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
