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| A supply of items held by a firm to meet demand (either external customer or internal operations) |
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| Raw materials and component parts |
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| Items that are bought from suppliers to use in the production of a product |
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| Work in Process Inventory |
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Definition
| Inventory that is in the production process |
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| When manufacturing is completed and products are ready for sale to customer (held by retailers and wholesalers) |
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| Maintenance, Repair and Operating Supplies (ex: office supplies, toilet paper/cleaning supplies, tools/parts) |
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| Items that are in the process of being transported from one location to another (ex: warehouse to retail store) |
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| Extra inventory held to guard against uncertainty in demand or supply |
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| Speculative holdings of inventory |
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| When supply managers buy ahead of need because they believe that prices may increase in the future or there may be disruptions/shortages |
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| The amount paid to suppliers for the product(s) that is(are) purchased |
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Several expenses that are incurred due to the fact that inventory is held
Opportunity Cost, including cost of capital
Cost of owning and maintaining storage space
Taxes
Insurance
Cost of obsolescence, loss and disposal
Costs of materials handling, tracking and management |
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| Transaction cost associated with replenishing inventory. Includes expenses incurred in placing and receiving orders from suppliers: order preparation, order transmittal, order receiving and accounts payable processing |
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(Inventory is produced internally)
Administrative expenses and the expenses of rearranging a work center to produce an item |
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Cost incurred when company does not have inventory available to meet demand
Loss of current sale
Loss of future sales
Backordering costs
Expediting costs
Disruptions of material flows in supply chain |
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Measures ratio between average amount of inventory held and level of sales (asset productivity)
Inventory Turnover = Cost of Goods Sold/Average Inventory @ Cost
Inventory Turnover = Net Sales/Average Inventory @ Selling Price
Inventory Turnover = Unit Sales/Average Inventory in Units
Red is most common/universal
Blue used primarily by retialers who use retail method of invetory valuation
Green more accurate when cost of item and its selling price vary a lot during a year (ex: gasoline) |
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| High inventory turnover advantages |
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Definition
Increased sales volume due to having rapid flow of new/fresh items
Less risk of obsolescence or need to discount prices
Decreased carrying costs
Lower asset investment and increased asset productivity
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| High inventory turnover disadvantages: |
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Definition
Possible lowered sales volume due to stockout
Increased cost of goods sold (inability to purchase/ produce in quantity)
Increased purchasing, ordering and receiving time, effort and cost |
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= Current Inventory/Expected Rate Daily Demand
The number of days of business operations that can be supported with the inventory on hand (none bought or produced)
Forward looking
*most meaningful when expressed in terms of future expected demand or daily rate of usage*
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| A measure of how well the objective of meeting customer demand is met |
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| The situation that exists when there is demand for an item and no inventory is available |
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| Independent demand inventory systems |
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| Used when the demand for an item is beyond the control of the organization (customer demands of end-items and repair parts) |
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| Dependent demand inventory management |
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| Demand for an item is derived from demand for some other item (ex component parts) |
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| Independent demand inventory models: (2 types) |
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- continuous review
- periodic review
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| Inventory is constantly monitored to decide when a replenishment order needs to be placed |
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Management system reviews and orders inventory at some regular interval |
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| An illustration of the pattern of ordering and inventory levels |
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| The order quantity that minimizes the sum of annual inventory carrying cost and annual ordering cost (ordering costs = carrying costs) |
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| The minimum level of inventory that triggers the need to order more |
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| Production order quantity |
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Definition
| The most economic quantity to order when units become available at the rate at which they are produced, and are sold while more being produced |
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| The amount of demand that occurs while awaiting receipt of an inventory replenishment order |
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| The amount of risk of incurring a stockout that a firm is willing to incur |
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| The portion of average inventory determined as order quantity divided by two |
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| A fixed time period that passes between inventory reviews |
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| A period of time when an unknown amount of inventory is on hand |
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| Single period inventory model |
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| Model used to determine the order size for a one time purchase (ex: ordering swimsuits for summer season, newsvendor problem) |
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| The sum of all the inventory held across all of the locations in a company |
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A method of estimating the impact of changing the number of locations on the quantity of inventory held
Based on assumptions that: demands in different locations are independent and that inventories are not shared across stocking locations |
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The ranking of all items of inventory according to importance
Finished goods: annual sales volume or item profit
Raw materials, component parts or MRO: according to cost, annual usage or difficulty of acquiring |
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| A small percentage of items account for a large percentage of sales, profit or importance to a company |
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| Global Trade Item Number (GTIN) |
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Definition
| Item identification system for finished goods sold to consumers (ex: Universal Product Code (UPC) or European Automatic Numbering (EAN) |
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| A unique identifier of a part used by a specific company (often different b/w businesses) |
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| A process where each item in inventory is physically counted on a routine schedule |
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| Inventory of an item is stored in two different locations |
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| A small disturbance generated by a customer produces successively larger disturbances at each upstream stage in the supply chain |
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| Vendor-managed Inventory (VMI) |
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Definition
| The vendor (supplier) is responsible for managing the inventory located at a customer's facility |
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| Collaborative planning, forecasting and replenishment (CPFR) |
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Definition
| Supply chain partner firms share information and insights in order to generate better forecasts and plans |
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| Supply management (purchasing or procurement) |
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| Identification, acquisition, and management of inputs and supplier relationships that a firm needs to attain strategic objectives |
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| Identification, evaluation and selection of suppliers |
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| The probability of an unplanned event in acquisition, delivery and use that negatively affects a firm's ability to serve its customers |
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| Total cost of ownership (TCO) |
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Definition
| considers all the costs incurred before, during and after the purchase of a good or service (sourcing costs, purchase price, transportation, handling, inspection, quality, rework, maintenance, disposal) |
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| Business practices designed to positively affect people, society, the planet, as well as profits |
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| the choice between making a product internally (insourcing) or purchasing from a supplier (outsourcing) |
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| outsourcing to a different country |
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| One-time costs incurred by buying firm at the start of the contract or when beginning to make a product |
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| the firm will incur costs each time it places a new order (for example, costs to inspect and refurbish tools for individual production runs) |
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| costs associated with each unit produced including labor, materials, asset depreciation, energy, purchase price |
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| a process to understand what purchases are being made and at what price from which suppliers |
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| an internal document that communicates needs between the user and supply management (what, when, how many) |
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| represent a high level of spend and are high risk. unique and core to the firm's performance (fewer suppliers, partnership) |
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| high risk and low spend, not core to firm's performance but a lack of can cause delays. (at least two suppliers) |
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| low risk but high spend, standard goods or services where many suppliers are available |
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| low spend, low impact on performance. (use purchasing cards to lower transaction cost and automate) |
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| determines which suppliers to use for which purchases. considers: number of suppliers to use, capabilities and locations of suppliers, type of relationship and contract length |
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| the determination of the number of suppliers to use |
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| adversarial relationships |
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Definition
| characterized by distrust, limited communication, short term business transactions. buyers attempt to minimize dependency through multiple sourcing. Suppliers try to maximize buyers. Price focused. Information is not shared. Turnover is high. |
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| arms length relationships |
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Definition
| limited to simple purchasing transactions. not close but not too adverse/distrusting. buyers attempt to minimize dependency through multiple sourcing. Suppliers try to maximize buyers. Price focused. Information is not shared. Turnover is high. |
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| acceptance of mutual goals |
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| a collaborative relationship, but not as commited as partnership |
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| close working relationship, trust, respect, integrated operations. reduce total costs so both parties benefit. Info is shared - often access to info systems. Mostly long term contracts (many advantages of vertical integration) |
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| price is most important factor, specifications are known and clear, spend level is large enough, number of qualified suppliers willing to compete. mature standardized products. often required for govt purchases. adversarial or arms length relationships |
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| Request for Proposal (RFP)/ Request for Quotation (RFQ) |
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| first step in competitive bidding. documents that describe purchase requirements specifically, sent from supply manager to supplier |
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| links supplier's performance ratings to firm's competitive priorities. performance categories are weighted according to importance |
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| legally binding document prepared by a buyer to describe all terms and conditions of a purchase |
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| electronic data interchange (EDI) |
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| the structured secure electronic transmission of data between organizations (such as PO) |
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| Demand forecasting and management, combined to create a planned pattern of demand that meets firm's operational and financial goals |
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| consistent, horizontal stream of demand. mature consumer products (ex shampoo, milk) |
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| regular patterns of repeating highs and lows (ex: restaurants, banks, economic/political trends influence) |
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| general sloping tendency of demand, either upward or downward, linear or non linear fashion (new products in growth phase of life cycle) |
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| one time change in demand, usually due to some external influence such as product promotional campaign |
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| relationship of current demand with past demand (high correlation = autocorrelation) |
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| unexplained component of demand that is random in nature |
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| judgement based, seeks inputs from ppl in close contact with product and customers. most useful for short term forecasts of individual products |
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| forecast that uses input from high level experienced managers. better for long term sales or business patterns |
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| judgement based, uses data and experience from similar products to forecast for new product |
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| bases forecasts on purchasing patterns and attitudes of current or potential customers (consumer surveys, interviews, focus groups) |
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| develops forecasts by asking panel of experts to individually respond to series of questions. ppl see responses and talk about it in panel |
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| compute forecasts using historical data arranged in order of occurence (past demand = future demand) |
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| simple forecasting approach, assumes recent history is good predictor of near future (doesnt take into account trend or seasonal) |
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| moving average forecasting model |
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| computes forecast as average of demands over number of immediate past periods Ft+1=d1+dt-1.../n |
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| weighted moving average model |
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| assigns different weight to each period's demand according to its importance (dont divide by n) |
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a moving average approach that applies exponentially decreasing weights to each demand that ocurred farther back in time
Ft+1=smoothing coefficient(dt)+(1-SC)Ft
Ft+1=Ft+SC(dt-ft)
(dt-ft) is forecast error |
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| a mathematical approach to fitting an equation to a set of data |
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| an adjustment factor applied to forecasts to account for seasonal changes or cycles in demand |
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| predict demand, focus on external factors |
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| sophisticated mathetmatical programs that offer forecasters the ability to evaluate different business scenarios that might yield different demand outcomes |
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| a product designed so that it can be configured to its final form quickly and inexpensively once actual customer demand is known |
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| collaborative planning, forecasting and replenishment (CPFR) |
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Definition
| a method by which supply chain partners periodically share forecasts, demand plans and resource plans in order to reduce uncertainty and risk in meeting customer demand |
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