Question 4 Flashcards
5 main inventory costs
- Item cost
- Carrying costs
- Order costs
- Stockout costs
- Capacity-associated costs
Item cost
Landed costs or TCO
- For purchased items: unit cost, delivery (transport) and landed price (insurance)
- For manufactured items: direct material, direct labour and factory overhead (COGS)
Carrying costs
- Capital cost: money invested (tied up) in inventory
- Storage cost: rent, heat, light, equipment, workers etc.
- Risk cost: loss of value (slow moving and obsolete), damage, stolen goods etc.
Order costs
The cost of placing an order
- Cost of purchase order includes placing the order, preparation, follow up, receiving, authorizing payment.
- Cost of production order includes planning, issuing, closing, follow-up, setup time. Setup time is not productive so it will be lost capacity.
Stockout costs
The cost of having a shortage/stock-out of an item for which there is demand
- Missing profit from lost sale
- Loss of future sale, goodwill (assets minus liabilities) and reputation
- Rescheduling of operations
- Sending out emergency orders and paying for special transportation
- Using alternative and more expensive suppliers
Capacity-associated costs
- The cost of changing capacity: level vs chase capacity strategy (hiring, training, extra shifts, firing etc.)
- SC scalability cost: rebalance (scaling up or down) inventory that has been positioned (buying racks, warehouses etc.)
Inventory Turns
The number of times that an inventory cycles, or turns over, during the year
The higher the IDOS, the lower is inventory turns and vice versa
Inventory Turns formula
Inventory turns = annual COGS / Average inventory value
Inventory Days of Supply (IDOS)
A measure of how many days current inventory will last without replenishment
The higher the IDOS, the lower is inventory turns and vice versa
IDOS formula
IDOS = inventory on hand / Average daily usage
Capacity
The rate of work being done by worker, facility etc. in a time period
The capability of a worker, machine, plant, or organisation to provide goods and services (output) per period of time
Load
The amount of planned work scheduled for and actual work released to a facility, work center, or operation for a specific span of time.
This is usually expressed in terms of standard hours of work or, when items consume similar resources at the same rate, units of production
The sum of all time required for orders on a work center (machine), which it is expected to do in a period of time
Capacity available
The capacity of a resource to produce a quantity in a given time period (what is currently available to us in our system?). This needs to be balance against the required capacity (load) to identify possible bottlenecks
Output
Units or standard time
Capacity in relation to the MPC
- PPL -> Resource Plan
- MPS -> Rough-Cut Capacity Plan (RCCP)
- MRP -> Capacity Requirements Plan (CRP)
- PAC -> Capacity Control
Resource Plan
Level: PPL
Focus: product priorities (product families)
Horizon: long range
Purpose: to translate monthly, quarterly, or annual product priorities from the production plan into some total measure of capacity, such as gross labour hours. Resource planning involves changes in staffing, capital equipment, product design, or other facility changes that take a long time to acquire and eliminate.
Rough-Cut Capacity Plan (RCCP)
Level: MPS
Focus: critical resources (end items)
Horizon: medium range
Purpose: to check the feasibility of the MPS by checking whether critical resources are available, providing warnings of any bottlenecks, ensure utilisation of work centers, and advise vendors of capacity requirements.
Input: preliminary MPS
Output: finalised MPS
Capacity Requirements Plan (CRP)
Level: MRP
Focus: component parts - individual orders at individual work centers
Horizon: short range
Purpose: to calculate work center loads and labour requirements for each time period at each work center.
Capacity Control
Level: PAC
Focus: execution (orders and staff)
Purpose: to monitor production output, comparing it with capacity plans, and taking corrective action when needed.
Outsourcing
The transfer of activities, that were previously conducted in-house, to a third party
The process of having suppliers provide goods and services that were previously provided internally
Strategic phase of the outsourcing process
WHY? WHAT? WHO?
Competence analysis
- Why outsource – Focus on core competences, cost efficiency or improving customer service.
- What to outsource – Use transaction cost approach (what is cheaper) or core competence approach (outsource all non-core competence activities to only focus on core competences) to decide
Assessment and approval
What qualifications does the supplier need to meet?
- Make a market search and a preliminary supplier list of possible candidates.
- Make audits and approve the final list of suppliers
- Move on to contract negotiations.
Transition phase of the outsourcing process
HOW?
Contract negotiation
The contract is the start of a long-term relationship, allowing both organisations to maximise rewards and minimise risks.
The contract should refer to the business case, explaining the background, objectives, delivery requirements, migration plan and benefits/costs/risk. The type of contract needed and use of incentives/penalties are discussed, as well as:
- Scope of service and terms of agreement
- Conflict resolution and communication
- Termination plan
Project execution and transfer
The contract is signed, and the outsourced function has to be transferred to the supplier, establishing basis for supplier combination and defining the workflow interfaces etc. The final step is a test phase where to suppliers product is tested against the contractual requirements
Operational phase of the outsourcing process
HOW TO MANAGE?
Managing relationship
Critical to achieve the goals of outsourcing. Successful outsourcing relationships are performance-driven; measuring and benchmarking performance against the agreed service level and other providers. The byer must explain what they want, but leave it to the supplier to determine how results are achieved
Contract termination
Contract review should be a recurring process, assessing alternatives such as new supplier or bringing activity back in-house
