1
Q
What is inventory?
A
A physical resource that hold stock in an organization
2
Q
Why hold inventory? Was is the intent in doing this?
A
The intent is to sell it and/or transform it into a more valuable state
3
Q
Why is inventory so important?
A
- One of the most valuable assets for any organization
- More than 50% of capital is invested in it
4
Q
What happens if you over produce ?
A
- Lose capital
- Products become expired and/or outdated
5
Q
What happens if you under produce?
A
- Lose capital
- Lose opportunities
6
Q
What is the purpose of inventory management?
A
- Maintain independence and smooth running operations
- Flexibility in operations
- Meet variation in the demand of the product
- Natural calamities and delays happen all the time
- Provide flexibility in production scheduling
- Stock of items kept for use or sale in the future
7
Q
What does inventory management help us understand?
A
- When to order units/products
- How many units/products to order
8
Q
What decisions are made from inventory management?
A
- How many units to order
- When to order them
9
Q
What are the six functions of inventory?
A
- To wait while in transit
- To protect against stock-outs
- To take advantage of quantity discounts
- Smooth production requirements
- Decouple operations
- To meet above average demand
10
Q
Main objective of inventory management
A
To achieve satisfactory levels of customer service while minimizing inventory costs
11
Q
What must management understand in order to establish an inventory policy?
A
The relationship dynamics of inventory must be considered
12
Q
What are the two key indicators of inventory performance?
A
- Service level
- Average inventory
13
Q
What is an inventory policy? (4 points)
A
- Guidelines on what to purchase or manufacture, when, and in what quantity
- Decisions on geographical inventory positioning
- Geographic postponement strategy for items with high demand uncertainty or high value
- Speculative positioning for low value items or items requiring quick accessibility
14
Q
What is the most challenging aspect of inventory management?
A
Developing a sound inventory policy
15
Q
What is an inventory management practice? (5 points)
A
- Independent inventory management at each stocking facility
- Centralized inventory management of all stocking locations
- Centralized inventory management requires effective communication and coordination
- Information technology and integrated planning systems enable more firms to implement centralized inventory planning
- Centralized inventory planning systems can reduce demand uncertainty between distribution locations
16
Q
What is service level?
A
- Performance target specified by management. It defines inventory performance objectives
17
Q
How is service level measured?
A
- Performance cycle time
- Case fill rate
- Line fill rate
- Order fill rate
(Or any combination of these)
18
Q
What is the performance cycle?
A
- Elapsed time between the release of a purchase order by a buyer to the receipt of the shipment
19
Q
What is a case fill rate?
A
- The percent of cases or units ordered that are shipped as requested
- Example: 95 percent case fill rate means 95 out of 100 are filled from available stock
20
Q
What is the line fill rate?
A
- Percent of orders filled completely
21
Q
What is the order fill?
A
- Percent of customer orders filled completely
22
Q
What are the types of inventory based on?
A
- Process stage
- Demand type
- Purpose
23
Q
What types of inventory are included in the process stage?
A
- Raw material
- Work-in process
- Maintenance/ Repair/ Operating
- Finished goods
24
Q
What are the two types of demand? (types of inventory)
A
- Independent
- Dependent
25
Purpose (Types of inventory)
- Cycle
- Seasonal
- Hedge
- Obsolete
- Speculative
- Transit
- Safety
26
Raw materials (Process stage)
- Basic inputs that are converted into finished products
- These are often purchased
27
Work in process (WIP) (Process stage)
- Semi manufactured products
- Gone under some manufacturing/transformation process but still need to be transformed into final state
- Examples: French fries (Frozen)
28
Maintenance/ Repair/ Operating (Process stage)
- Keeps machinery and processes productive
- Often called "supplies"
- May be materials that do not enter production process but are critical for the production process
- DO NOT require a big investment
29
Finished Goods (process stage)
- Completed products are ready for sale
- Await shipment
30
Independent and dependent demand
Independent: Demand that is beyond the control of an organization (Ex: cars)
Dependent: Demand of a product that is contingent on another product (Ex: tires)
31
Is consumer demand independent or dependent?
Usually independent, as consumers dont inform retailers in advance that they will purchase a product
32
How can retailers prepare for demand?
- Anticipating consumer needs by having inventory ready at the store (just in case inventory)
- Forecast demand based on historical patterns but need to be prepared for consumer arrivals
33
What is component inventory at the supplier end dependent on?
Production schedule
34
Dependent demand is seen in industries such as....
automotive or electronic, where components are assembled into final products
35
Who do manufacturers share their production schedule with and why?
Share with suppliers, allowing them to anticipate the demand and delivery schedule for component parts
36
When can "just-in-time" deployment be used?
In a dependent demand situation because there is no uncertainty once the finished product schedule is established and shared with suppliers
37
Seasonal inventory (Purpose)
- High in demand stock during particular times of year (christmas, halloween etc.)
- In some cases, extra units of products are developed to absorb the seasonal fluctuations (snow shovels)
38
Cycle inventory (Purpose)
- The portion of inventory available to meet normal demand during given period
- One of the more important chunks of overall inventory as it is the inventory needed to meet customer needs
- Amount of inventory you would expect to go through based on forecasts and historical data
- First place a customers order will be fulfilled from
- Portion of average inventory that results from replenishment of production. Stock level is at a max following stock receipt from supplier
- Customer depletes inventory until stock level reaches its reorder point. Prior to stock reaching minimum, replenishment order is created
39
What is the formula for cycle stock inventory?
Cycle stock inventory = total on-hand inventory - safety stock
40
What does production quantity mean?
The amount ordered for replenishment
41
Given the basic order formulation...
average cycle inventory (base stock) = 1/2 order quantity
42
Safety stocks (purpose)
- Extra inventory that a company hold to protect itself against uncertainties in either demand or replenishment times
- Back up stock
- Just incase something goes wrong
- Unexpected events like strikes, machine breakdown
43
What types of variables should be included in analytical data to drive safety stock levels?
- Lead times
- Service levels
- Fluctuations in supply and demand
44
At what point in the replenishment cycle are safety stocks used?
- End of the replenishment cycle when uncertainty causes higher than expected demand or longer than expected performance cycles
45
Transit inventory (Purpose)
- Inventory that is moving from one link in the supply chain to another
- Goods that have left a firms warehouse but have not been bought by the ultimate consumers, customers or users
- Also called Pipeline stock or transportation inventory
46
Obsolete inventory (Purpose)
- Out of date stock that has not experienced recent demand
47
Speculative Inventory (Purpose)
- Inventory held in anticipation of customer demand
- Bought prior to the need to hedge a currency exchange, take advantage of a special discount or prepare for a potential workforce disruption
- Also called anticipation inventory
48
Hedge Inventory (Purpose)
- Type of inventory that is held by a company as a strategic measure to mitigate potential risks or fluctuations in the market
- Kept in stock as a buffer to reduce risk of future price fluctuations
- Goal is to provide a level of stability and protection for the companies operations.
- Allows businesses to navigate uncertain market conditions
- Requires careful planning, forecasting and monitoring
49
What are some types of industries and specific circumstances where hedge inventory can serve different purposes
1. Price fluctuations
2. Seasonal demand
3. Supply disruptions
4. Currency Exchange rates
50
What is the main difference between hedge inventory and speculative inventory
Hedge focuses on risk mitigation and stability while speculative inventory is driven by profit generation with the intention of selling inventory at a higher price
51
Risk management vs. profit generation (hedge vs. speculative)
- Hedge is used to reduce or offset potential losses or risks in other parts of the business. Aims to stabilize operations
- Speculative is held to take advantage of market opportunities and capitalize on potential price increases or demand surges. Higher risk=Higher reward
52
Timing and market Conditions (hedge vs. speculative)
- Hedge is held consistently or periodically to provide stability and manage risk in ongoing manners
- Speculative is held based on specific market expectations or forecasts. Often acquired in anticipation of favorable market conditions and timing of acquisition and disposal are crucial
53
Inventory management approach (Hedge vs. Speculative)
- Hedge requires analysis, forecasting and risk assessment, monitoring market trends, identifying potential risks, and adjusting inventory levels to protect the company
- Speculative requires market research, analysis of demand patterns and assessing potential profit opportunities
54
What are the 5 essentials of inventory management
1. Inventory control systems
2. Inventory tracking tools
3. Demand forecasting and lead time information
4. Inventory costs
5. The A-B-C Classification
55
What are the two inventory control systems
1. Periodic inventory system
2. Perpetual inventory system
56
What is the periodic Inventory system
- Physical count of items in inventory is made at periodic, fixed intervals (weekly, monthly etc.) to decide how much of each item to order.
- count is typically at the end of a specific accounting period
57
What is the cost of good sold (COGS) calcualtion? (periodic inventory)
- Calculation of inventory at the beginning and end of the accounting period
- Cost of goods sold= ending inventory value-beginning inventory value + purchases made during the period
58
Does the periodic inventory system provide lots of inventory information? Why?
No, because the inventory levels are not continuously updated so it provides limited information about the status of inventory.
59
Does the perpetual inventory system or the periodic inventory system require more detail oriented record keeping?
Perpetual, because inventory transactions are recorded continuously
60
How cost effective is the periodic inventory system?
- More cost effective for businesses with limited resource or smaller inventory volumes
- Less sophisticated inventory management software required
61
Is the periodic inventory system prone to errors or inaccuracies?
- Because it is periodic physical counts and calculations, there is a higher risk of errors and discrepancies in the records
62
What size business is the periodic inventory system best for
Small businesses with simpler inventory management
63
What is a perpetual inventory system?
- Keeps track of removals and additions to the inventory of each item on a continuous basis, so information of the current inventory position of each item can be found at any time
- Real time tracking
- Continuous up to date for quantity, location and value.
64
What is a technology used for real time inventory tracking?
RFID Tags, barcode scanners, inventory management software
65
What is the immediate cost of good sold calculation? (Perpetual inventory)
IGOGS= inventory value-cost of sold items
66
Does the perpetual inventory system maintain a detailed transaction history? Why?
Yes it records all inventory related activities
67
What are 4 benefits of the perpetual inventory system?
1. Enhanced inventory control
2. Efficient Replenishment Planning
3. Improved accuracy and efficiency
4. Suitable for various business sizes
68
Inventory tracking tools
Bar code, RFID (radio frequency identification)
69
What is purchase lead time
Time interval between ordering and receiving the order
70
What is the point of sale (POS) System
- Software for electronically recording actual sales at the time and location of the sale
71
What are the 5 types of inventory cost?
- Basic cost
- Holding cost
- Ordering cost
- Setup cost
- Shortage cost
72
What is ordering cost?
Cost of placing an order and receiving a good
73
What is holding cost?
Storing inventory overtime
74
What is setup cost
Cost to prepare/setup machine or process for manufacturing an order
75
What is shortage cost
- Cost of cancelling an order, lost orders, late penalties
- Two options with products shortage:
1. Can meet the shortage with some type of rush
2. It cannot meet the shortage at all
76
What is a temporary shortage cost?
- Backordered, not necessarily lost
- Extraordinary transportation cost to the customer
77
What is the permanent shortage cost
- Lost profits due to unsatisfied demand
- Lost profits of future sales
78
What is basic cost
- Standard cost of a product
- Considered when quantity discounts are offered
79
What is warehousing
- A temporary place to store inventory
- Match customer demand with product availability
- Operations include: receiving, storage, repackaging, sorting goods
80
Warehouses vs. Distribution Centres
- Warehouses: Used to store goods like raw materials or manufactured goods
- Warehouse is owned, rented or leased. Ownership provides more control but demand should be high and stable.
- Public warehousing is for short term needs, while contracting is offered by a third party logistics service provider.
- Distribution Centers: Product mixing, order fulfillment, cross docking, packaging etc.
81
What is a SKU
Stock keeping unit must be stored and accounted for seperately
82
What does warehouse capacity depend on?
- Yearly volume and frequency of inventory movement
83
What are some components of warehouse capacity and design
- Max space required for each item
- Floor space
- Being uncluttered
- Space utilization techniques
- Cold rooms for produce if needed
- Vertical pace for moving items long distance
- Racks, shelves, bins etc.
- Storing heavy items on the floor
- Each location contains an address code
84
What should be considered in warehouse safety and security?
- Safety is crucial in warehouse management due to heavy pallets, high racks, forklifts and fast moving pallet jacks
- Access to building should be controlled
- Small valuable items should be locked up
- Workers must ensure items are not damaged or stolen during movement
85
What are some warehouse functions?
- Stocking
- Consolidation and Deconsolidation
- Crossdocking
- Value added services
- Hub-and-spoke systems
- Reverse logistics
86
What is stocking?
- Establishes storage for goods (seasonal products) having high demand for a period of of time
- High demand goods are temporarily kept in local warehouses and distribution centers
- Example: Suppliers ofwinter tires place their products close to the retailers during the fall/winter season
87
What is consolidation
- Occurs when the warehouse combines the received items from various sources into a single large shipment
- Benefits are reduction in transportation cost, less congestion and on time delivery
88
What is deconsolidation
- Also called breaking bulk
- Process in which warehouse splits a large batch of received items into small shipments
- Economies of scale of bulk purchasing for distributors and reduction of warehouse space for retailers
89
What is value added services
- Involves adding features and configurations to the product in a warehouse or distribution center to match a specific customer order
- Increase value for customers through product customization
- Final assembly is delayed until complete
- Increased product variety
- Reduces labor and shipping for manufacturers
- Third party warehouses involved in postponing electric product configurations. For example: laptop is shipped to warehouse, operator in warehouse loads software and assembles specific parts for customer order, customized product sent for delivery
90
What are reverse logistics?
- Physically returning items from consumers or retailers to manufacturer, supplier, distribution centers or third part warehouses
- Goods are returned due to defects, excess inventory, customer changes of mind and lack of product understanding
91
What does the reverse logistics process include?
Retrieving items, inspecting and sorting and transporting to the final destination
92
Warehouse/Distribution center roles in reverse logistics
- Sort, examine/test, restock, repair defective, recondition, recycle materials and dispose of obsolete or hazardous items
93
Flexible Manufacturing
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