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  1. Periodic review =a performance target specified by management and defines inventory performance objectives
    Generally, the higher the service level target, the higher the amount of inventory you will need to assure the target is achieved.
    e.g. 90% of orders filled complete in 3 order cycle days

          

  2. Determined / Calculated Demand- Describes the internal demand for parts based on the demand of the final product in which the parts are used.

          

  3. Assumptions of Reactive (Pull) Inventory LogicCustomer Service Level - measured as "fill rate"
    Units - the number of units available
    Dollars - the amount of dollars tied up in inventory
    Weeks of Supply - (avg. on-hand inventory) / (avg. weekly usage)
    Inventory Turns - (cost of good sold) / (avg. inventory value)
    Inventory Carrying Cost - (discussed with EOQ)

          

  4. Obsolete Inventoryrepresents the inventory being held by third parties outside the firm in the "downstream" external supply channel.

          

  5. Inventory control defines how often inventory levels are reviewed to determine when and how much to orderSteps:
    1.) Determine annual usage or sales for each item.
    2.) Determine % of total usage or sales that each item represents.
    3.) Rank items from highest to lowest %.
    4.) Classify items into groups:
    A: Highest Value
    B: Moderate Value
    C: Least Valuable

          

  6. When is safety stock neededis inventory held for the purpose of buffering against variations or uncertainty in demand or supply.

          

  7. Fair Share AllocationAll demand is satisfied. Stock-outs are not allowed.
    Rate of demand is continuous, constant and known
    Replenishment lead time is constant and known
    Unit price of product is constant and independent of order quantity or time
    Holding/Carrying cost is known and constant.
    Ordering cost is known and constant
    An infinite planning horizon exists
    No interaction between multiple items of inventory
    No in transit inventory time
    No limit is placed on capital availability

          

  8. Dependent Demand- Describes the internal demand for parts based on the demand of the final product in which the parts are used.

          

  9. Policies and Parametersmust be defined at a detailed level
    e.g., data requirements, software applications, performance objectives, and decision guidelines

          

  10. An ABC System classifies inventory based the degree of importance:Steps:
    1.) Determine annual usage or sales for each item.
    2.) Determine % of total usage or sales that each item represents.
    3.) Rank items from highest to lowest %.
    4.) Classify items into groups:
    A: Highest Value
    B: Moderate Value
    C: Least Valuable

          

  11. Planning safety stock requires three steps:Safety stock is only needed for under-forecast (demand exceeds forecast) error!

          

  12. The primary functions of inventory are:Buffering against uncertainty in the marketplace
    Decoupling dependencies in the supply chain
    Balancing demand and supply
    Geography (Where used)

          

  13. Approaches to implementing inventory management policies:Inventory Control is the managerial procedure for implementing an inventory policy
    Demand Uncertainty involves the variation in sales during the lead time necessary to replenish inventory
    Supply (or performance cycle) Uncertainty involves variation in the time and/or quantity necessary to replenish inventory.
    Time Buckets are discrete increments of time used to facilitate planning activities
    Reorder Point defines when a replenishment order is initiated.
    Carrying Cost is the expense associated with maintaining inventory.
    Safety Time is ordering an item earlier than necessary based on the lead time, to assure timely arrival.
    Fill Rate represents the magnitude of a backorder or stockout. Can be case fill rate, line fill rate, etc.

          

  14. MRP and DRPgiven the highest priority. "80/20 rule" Generally, A items account for approximately 20% of the total number of items, but about 80% of the total inventory cost.

          

  15. Inventory Carrying Cost PolicyInventory carrying cost is an imputed cost. It doesn't appear in the financial statement. Companies determine the cost of capital they want to use which is typically the return they expect on investments.


    Final carrying cost percent used by a firm is a managerial policy

          

  16. Vendor Managed Inventory (VMI)VMI arrangements transfer the responsible for managing the inventory located at a customer's facility back to the vendor/manufacturer of that inventory.

    The vendor/manufacturer:
    -Stocks inventory
    -Places replenishment orders
    -Arranges the display
    -Typically owns inventory until purchased
    -Is required to work closely with customer

          

  17. Every unit/dollar of inventory that you can reducedrops right to the bottom line as pure savings

          

  18. Other Important Inventory Related DefinitionsInventory Control is the managerial procedure for implementing an inventory policy
    Demand Uncertainty involves the variation in sales during the lead time necessary to replenish inventory
    Supply (or performance cycle) Uncertainty involves variation in the time and/or quantity necessary to replenish inventory.
    Time Buckets are discrete increments of time used to facilitate planning activities
    Reorder Point defines when a replenishment order is initiated.
    Carrying Cost is the expense associated with maintaining inventory.
    Safety Time is ordering an item earlier than necessary based on the lead time, to assure timely arrival.
    Fill Rate represents the magnitude of a backorder or stockout. Can be case fill rate, line fill rate, etc.

          

  19. Segment Strategy definitionraw materials, work-in-process, finished goods, and maintenance, repair, and operations (MRO) (Stocked internally)

          

  20. Calculating Safety Stockis inventory held for the purpose of buffering against variations or uncertainty in demand or supply.

          

  21. Formula for Calculating Safety StockK X sqrt(Lead time X dc) X 1.25 MAD
    K= Customer service level
    Lead time = time to replenish goods
    DC=Number of distribution centers where there's safety stock
    MAD = Mean absolute deviation of the monthly demand(past 12 months)

          

  22. A items areis inventory held for the purpose of buffering against variations or uncertainty in demand or supply.

          

  23. EOQ ='sTotal Cost = Purchase Cost + Ordering Cost + Holding Cost

    Total cost is driven by inventory planning decisions which establish when and how much to order

          

  24. Inventory Carrying Cost ComponentsOrdering Costs - are incurred each time an order is placed
    Order preparation costs
    Order transportation costs
    Order receipt processing costs
    Material handling costs

          

  25. Determining How Much to OrderOrder quantities computed with Material Requirements Planning (MRP).
    Relationship between independent and dependent demand shown in Bill of Materials (BOM).
    Subassemblies, components, & raw materials are examples of dependent demand items.
    Example: Pick-up Truck Engine

          

  26. Who are your key customers/stakeholders?Safety stock is only needed for under-forecast (demand exceeds forecast) error!

          

  27. Pipeline Inventoryis stock that is expired/out-of-date or no longer needed.

          

  28. Common measures of service level include:Performance Cycle - the elapsed time between release of a purchase order by the buyer to the receipt of shipment
    Case Fill Rate - the percent of cases ordered that are shipped as requested
    Line Fill Rate - the percent of order lines (items) that were filled completely as requested
    Order Fill - the percent of customer orders filled completely as requested

          

  29. Safety StockTotal Cost = Purchase Cost + Ordering Cost + Holding Cost

    Total cost is driven by inventory planning decisions which establish when and how much to order

          

  30. Safety Stock with Combined Uncertainty\ is inventory to satisfy actual or projected demand in the next immediate time

          

  31. Profile Replenishment (PR)is a technology-driven cooperative effort between retailers and suppliers to improve inventory velocity while matching supply to consumer buying patterns

          

  32. Requirements Planning- Describes the internal demand for parts based on the demand of the final product in which the parts are used.

          

  33. Dependent Demand ReplenishmentDependent demand inventory requirements are a function of known events that are not random

    Dependent demand does not require forecasting because there is no uncertainty

    Generally, no specific safety stock is needed to support time-phased procurement programs (e.g., MRP)

    No safety stock assumes
    -Procurement replenishment is predictable and constant
    -Vendors and suppliers maintain adequate inventories to satisfy 100% of purchase requirements

          

  34. Collaborative Inventory Replenishment Programsare designed to streamline the flow of goods within the supply chain

    Intent is to reduce reliance on forecasting and position inventory using actual demand on a just-in-time basis

          

  35. Total costTotal Cost = Purchase Cost + Ordering Cost + Holding Cost

    Total cost is driven by inventory planning decisions which establish when and how much to order

          

  36. Service Level isa performance target specified by management and defines inventory performance objectives
    Generally, the higher the service level target, the higher the amount of inventory you will need to assure the target is achieved.
    e.g. 90% of orders filled complete in 3 order cycle days

          

  37. Typical Adjustments to EOQ-Volume Transportation Rates offer a freight-rate discount for larger shipments
    -Quantity discounts offer a lower per unit cost when larger quantities are purchased

    -Ordering in full production lot sizes (due to vendor requirement, quality, etc.)
    -Multiple-item purchase (may generate a volume discount or other benefit)
    -Limited capital - may not be able to afford to buy the EOQ quantity at one time
    -Dedicated trucking (due to security reasons, cross contamination concerns, etc.)

          

  38. Inventory Ordering Cost Components-Cost of capital - specified by senior management
    -Taxes - on inventory held in warehouses
    -Insurance - based on estimated risk or loss over time and facility characteristics
    -Obsolescence - deterioration of product during storage, and shelf-life
    e.g., food and pharmaceutical sell-by dates
    -Storage - facility expense related to product holding rather than product handling


    is the expense associated with maintaining inventory

    Annual inventory carrying cost percent times average inventory value

          

  39. Three approaches to introduce safety stock into dependent demand situations if necessaryAnticipatory / Planning (or push) Approach proactively allocates inventory on the basis of forecasted demand and product availability

    Responsive / Reactive (or pull) Approach responds to actual customer demand to pull the product through the distribution channel

    Hybrid approach uses a combination of push and pull

          

  40. Cycle Stock (aka base stock)Service level is equal to 100% minus probability % of stockout
    e.g., a service level of 99% results in a stockout probability of 1%

    The most common probability distribution for demand is the normal distribution, i.e., "bell curve"

    From analysis of historical demand data the safety stock required to ensure a stockout only 1% of the time is possible

    A one-tailed normal distribution is used because only demand that is greater than the forecast can create a stockout.

    Is the forecast error bias on the over-forecast or under-forecast side of the

          

  41. Independent Demand- The demand for the final product. Has a demand pattern affected by trends, seasonal patterns, & general market conditions.
    Forecasted Demand
    Example: Pick-up Truck

          

  42. EOQ Model AssumptionsAll demand is satisfied. Stock-outs are not allowed.
    Rate of demand is continuous, constant and known
    Replenishment lead time is constant and known
    Unit price of product is constant and independent of order quantity or time
    Holding/Carrying cost is known and constant.
    Ordering cost is known and constant
    An infinite planning horizon exists
    No interaction between multiple items of inventory
    No in transit inventory time
    No limit is placed on capital availability

          

  43. What are the 2 types of uncertainty we are trying to account for with safety stock?1.)Demand Uncertainty — when and how much product will our customers order?
    2.)Supply (Performance Cycle) Uncertainty — how long will it take to replenish inventory with our customers?

    Variations must be considered in both areas to make effective inventory planning decisions

          

  44. B & C itemsTotal Cost = Purchase Cost + Ordering Cost + Holding Cost

    Total cost is driven by inventory planning decisions which establish when and how much to order

          

  45. Quick Response (QR)is a technology-driven cooperative effort between retailers and suppliers to improve inventory velocity while matching supply to consumer buying patterns

          

  46. Anticipation (Speculative) / Strategic Inventoryis to hedge a currency exchange, take advantage of a discount, protect against a major short-term disruptive event in supply, take advantage of a major business opportunity for sales, provide for life cycle changes; seasonal, launch, bridging, etc.

          

  47. Inventory Definitionsraw materials, work-in-process, finished goods, and maintenance, repair, and operations (MRO) (Stocked internally)

          

  48. Perpetual review =a performance target specified by management and defines inventory performance objectives
    Generally, the higher the service level target, the higher the amount of inventory you will need to assure the target is achieved.
    e.g. 90% of orders filled complete in 3 order cycle days

          

  49. Vendor Managed Inventory detail (VMI)VMI arrangements transfer the responsible for managing the inventory located at a customer's facility back to the vendor/manufacturer of that inventory.

    The vendor/manufacturer:
    -Stocks inventory
    -Places replenishment orders
    -Arranges the display
    -Typically owns inventory until purchased
    -Is required to work closely with customer

          

  50. Common Metrics for Inventory:is stock that is expired/out-of-date or no longer needed.

          

  51. Maintenance, Repair, and Operations (MRO)are items that are needed by the firm to operate the business and/or produce products but do not end up as part of the final product.

          

  52. Product/Market Classificationprovides each distribution facility with an equitable distribution of available inventory

    Limited ability to manage multistage inventories

    DS=AQ+Sum Inventory for each whse /sum of daily demand for each whose
    Amount allocated = (DS * D) - I

    DS = Common days supply for warehouse inventories
    AQ = Inventory units to be allocated from plant warehouse = 500
    Ij = Inventory in units for warehouse J
    Dj = Daily demand for warehouse J