Ch 20 - Inventory Management

Question 1

. Logistics managers have to perform a daily, delicate act balancing:

Answer 1

• Transportation costs against fulfillment speed
• Inventory costs against the cost of stock outs
• Customer satisfaction against the cost to serve
• New capabilities against profitability

What’s more, two accelerating business trends are making it even harder to synchronize supply chains (global sourcing is forcing supply chains to stretch farther across borders, and powerful retailers and other end customers with clout are starting to push value-added supply chain responsibilities further up the supply chain).

Question 2

What is a decoupling point

Answer 2

A decoupling point is where inventory is carried and allows the “upstream” part of the supply chain to operate relatively independent of the “downstream” part.

customer order decoupling point, which is a point where inventory is positioned to allow processes or entities in the supply chain to operate independently. For example, if a product is stocked at a retailer, the customer pulls the item from the shelf and the manufacturer never sees a customer order. In this case, inventory acts as a buffer to separate the customer from the manufacturing process. Selection of decoupling points is a strategic decision that determines customer lead times and can greatly impact inventory investment.

Question 3

What is inventory?

Answer 3

Inventory is the STOCK of any item or resource used in an organization. An inventory system is the set of policies and controls that monitor levels of inventory and determine what levels should be maintained, when stock should be replenished, and how large orders should be. By convention, manufacturing inventory generally refers to items that contribute to or become part of a firm’s product output. Manufacturing inventory is typically classified into raw materials, finished products, component parts, supplies, and work-in-process. In distribution, inventory is classified as in-transit, meaning that it is being moved in the system, and warehouse, which is inventory in a warehouse or distribution center. Retail sites carry inventory for immediate sale to customers. In services, inventory generally refers to the tangible goods to be sold and the supplies necessary to administer the service.

Question 4

What is the basic purpose of inventory analysis (whether in manufacturing, distribution, retail, or services)?

Answer 4

(1) when items should be ordered and (2) how large the order should be.

Many firms are tending to enter into longer-term relationships with vendors to supply their needs for perhaps the entire year. This changes the “when” and “how many to order” to “when” and “how many to deliver.”

Question 5

All firms (including JIT operations) keep a supply of inventory for the following reasons:

Answer 5

1. To maintain independence of operations. A supply of materials at a work center allows that center flexibility in operations. For example, because there are costs for making each new production setup, this inventory allows management to reduce the number of setups. Independence of workstations is desirable on assembly lines as well. The time it takes to do identical operations will naturally vary from one unit to the next. Therefore, it is desirable to have a cushion of several parts within the workstation so that shorter performance times can compensate for longer performance times. This way, the average output can be fairly stable.
2. To meet variation in product demand. If the demand for the product is known precisely, it may be possible (though not necessarily economical) to produce the product to exactly meet the demand. Usually, however, demand is not completely known, and a safety or buffer stock must be maintained to absorb variation.
3. To allow flexibility in production scheduling. A stock of inventory relieves the pressure on the production system to get the goods out. This causes longer lead times, which permit production planning for smoother flow and lower-cost operation through larger lot-size production. High setup costs, for example, favor producing a larger number of units once the setup has been made.
4. To provide a safeguard for variation in raw material delivery time. When material is ordered from a vendor, delays can occur for a variety of reasons: a normal variation in shipping time, a shortage of material at the vendor’s plant causing backlogs, an unexpected strike at the vendor’s plant or at one of the shipping companies, a lost order, or a shipment of incorrect or defective material.
5. To take advantage of economic purchase order size. There are costs to place an order: labor, phone calls, typing, postage, and so on. Therefore, the larger each order is, the fewer the orders that need be written. Also, shipping costs favor larger orders—the larger the shipment, the lower the per-unit cost.
6. Many other domain-specific reasons. Depending on the situation, inventory may need to be carried. For example, in-transit inventory is material being moved from the suppliers to customers and depends on the order quantity and the transit lead time. Another example is inventory that is bought in anticipation of price changes such as fuel for jet planes or semiconductors for computers. There are many other examples.

Question 6

A key idea about inventory!

Answer 6

Every individual item in inventory should be there for a specific purpose. Also, when you see an item in inventory, put a dollar sign on it. Inventory is like piles of money sitting in a warehouse.

Question 7

In making any decision that affects inventory size, the following costs must be considered:

Answer 7

1. Holding (or carrying) costs. This broad category includes the costs for storage facilities, handling, insurance, pilferage, breakage, obsolescence, depreciation, taxes, and the opportunity cost of capital. Obviously, high holding costs tend to favor low inventory levels and frequent replenishment.
2. Setup (or production change) costs. To make each different product involves obtaining the necessary materials, arranging specific equipment setups, filling out the required papers, appropriately charging time and materials, and moving out the previous stock of material. If there were no costs or loss of time in changing from one product to another, many small lots would be produced. This would reduce inventory levels, with a resulting savings in cost. One challenge today is to try to reduce these setup costs to permit smaller lot sizes. (This is the goal of a JIT system.)
3. Ordering costs. These costs refer to the managerial and clerical costs to prepare the purchase or production order. Ordering costs include all the details, such as counting items and calculating order quantities. The costs associated with maintaining the system needed to track orders are also included in ordering costs.
4. Shortage costs. When the stock of an item is depleted, an order for that item must either wait until the stock is replenished or be canceled. When the demand is not met and the order is canceled, this is referred to as a stock out. A backorder is when the order is held and filled at a later date when the inventory for the item is replenished. There is a trade-off between carrying stock to satisfy demand and the costs resulting from stock outs and backorders. This balance is sometimes difficult to obtain because it may not be possible to estimate lost profits, the effects of lost customers, or lateness penalties. Frequently, the assumed shortage cost is little more than a guess, although it is usually possible to specify a range of such costs.

Question 8

An important characteristic of demand relates to whether demand is derived from an end item or is related to the item itself. We use the terms independent demand and dependent demand to describe this characteristic, but what do they mean?

Answer 8

An important characteristic of demand relates to whether demand is derived from an end item or is related to the item itself. We use the terms independent demand and dependent demand to describe this characteristic. Briefly, the distinction between independent and dependent demand is this: In independent demand, the demands for various items are unrelated to each other. For example, a workstation may produce many parts that are unrelated but that meet some external demand requirement. In dependent demand, the need for any one item is a direct result of the need for some other item, usually a higher-level item of which it is part.

Question 9

How to determine required quantaties of dependent demand an independent demand?

Answer 9

In concept, dependent demand is a relatively straightforward computational problem. Required quantities of a dependent-demand item are simply computed, based on the number needed in each higher-level item in which it is used. For example, if an automobile company plans on producing 500 cars per day, then obviously it will need 2,000 wheels and tires (plus spares). The number of wheels and tires needed is dependent on the production levels and is not derived separately. The demand for cars, on the other hand, is independent—it comes from many sources external to the automobile firm and is not a part of other products; it is unrelated to the demand for other products.

To determine the quantities of independent items that must be produced, firms usually turn to their sales and market research departments. They use a variety of techniques, including customer surveys, forecasting techniques, and economic and sociological trends, as we discussed in Chapter 18 on forecasting. Because independent demand is uncertain, extra units must be carried in inventory. This chapter presents models to determine how many units need to be ordered, and how many extra units should be carried to reduce the risk of stocking out.

Eg the weel is independent demand but downstream it has dependent demand?

Question 10

What is an inventory system and why is it important?

Answer 10

An inventory system provides the organizational structure and the operating policies for maintaining and controlling goods to be stocked. The system is responsible for ordering and receipt of goods: timing the order placement and keeping track of what has been ordered, how much, and from whom. The system also must follow up to answer such questions as: Has the supplier received the order? Has it been shipped? Are the dates correct? Are the procedures established for reordering or returning undesirable merchandise?

Question 11

Inventory systems can be divided into single-period systems and multiple-period systems.

Answer 11

The classification is based on whether the decision is just a one-time purchasing decision where the purchase is designed to cover a fixed period of time and the item will not be reordered (Single-Period Inventory Mode), or the decision involves an item that will be purchased periodically where inventory should be kept in stock to be used on demand.