Module 2 SCM
Inventory: The items that are owned by a company for the purpose of present or future sales or for use in day-to-day
operations.
Lead Time: The period between when an order is placed and when the order is received by the customer.
Lot Size: An accepted order size. order size increment.
Types of risk: company risk, supplier risk, and customer risk.
-cases, having additional inventory could result in uninterrupted demand.
-too much inventory risks higher holding costs, includes damage, theft and obsolescence.
Inventory is an insurance.
Market needs/expectations
-prepared to meet customer needs quickly.
-market expects that when the need arises/need can be met
Purchasing inventory helps manage costs: economies of skills, quantity discounts, manufacturing efficiencies
Demand Forecasting: A predictive analysis and/or estimation of consumer demand in a future period.
-quantitative – typically using historical data to predict future demand.
-Qualitative -using opinions of experts to predict future demand.
Stock keeping unit (SKU): A specific product or service’s identification code used to track inventory or catalog sales.
Independent Demand Item: An item for which demand levels are not directly impacted by the demand of another related
item.
Dependent Demand Item: An item for which demand levels are directly impacted by the demand of another related item.
Inventory: stock of any item or resource used in an organization.
Issues to consider inventory: storage, transport, shrinkage, money, legal considerations, other
Types of inventory:
Perishable: limited shelf life
Market Inventory: Inventory that is readily available on the shelf.
Safety Stock (Buffer Stock): Inventory kept to account for variation/uncertainty of demand. Not intended to be
used./Insurance.
Anticipation Inventory/seasonal: Inventory that is created and stored for future use. Used to abosrd uneven rates of demand
caused by seasonal demand, holidays, discounts.
Pipeline Inventory: Inventory in transit between two points/the two points establish the beginning and the end of the
pipeline. Orders that have been placed but not yet received nor paid for.
Pipeline Inventory = Period Demand * Lead-Time Pipeline Inventory = dL
Pros of High Inventory Levels:
-Higher levels of customer service - having inventory will help a company address their immediate demand for a product.
-Quantity discount may be possible - lower per unit costs.
-Fewer orders will need to be placed - possibly lower ordering costs and transportation costs
-Greater security against unexpected demand variability
Pros of Low Inventory Levels:
-Less storage space required – costs of holding inventory may be lower
-Lower chance of inventory obsolescence and shrinkage.
-Less inventory typically means less materials handling requirements.
-Less money invested in inventory means more money available for other investment opportunities.
4 Cost of inventory/key inventory cost classifications: cost to buy it, hold it, and order it.
Cost to Purchase: The cost to purchase the inventory.
Holding Cost: The cost of holding the inventory. (Rent for the storage facility, energy and equipment required to keep inventory
in an acceptable environment, insurance, security)
Ordering Cost: The costs associated with placing an order for inventory.( research suppliers, negotiate purchase, the cost to
have items shipped and the upkeep of any electronic ordering system.)
Stockout Cost: The costs associated with not having enough inventory on hand to meet customer demand.
Reasons for making:
Proprietary Technology, no competent supplier, Better Quality Control, Idle Capacity, control
Reasons for Outsourcing/buying:
Insufficient Capacity, Lack of Expertise, No Competent Supplier, Better Use of Resources
Total Cost of Ownership (TCO): cost of owning an item over the entire lifetime of the item.
Vertical Integration: The act of a company taking on additional supply chain responsibilities that were formerly done by
outside parties. 2 classes of vertical integration:
Module 2 SCM
-Forward Integration – Taking over supply chain responsibilities formerly performed by downstream supply chain partners.
-Backward Integration – Taking over supply chain responsibilities formerly performed by upstream supply chain partners.
Steps in purchasing process:
1st Requisition-MR
2nd Supplier selection: select supplier- a Request for Quotation (RFQ) to get a price for Item A.
3rd Place Order – Once a supplier is chosen and a price for Item A is agreed upon, a Purchase Order (PO) may be issued by
procurement to formally order the item./negotate
4th Track Order- communicate with supplier
5th Receive Order – Item A arrives it will likely be inspected, scanned into inventory, and moved either to where it will be used
or onto a shelf for storage.- inspect, record, shelve
Material Requisition (MR) – The document used to initiate the purchasing process.
Request for Quotation (RFQ) – If the product or service requested is not in stock, an RFQ can be issued to one or more
potential suppliers.
Purchase order PO- contract that states the terms and conditions of the order.
electronic procurement system that can aid in submitting requests for materials, making material orders, negotiating with
suppliers, tracking shipments, and receiving shipments.
Centralized Purchasing – A purchasing system where all corporate employees send material requisitions to a single purchasing
department. Advantages:
- Avoid Duplication, Volume Discounts, Consolidated Shipping, Established Supply Base, Supply Specialization.
Decentralized Purchasing – A purchasing system where material requisitions are sent to a departmental purchasing
department. Advantages:
- Closer Knowledge of Requirements, Closer Knowledge of the Suppliers, Speed of Purchase
Supplier Base: group of suppliers from which a company makes most of its purchases.
Choosing a supplier/criterion:
Consumer Needs, Cost, Quality, Speed and Flexibility, Technological Capability, location, Information Technology System, Ability
to Innovate, Capacity Potential, 2nd and 3rd Tier Suppliers, Reliability, service.
Relationship management tools that help buyers and suppliers communicate are:
supplier scorecards: A report card that can be used to communicate desires before a sales presentation or shipment.
supplier certifications: Assessments that help ensure that a buyer’s suppliers all meet the minimum supplier standards.
Single supplier advantages:
- Quantity Discount Opportunities – buyer may have negotiating leverage and economies of scale may be easier to
achieve.
- Lowest Total Cost –supplier’s product and service package cannot be matched by any other supplier.
- Intellectual Property Advantages- no one else can make it like them
- Quality Control
- Relationship Management is Easier
- Easier Collaboration
Multiple supplier advantages: Competition Breeds Innovation, Risk Among Multiple Suppliers, capacity flexibility, location
advantages
Module 2 SCM
Inventory calculation:
Q – Lot size/#units
D – Annual demand
C – Cost to purchase one unit of inventory
H – Cost to hold one unit of inventory for one year
S – Cost to place a single order
TC- total cost of inventory
Average Amount of Inventory = Q/2
Number of orders per year = D/Q
Ex: If 12,000 units is the expected demand for the year (D), and a company orders 1,000 units per order (Q),
then the number of orders per year would be 12.
Time between orders (in weeks) = (Q/D)*52
(above), D=12,000 and Q=1,000 (4.33 weeks)
Total Annual Inventory/savings Cost Calculation
TC = DC + (Q/2)*H + (D/Q)*S
TC = DC + AHC + AOC
Annual cost to purchase inventory = DC
Annual holding cost (AHC) = (Q/2)*H
Annual ordering cost (AOC) = (D/Q)*S
Economic Order Quantity (EOQ)
EOQ is the lot size (Q) that will minimize total annual inventory cost (TC); it is therefore seen as the optimal lot
size.
EOQ = Sqrt[ (2DS) / H ]
AHC is greater than AOC: Holding costs are too high – You are to the right of EOQ on the chart below. Decrease
lot size to reduce TC.
AOC is greater than AHC: Holding costs are too low – You are to the left of EOQ on the chart below. Increase lot
size to reduce TC.
=
According to the eTextbook chapter 2, if daily demand is 600 units and lead time is 3 days, then ____ would be
equal to 1800 units
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