintained at the constraint, convergent points (with a constraint part), divergent points, and shipping points.

Question 29

buffer management

Answer 29

In the theory of constraints, a process in which all expediting in a shop is driven by what is scheduled to be in the buffers (constraint, shipping, and assembly buffers). By expediting this material into the buffers, the system helps avoid idleness at that constraint and missed customer due dates. In addition, the reason items are missing from the buffer are identified, and the frequency of occurrence is used to prioritize improvement activities.

Question 30

bullwhip effect

Answer 30

An extreme change in the supply position upstream in a supply chain generated by a small change in demand downstream in the supply chain. Inventory can quickly move from being backordered to being excess. This is caused by the serial nature of communicating orders up the chain with the inherent transportation delays of moving product down the chain. The bullwhip effect can be eliminated by synchronizing the supply chain.

Question 31

business plan

Answer 31

(1) A statement of long-range strategy and revenue, cost, and profit objectives usually accompanied by budgets, a projected balance sheet, and a cash flow (source and application of funds) statement. A business plan is usually stated in terms of dollars and grouped by product family. The business plan is then translated into synchronized tactical functional plans through the production planning process (or the sales and operations planning process). Although frequently stated in different terms (dollars versus units), these tactical plans should agree with each other and with the business plan. (2) A document consisting of the business details (organization, strategy, and financing tactics) prepared by an entrepreneur to plan for a new business.

Question 32

capable-to-promise (CTP)

Answer 32

The process of committing orders against available capacity as well as inventory. This process may involve multiple manufacturing or distribution sites. Used to determine when a new or unscheduled customer order can be delivered. Employs a finite-scheduling model of the manufacturing system to determine when an item can be delivered. Includes any constraints that might restrict the production, such as availability of resources, lead times for raw materials or purchased parts, and requirements for lower-level components or subassemblies. The resulting delivery date takes into consideration production capacity, the current manufacturing environment, and future order commitments. The objective is to reduce the time spent by production planners in expediting orders and adjusting plans because of inaccurate delivery-date promises.

Question 33

capacity available

Answer 33

The capability of a system or resource to produce a quantity of output in a particular time period.

Question 34

capacity management

Answer 34

The function of establishing, measuring, monitoring, and adjusting limits or levels of capacity in order to execute all manufacturing schedules (i.e., the production plan, master production schedule, material requirements plan, and dispatch list). Capacity management is executed at four levels: resource requirements planning, rough-cut capacity planning, capacity requirements planning, and input/output control.

Question 35

capacity planning

Answer 35

The process of determining the amount of capacity required to produce in the future. This process may be performed at an aggregate or product-line level (resource requirements planning), at the master-scheduling level (rough-cut capacity planning), and at the material requirements planning level (capacity requirements planning).

Question 36

capacity requirements planning (CRP)

Answer 36

The function of establishing, measuring, and adjusting limits or levels of capacity. IN this context, the term refers to the process of determining in detail the amount of labor and machine resources required to accomplish the tasks of production. Open shop orders and planned orders in the MRP system are input to CRP, which through the use of parts routings and time standards translates these orders into hours of work by work center by time period. Even though rough-cut capacity planning may indicate that sufficient capacity exists to execute the MPS, CRP may show that capacity is insufficient during specific time periods.

Question 37

carrying cost

Answer 37

The cost of holding inventory, usually defined as a percentage of the dollar value of inventory per unit of time (generally one year). Carrying cost depends mainly on the cost of capital invested as well as costs of maintaining the inventory such as taxes and insurance, obsolescence, spoilage, and space occupied. Such costs vary from 10 percent to 35 percent annually, depending on type of industry. Carrying cost is ultimately a policy variable reflecting the opportunity cost of alternative uses for funds invested in inventory.

Question 38

cash flow

Answer 38

The net flow of dollars into or out of the proposed project. The algebraic sum, in any time period, of all cash receipts, expenses, and investments. Also called cash proceeds or cash generated.

Question 39

cause-and-effect diagram

Answer 39

A tool for analyzing process dispersion. It is also referred to as the Ishikawa diagram (because Kaoru Ishikawa developed it) and the fishbone diagram (because the complete diagram resembles a fish skeleton). The diagram illustrates the main causes and subclasses leading to an effect (symptom). The cause-and-effect diagram is one of the seven tools of quality.

Question 40

cellular manufacturing

Answer 40

A manufacturing process that produces families of parts within a single line or cell of machines controlled by operators who work only within the line or cell.

Question 41

centralized inventory control

Answer 41

Inventory decision making for all storekeeping units exercised from one office or department for an entire company.

Question 42

certified supplier

Answer 42

A status awarded to a supplier that consistently meets predetermined quality, cost, delivery, financial, and count objectives. Incoming inspection may not be required.

Question 43

chase production method

Answer 43

A production planning method that maintains a stable inventory level while varying production to meet demand. Companies may combine chase and level production schedule methods.

Question 44

closed-loop MRP

Answer 44

A system built around material requirements planning that includes the additional planning processes of production planning (sales and operations planning), master production scheduling, and capacity requirements planning. Once this planning phase is complete and the plans have been accepted as realistic and attainable, the execution processes come into play. These processes include the manufacturing control processes of input-output (capacity) measurement and detailed scheduling and dispatching, as well as anticipated delay reports from both the plant and suppliers, supplier scheduling, and so on. The term closed loop implies not only that each these processes is included in the overall system, but also that feedback is provided by the execution processes so the planning can be kept valid at all times.

Question 45

common carrier

Answer 45

Transportation available to the public that does not provide special treatment to any one party and is regulated as to the rates charged, the liability assumed, and the service provided. A common carrier must obtain a certificate of public convenience and necessity from the Federal Trade Commission for interstate traffic.

Question 46

component

Answer 46

The raw material, part, or subassembly that goes into a higher-level assembly, compound, or other item. This term may also include packaging materials for finished items.

Question 47

consignment

Answer 47

(1) A shipment that is handled by a common carrier. (2) The process of a supplier placing goods at a customer location without receiving payment until after the goods are used or sold.

Question 48

constraint

Answer 48

(1) Any element or factor that prevents a system from achieving a higher level of performance with respect to its goal. Constraints can be physical, such as a machine center or lack of material, but they can also be managerial, such as a policy or procedure. (2) One of a set of equations that cannot be violated in an optimization procedure.

Question 49

continuous process improvement (CPI)

Answer 49

A never-ending effort to expose and eliminate root causes of problems; small-step improvement as opposed to big-step improvement.

Question 50

continuous production

Answer 50

A production system in which the productive equipment is organized and sequenced according to the steps involved to produce the product. This term denotes that material flow is continuous during the production process. The routing of the jobs is fixed and setups are seldom changed.

Question 51

continuous replenishment

Answer 51

A process by which a supplier is notified daily of actual sales or warehouse shipments and commits to replenishing these sales (for example, by size or color) without stockout and without receiving replenishment orders. The result is a lowering of associated costs and an improvement in inventory turnover.

Question 52

contract carrier

Answer 52

A carrier that does not serve the general public, but provides transportation for hire for one or a limited number of shippers under a specific contract.

Question 53

control chart

Answer 53

A graphic comparison of process performance data with predetermined computed control limits. The process performance data usually consists of groups of measurements selected in the regular sequence of production that preserves the order. The primary use of control charts is to detect assignable causes of variation in the process as opposed to random variations. The control chart is one of the seven tools of quality.

Question 54

control limit

Answer 54

A statistically determined line on a control chart (upper control limit or lower control limit). If a value occurs outside this limit, the process is deemed to be out of control.

Question 55

cost of goods sold (COGS)

Answer 55

An accounting classification useful for determining the amount of direct materials, direct labor, and allocated overhead associated with the products sold during a given period of time.

Question 56

cost of poor quality

Answer 56

The costs associated with performing a task incorrectly and/or generating unacceptable output. These costs would include the costs of nonconformities, inefficient processes, and lost opportunities.

Question 57

critical chain method

Answer 57

In the theory of constraints, a networking planning technique for the analysis of a project's completion time, used for planning and controlling project activities. The critical chain, which determines project duration, is based on technological and resource constraints. Strategic buffering of paths and resources is used to increase project completion success.

Question 58

critical path method (CPM)

Answer 58

A networking planning technique for the analysis of a project's completion time used for planning and controlling the activities in a project. By showing each of these activities and their associated times, the critical path, which identifies those elements that actually constrain the total time for the project, can be determined.

Question 59

cross-docking

Answer 59

The concept of packing products on incoming shipments so they can be easily sorted at intermediate warehouses or for outgoing shipments based on final destination. The items are carried from the incoming vehicle docking point to the outgoing vehicle docking point without being stored in inventory at the warehouse. Cross-docking reduces inventory investment and storage space requirements.

Question 60

cumulative lead time

Answer 60

The longest planned length of time to accomplish the activity in question. It is found by reviewing the lead time for each bill of material path below the item; whichever path adds up to the greatest number defines cumulative lead time.

Question 61

customer relationship management (CRM)

Answer 61

A marketing philosophy based on putting the customer first. Involves the collection and analysis of information designed for sales and marketing decision support (in contrast to enterprise resources planning information) to understand the support existing and potential customer needs. Includes account management, catalog and order entry, payment processing, credits and adjustments, and other functions.

Question 62

customer service

Answer 62

(1) The ability of a company to address the needs, inquires, and requests of customers. (2) A measure of the delivery of a product to the customer at the time the customer specified.

Question 63

customs broker

Answer 63

A person who manages the paperwork required for international shipping and tracks and moves the shipments through the proper channels.

Question 64

cycle counting

Answer 64

An inventory accuracy audit technique where inventory is counted on a cyclic schedule rather than once a year. A cycle inventory count is usually taken on a regular, defined basis (often more frequently for high-value or fast-moving items and less frequently for low-value or slow-moving items). Most effective cycle counting systems require the counting of a certain number of items every workday with each item counted at a prescribed frequency. The key purpose of cycle counting is to identity items in error, thus triggering research, identification, and elimination of the cause of the errors.

Question 65

cycle stock

Answer 65

One of the two main conceptual components of any item inventory, the cycle stock is the most active component. The cycle stock depletes gradually as customer orders are received and replenished cyclically when supplier orders are received. The other conceptual component of the item inventory is the safety stock, which is a cushion of protection against uncertainty in the demand or in the replenishment lead time.

Question 66

cycle time

Answer 66

(1) In industrial engineering, the time between the completion of two discrete units of production. For example, the cycle time of motors assembled at a rate of 120 per hour is 30 seconds. (2) In materials management, the length of time from when material enters a production facility until it exits.

Question 67

data governance

Answer 67

The overall management of data's accessibility, usability, reliability, and security. Used to ensure data record accuracy.

Question 68

days of supply

Answer 68

(1) Inventory-on-hand metric converted from units to how long the units will last. For example, if there are 2,000 units on hand and the company is using 200 prepay, then there are 10 days of supply. (2) A financial measure of the value of all inventory in the supply chain divided by the average daily cost of goods sold rate.

Question 69

decentralized inventory control

Answer 69

Inventory decision making exercised at each stocking location for SKUs at that location.

Question 70

decoupling inventory

Answer 70

An amount of inventory maintained between entities in a manufacturing or distribution network to create independence between processes or entities. The objective of decoupling inventory is to disconnect the rate of use from the rate of supply of the item.

Question 71

delivery lead time

Answer 71

The time from the receipt of a customer order to the delivery of the product.

Question 72

demand lead time

Answer 72

The amount of time potential customers are willing to wait for the delivery of a good or a service.

Question 73

demand management

Answer 73

(1) The function of recognizing all demands for goods and services to support the marketplace. It involves prioritizing demand when supply is lacking. Proper demand management facilitates the planning and use of resources for profitable business results. (2) In marketing, the process of planning, executing, controlling, and monitoring the design, pricing, promotion, and distribution of products and services to bring about transactions that meet organizational and individual needs.

Question 74

demand planning

Answer 74

The process of combining statistical forecasting techniques and judgement to construct demand estimates for products or services (both high and low volume; lumpy and continuous) across the supply chain from the supplier's raw materials to the consumer's needs. Items can be aggregated by product family, geographical location, product life cycle, and so forth, to determine an estimate of customer demand for finished products, service parts, and services. Numerous forecasting models are tested and combined with judgement from marketing, sales, distributors, warehousing, service parts, and other functions. Actual sales are compared to forecasts provided by various models and judgements to determine the best integration of techniques and judgement to minimize forecast error.

Question 75

demonstrated capacity

Answer 75

Proven capacity calculated from actual performance data, usually expressed as the average number of items produced multiplied by the standard hours per item.

Question 76

demurrage

Answer 76

The carrier charges and fees applied when rail freight cars and ships are retained beyond a specified loading or unloading time.

Question 77

dependent demand

Answer 77

Demand that is directly related to or derived from the bill-of-material structure for other items or end products. Such demands are therefore calculated and need not and should not be forecast. A given inventory item may have both dependent and independent demand at any given time. For example, a part may simultaneously be the component of an assembly and sold as a service part.

Question 78

detention

Answer 78

Carrier charges and fees applied when truck trailers are retained beyond a specified loading or unloading time.

Question 79

direct labor

Answer 79

Labor that is specifically applied to the good being manufactured or used in the performance of the service.

Question 80

direct material

Answer 80

Material that becomes a part of the final product in measurable quantities.

Question 81

discrete manufacturing

Answer 81

The production of distinct items such as automobiles, appliances, or computers.

Question 82

discrete order picking

Answer 82

A method of picking orders in which the items on one order are picked before the next order is picked.

Question 83

dispatching

Answer 83

The selecting and sequencing of available jobs to be run at individual workstations and the assignment those jobs to workers.

Question 84

distribution

Answer 84

(1) The activities associated with the movement of material, usually finished goods or service parts, from the manufacturer to the customer. These activities encompass the functions of transportation, warehousing, inventory control, material handling, order administration, site and location analysis, industrial packaging, data processing, and the communications network necessary for effective management. It includes all activities related to physical distribution, as well as the return of goods to the manufacturer. In many cases, this movement is made through one or more levels of field warehouses.

Question 85

distribution center (DC)

Answer 85

(1) A location used to store inventory. Decisions driving warehouse management include site selection, number of facilities in the system, layout, and methods of receiving, storing, and retrieving goods. (2) Typically a finished goods warehouse designed for demand-driven rapid distribution to retailers (retail distribution centers), wholesalers, or direct shipments to customers (order fulfillment centers). Cross-docking warehouses are another type of distribution center.

Question 86

distribution channel

Answer 86

The distribution route, from raw materials through consumption, along which products travel.

Question 87

distribution inventory

Answer 87

Inventory, usually spare parts and finished goods, located in the distribution system (e.g., in warehouses or in transit between warehouses and the consumer).

Question 88

distribution requirements planning (DRP)

Answer 88

(1) The function of determining the need to replenish inventory at branch warehouses. A time-tased order point approach is used where the planned orders at the branch warehouse level are "exploded" via MRP logic to become gross requirements of the supplying source. In the case of multilevel distribution networks, this explosion process can continue down through the various levels of regional warehouses (master warehouse, factory warehouse, etc.) and become input to the master production schedule. Demand on the supplying sources is recognized as dependent, and standard MRP logic applies. (2) More generally, replenishment inventory calculations, which may be based on other planning approaches such as period order quantities or "replace exactly what was used," rather than being limited to the time-phased order point approach.

Question 89

distribution warehouse

Answer 89

A facility where goods are received in large-volume uniform lots, stored briefly, and then broken down into smaller orders of different items required by the customer. Emphasis is on expeditious movement and handling.

Question 90

dock-to-stock

Answer 90

A program through which specific quality and packaging requirements are met before the product is released. Prequalified product is shipped directly into the customer's inventory. Dock-to-stock eliminates the costly handling of components, specifically in receiving and inspection, and enables products to move directly into production. Sometimes referred to as ship-to-stock.

Question 91

drop ship

Answer 91

To take the title of the product but not actually handle, stock, or deliver it (i.e., to have one supplier ship directly to another or to have a supplier ship directly to the buyer's customer).

Question 92

drum-buffer-rope (DBR)

Answer 92

The theory of constraints method for scheduling and managing operations that have an internal constraint or capacity-constrained resource.

Question 93

drum schedule

Answer 93

The detailed production schedule for a resource that sets the pace for the entire system. The drum schedule must reconcile the customer requirements with the system's constraint(s).

Question 94

duty

Answer 94

A tax levied by a government on the importation, exportation, or use and consumption of goods.