Inventory Management And Supply Chain Basics Essay.

1. Explain the importance of inventory, types of inventories, and key decisions and costs

2. Describe the major characteristics that impact inventory decisions

3. Describe how to conduct an ABC inventory analysis

4. Explain how a fixed-order-quantity inventory system operates and how to use the economic order quantity (EOQ) and safety stock models

5. Explain how a fixed-period inventory system operates

6. Describe how to apply the single-period inventory model

7. Explain the basic concepts of supply chain management

8. Describe the activities associated with logistics

9. Describe the types of risks supply chains face and ways to mitigate them

10.Describe how e-commerce has changed the role of supply chains

11. List and describe the important metrics used to measure supply chain performance, and be able to evaluate total supply chain costs and cash-to-cash conversion cycles

12. Describe how organizations are incorporating sustainability issues in managing their supply chains, and explain how manufactured goods recovery and reverse logistics work.

Importance of inventory, types of inventories, and key decisions and costs

1. Inventory management plays a very significant role in the organizations and is closely linked to the supply chain management. Business organizations maintain of finished goods to serve customers using various policies like vendor managed inventory and electronic data interchange. Inventory is considered to be an important asset and companies manage this asset strategically. The apex management plans, coordinates and controls acquiring, storage and movement of stocjk of finished goods and raw materials.

Types of Inventory 

Raw materials, component parts, subassemblies, and supplies

Inputs to manufacturing and service-delivery processes

Work-in-process (WIP) inventory

Partially finished products in various stages of completion that are awaiting further processing

Finished-goods inventory

Completed products ready for distribution or sale to customers

Safety stock inventory

Additional amount of inventory kept over and above the average amount required to meet demand

Managing Inventories in Global Supply Chains

Today’s global supply chains present significant challenges to inventory management.

The components and materials used in nearly any product are often purchased from suppliers across the globe and shipped through complex supply chains. Effective use of technology, processes, and information technology (IT) support combine to effect:

Global sourcing and total system cost considerations

Quality, delivery performance, and technical support

New suppliers and products based on evaluated potential to the company/organization.

Many firms (as well as consumers) subscribe to environmentally preferable purchasing (EPP), (green purchasing)which is the affirmative selection and acquisition of products and services that most effectively minimize negative environmental impacts over the manufacturing life cycle, transportation, use, and recycling or disposal provisions.

                                        

Inventory managers deal with two fundamental decisions:

1. When to order items from a supplier or when to initiate production runs if the firm makes its own items.
2. How much to order or produce each time a supplier or production order is placed.

Inventory management is all about making trade-offs among the costs associated with these decisions.

Inventory costs can be classified into four major categories:

a) Ordering or setup costs incurred as a result of the work involved in placing orders with suppliers or configuring tools, equipment, and machines within a factory to produce an item.

b) Inventory-holding costs or expenses associated with carrying inventory.

c) Shortage costs (stock outs) associated with inventory being unavailable when needed to meet demand.

d) Unit cost of the stock-keeping unit (SKUs) or single items or assets stored at a particular location.

2.Various inventory situations are introduced, the first steps inventory problem analysis comprises description of environment and inventory system characteristics. A description of each approach is offered given the seriousness to which inventory management is considered across industry sectors. 

Inventory Characteristics

The number of Items in multiple locations are assigned a unique identifier, called a stock-keeping unit, or SKU.

Stock-keeping unit (SKU): Single item or asset stored at a particular location

The nature of demand independent versus dependent, constant versus uncertain, and dynamic versus static.

1.Independent demand

Demand for an SKU that is unrelated to the demand for other SKUs and needs to be forecasted

2.Dependent demand

Directly related to the demand of other SKUs and can be calculated without needing to be forecasted

3.Static demand is stable in nature

Major characteristics that impact inventory decisions

4.Dynamic demand varies over time

The Number and Duration of Time Periods

Analyzing inventory for single or multiple periods

Lead time - Time between placement of an order and its receipt

Stockouts - Inability to satisfy the demand for an item

Backorder: Occurs when a customer is willing to wait for an item

Lost sale: Occurs when the customer is unwilling to wait and purchases the item elsewhere

3. ABC Inventory Analysis

One useful method for defining inventory value is ABC analysis. It is an application of the Pareto principle (after an Italian economist who studied the distribution of wealth in Milan during the 1800s who found that a “vital few” controlled a high percentage of the wealth).

ABC analysis gives managers useful information to identify the best methods to control each category of inventory.

Class A items require close control by operations managers.

Class C items need not be as closely controlled and can be managed using auto- mated computer systems.

Class B items are some- where in the middle.

ABC analysis consists of categorizing inventory items or SKUs into three groups according to their total annual dollar usage.

1.“A” items account for a large dollar value but a relatively small percentage of total items.

2.“C” items account for a small dollar value but a large percentage of total items.

3.“B” items are between A and C.

Total dollar usage = Item usage (volume) x Item's dollar value (unit cost)

With a good SKU system, you’ll be able to determine the popularity of different products and their variants, enabling you to make better business decisions. A good way of putting this into practice is through the ABC analysis: A-items are the top sellers with the highest annual consumption value, followed by B-items of medium consumption, and finally, C-items of low consumption value.

ABC analysis can help you to decide which products are worth investing in, and which aren’t. Inventory management software can provide specific insights into this through sales order reports, as opposed to spreadsheets and paper, which only provides retailers with a rough idea of what’s doing well and what isn’t. This works well in relation to the Pareto principle, which states that 80% of the overall consumption value is based on only 20% of the items. Once you’ve drawn up a graph and taken a close look at what your top performers are, it’ll be easier to organize your inventory to reflect this.

As your top performers, A-items need more attention through better inventory control and sales forecasts, and ensuring regular reorder points and avoiding stock-outs of A-items should be your priority.

On the other end of the scale, there are the C-items. Stocking too much of these means you’ll have to bear more carrying costs. Due to the low demand, a recommended policy is to stock only one unit of every C-item on hand, and to place reorders only once a purchase is made.

B-items straddle the two extremes, and reorder points should be adjusted accordingly. The thing about B-items is, they can easily swing either way: becoming top sellers or bottom sellers, depending on their continued performance.

How to conduct an ABC inventory analysis

                                                    

4. Managed Fixed Quantity Inventory

In a fixed-quantity system (FQS), the order quantity or lot size is fixed; that is, the same amount, Q, is ordered every time.

The order quantity (Q) can be any quantity of product, such as a box, pallet, or container, as determined by the vendor or shipping standards; it does not have to be determined economically.  FQSs are used extensively in the retail industry.

The general principles associated with FQS comprise:

• Avoiding Stockouts which is achieved (more or less) by provisioning additional on-hand inventory that acts as a buffer to reduce the risk of a stockout
• Service level considerations which comes down to a basic desired of not having a stockout during a lead-time period

Fixed-Quantity System (FQS)

Deals with a fixed order quantity or lot size

Same quantity is ordered every time, and it does not have to be economically determined

A fixed order quantity system is the arrangement in which the inventory level is continuously monitored and replenishment stock is ordered in previously-fixed quantities whenever at-hand stock falls to the established re-order point. Replenishment takes place after inventory is counted according to a designated time period.

In other words it is an Inventory Control Systems. An inventory system controls the level of inventory by determining how much to order (the level of replenishment), and when to order.

A summary of fixed-quantity systems is given in Exhibits 11.5. Exhibits 11.6 and 11.7 contrast the performance of FQS when demand is relatively stable and highly variable, for those interested in the finer technicalities of the Q Model.

               

Reorder point (r) is determined

r = μL + zσL

–Where

• μL - Average demand during the lead time
• σL - Standard deviation of demand during the lead time
• z - Number of standard deviations necessary to achieve the acceptable service level
• zσL - Amount of safety stock

Suppose that μt and σt are the mean and standard deviation of demand for some time interval (t), then 

   μL = μtL 

  σL = σt√("L " )

Summary of Fixed-Quantity System (FQS)

A more appropriate way to manage an FQS is to continuously monitor the inventory level and place orders when the level reaches some “critical” value. The process of triggering an order is based on the inventory position.

Inventory position (IP) is defined as the on-hand quantity (OH) plus any orders placed but which have not arrived (called scheduled receipts, SR), minus any back-orders (BO).

Fixed-Quantity System managed using:

Inventory position (IP)

On-hand quantity (OH) plus any orders placed that have not arrived (scheduled receipts, SR), minus any backorders (BO)

  IP = OH + SR − BO

When IP falls at or below a certain value (reorder point), a new order is placed

Reorder point (r): Value of the inventory position that triggers a new order

                         

Fixed-Quantity System (FQS) under Stable Demand

                                                         

Fixed-Quantity System (FQS) with Highly Variable Demand

                                                     

Cycle Inventory Pattern for the EOQ Model

How a fixed-order-quantity inventory system operates and how to use the economic order quantity (EOQ) and safety stock models

                                      

The economic order quantity (EOQ) model is a classic economic model developed in the early 1900s that minimizes the total cost, which is the sum of the inventory-holding cost and the ordering cost.

Several key assumptions underlie the quantitative model.

Only a single item (SKU) is considered

Entire order quantity (Q) arrives in the inventory at one time

Deals with only order/setup and inventory-holding costs

No stockouts are allowed

Demand for an item is constant and continuous over time

Lead time is constant

Under the assumptions of the model, the cycle inventory pattern shown here, suggests we we begin with Q units in inventory.

Because units are assumed to be withdrawn at a constant rate, the inventory level falls in a linear fashion until it hits zero.

Because no stockouts are allowed, a new order can be planned to arrive when the inventory falls to zero; at this point, the inventory is replenished back up to Q. This cycle keeps repeating. This regular pattern allows us to compute the total cost as a function of the order quantity, Q.

Economic Order Quantity (EOQ) Model

Annual ordering cost = (Number of orders per year) × (Cost per order)

     = "D" /"Q" C0

Where

D - Annual demand for the product

Q - Number of items ordered

C0 - Cost of placing one order

Total annual cost (TC)

TC = "1" /" 2 "  QCh + "D" /"Q" C0

Economic order quantity (Q*)

Minimizes the total annual cost

Q* = √("2DC0 " )/√("Ch" )

Reorder point (r)

  r = Lead time demand

     = (Demand rate)(lead time)

     = (d)(L)

Because the EOQ model depends only on the order quantity, fixed costs associated with any ordering or inventory holding are irrelevant (in accounting language, these are sunk costs). Therefore, only variable costs of ordering and inventory holding are required for the model.

5. Managed Fixed Period Inventory

The alternative to a fixed-order-quantity system is a fixed-period system (FPS)—sometimes called a periodic review system—in which the inventory position is checked only at fixed intervals of time, T, rather than on a continuous basis.

The two principal decisions in an FPS:

1.The time interval between reviews.

2.The replenishment level.

Fixed-Period System (FPS)

Optimal policy is established using the EOQ model that provides the best economic time interval under model assumptions

  T = "Q∗" /"D"

Where

Q* - Economic order quantity

Optimal replenishment level without safety stock

  M = d(T + L)

Where

d - Average demand per time period

L - Lead time in the same time units

M - Demand during the lead time plus review period

The length of the review period based on the importance of the item or the convenience of review can be left to judgement.

For example, management might select to review non-critical SKUs every month and more critical SKUs every week.

Also the economics of using the EOQ model come in handy to facilitate optimisation

How a fixed-period inventory system operates

Operation of a Fixed- Period System (FPS)

                                    

at the time of the first review, a rather large amount of inventory (IP1) is in stock, so the order quantity (Q1) is relatively small. Demand during the lead time was small, and when the order arrived, a large amount of inventory was still available.

At the third review cycle, the stock level is much closer to zero because the demand rate has increased (steeper slope). Thus, the order quantity (Q3) is much larger. During the lead time, demand was high and some stockouts occurred.

Note that when an order is placed at time T, it does not arrive until time T 1 L. Thus, in using an FPS, managers must cover the risk of a stockout over the time period T 1 L, and therefore, must carry more inventory.

Summary of Fixed-Period Inventory Systems

                

The choice of which system to use—FQS or FPS— depends on a variety of factors, such as how many total SKUs the firm must monitor, whether computer or manual systems are used, availability of technology and human resources, the nature of the ABC profile, and the strategic focus of the organization, such as customer service or cost minimization.

The ultimate decision from an OM persepective is a combination of technical expertise and subjective judgment.

Many other advanced inventory models are available, but the FQS and FPS provide the foundation.

6. Single period inventory model

The single-period inventory model applies to inventory situations in which one order is placed for a good in anticipation of a future selling season where demand is uncertain.

At the end of the period the product has either sold out, or there is a surplus of unsold items to sell for a salvage value.

Single-period models are used in situations involving seasonal or perishable items that cannot be carried (inventory) and sold in future periods.

Single-Period Inventory Model

–Costs are defined as

• cs - Cost per item of overestimating demand
• cu - Cost per item of underestimating demand

–Optimal order quantity is the quantity of Q* that satisfies

  P(demand ≤ Q*) = "cu" /"cu + cs"

Examples include clothing stores that must place orders as far as 6 months in advance of their selling seasons;  or ordering dough (which stays fresh for only 3 days) for a pizza restaurant, or and purchasing seasonal holiday items such as Christmas trees.

In such a single-period inventory situation, the only inventory decision is how much of the product to order at the start of the period.

Because newspaper sales are a typical example of the single-period inventory problem is sometimes referred to as the newsvendor problem.

The newsvendor problem can be solved using a technique called marginal economic analysis, which compares the cost or loss of ordering one additional item with the cost or loss of not ordering one additional item.

7. Supply Chain Management and Logistics

Supply Chain Management (SCM) encompasses the management of all activities that facilitate the fulfillment of a customer order for a manufactured good, to achieve customer satisfaction at reasonable cost.

How to apply the single-period inventory model

Requires several operational activity dimensions

1.Working closely with suppliers

2.Purchasing

3.Transportation

4.Inventory management

5.Managing risks that may disrupt the supply chain

6.Measuring supply chain performance

7.Ensuring sustainability

Logistics is a component of supply chain management which extends to the management of materials and transportation activities to ensure adequate customer service at reasonable cost

1.Vital to satisfy customers' needs and expectations

2.Leads to efficiency in supply chain performance

3.Select transportation carriers

4.Manage company-owned fleets of vehicles, distribution centers, and warehouses

5.Control efficient interplant movement of materials and goods within supply chains

6.Ensure that goods are delivered to customers

APICS Supply Chain Council's SCOR Model for Supply Chains

                         

The Supply Chain Operations Reference (SCOR) model is a framework for understanding the scope of supply chain management (SCM) that is based on five basic functions involved in managing a supply chain:

1.Plan—Developing a strategy that balances resources with requirements and establishes and communicates plans for the entire supply chain. This includes management policies and aligning the supply chain planned or actual demand. This includes identifying and selecting suppliers, scheduling deliveries, authorizing payments, and managing inventory.

2.Source—Procuring goods and services to meet planned or actual demand. This includes identifying and selecting suppliers, scheduling deliveries, authorising payments, and managing inventory.

3.Make—Transforming goods and services to a finished state to meet demand. This includes production scheduling, managing work-in-process, manufacturing, testing, packaging, and product release.

4.Deliver—Managing orders, transportation, and distribution to provide the goods and services. This entails all order management activities from processing customer orders to routing shipments, managing goods at distribution centers, and invoicing the customer.

5.Return—Processing customer returns; providing maintenance, repair, and overhaul; and dealing with excess goods. This includes return authorization, or credit

Sourcing

Key activity in manufacturing

Obtaining raw materials, manufactured components, and subassemblies

Sourcing options for services

Employment agencies

Equipment maintenance and repair companies

Information systems providers

Third-party logistic firms

Engineering services

Health services

Retirement providers

Global sourcing - Seeks to balance various economic factors with delivery performance and quantity requirements

Purchasing

1.Responsible for acquiring raw materials, component parts, tools, services, and other items required from external suppliers

2.Acts as an interface between suppliers and the production function in goods-producing firms

3.Buys the goods necessary to perform services in service firms

Goals of Purchasing

Supporting key internal customers

Ensuring quality, delivery performance, low cost, and technical support

Seeking new suppliers and products continually

Being able to evaluate the strategic, market, and the economic potential of new suppliers and products to the company

Purchasing Responsibilities

1.Learn the material needs of the organization

2.Aggregate orders

3.Select qualified suppliers and negotiating price and contracts

4.Select transportation modes and mix

5.Ensure delivery, expedite, and authorise payments

6.Monitor cost, quality, and delivery performance by supplier worldwide

7.Maintain good relationships with: (i) Internal departments (ii) External suppliers (iii) Third-party logistic providers (iv) Transportation services

Integrate Supply & Value Chain

Supply chain integration is the process of coordinating the physical flow of materials to ensure that the right parts are available at various stages of the supply chain, such as manufacturing and assembly plants. From a broader perspective, drawing upon the value chain concepts in Chapter 1, we may define value chain integration as the process of managing information, physical goods, and services to ensure their availability at the right place, at the right time, at the right cost, at the right quantity, and with the highest attention to quality.

Basic concepts of supply chain management

Value chain integration—where value is in the form of low prices, convenience, and access to special, time-sensitive deals and travel packages takes many forms.

8. Logistics

Logistics managers have the following three primary responsibilities:

1.Purchasing transportation services. ? Selecting appropriate modes of shipment and mix of specific carriers. ? Contracting with suppliers for domestic and global transportation services. ? Negotiating transportation rates, and shipping, insurance, and liability contracts. ? Managing international trade agreements, custom laws, and import/export fees. ? Using business analytics to evaluate different shipping options.

2.Managing the transportation of materials and goods through the supply chain. ? Tracing shipments in transit and expedite them when necessary. ? Coordinating shipments with airports, rail yards, and seaport docks. ? Issuing and auditing freight bills.

3.Managing inventories. ? Managing the flow of goods through warehouses, and sometimes, shipping directly to retail stores and customers. ? Filing claims for damaged goods.

The selection of transportation services is a complex decision, as varied services are available— rail, trucks, airlines/aircargo, ships, and pipeline.

Primary Responsibilities of Logistics Managers

a) Purchasing transportation services

b) Managing the transportation of materials and goods through the supply chain

c) Managing inventories

Consider leisure travel value chains include, Thomas Cook, Contiki, Topdeck, G Adventures and Travelocity which manage information purely to improve value chain more efficient and create value for their customers.

Electronic data interchange and Internet links streamline information flow between global customers and suppliers and increase the velocity of supply chains. Many firms now use cloud-based software for managing inventories in supply chains and synchronizing marketing and supply chain functions. Trucking companies track their trucks via global positioning system (GPS) technology as they move across the country, and many use in-vehicle navigational systems. 

Purchase of Transportation Services involves:

Selecting appropriate modes of shipment and mix of specific carriers

Contracting with suppliers for domestic and global transportation services

Negotiating transportation rates and shipping, insurance, and liability contracts

Managing international trade agreements, custom laws, and import/export fees

Using business analytics to evaluate different shipping options

Management of Transportation of Materials and Goods through Supply Chain

Tracing shipments in transit and expedite them when necessary

Coordinating shipments with airports, rail yards, and seaport docks

Issuing and auditing freight bills

Inventory Management

Managing the flow of goods through warehouses and shipping directly to retail stores and customers

Filing claims for damaged goods

Vendor-Managed Inventory (VMI)

Vendor monitors and manages inventory for the customer

Advantages 

Optimization of production operations

Better control on inventory and capacity

Reduction in total supply chain costs

Disadvantage

Substitutable products from competing manufacturers are not accounted for, resulting in higher than necessary customer inventories

Bullwhip Effect

Inventories exhibit wild swings up and down

Results from order amplification in a supply chain

Order amplification: Occurs when each member of a supply chain orders up to buffer its own inventory

Steps to Counteract Bullwhip Effect

• Modify the supply chain infrastructure and operational processes
• Use smaller order sizes
• Stabilize price fluctuations
• Share information on sales, capacity, and inventory data among the members of the supply chain

9. Risk management in supply chains

Companies face a multitude of risks in managing supply chains.

Risks in domestic supply chains are often minimal; however, risks in global supply chains are much greater. 

Activities associated with logistics

These include  production problems with suppliers that result in material shortages, labour strikes, unexpected transportation delays, delays from customs inspection or port operations, political instability in foreign countries, natural disasters, and even terrorism. 

Risk Management

• Identifying risks that can occur
• Assessing the likelihood that they will occur
• Determining the impact on the firm and its customers
• Identifying steps to mitigate the risks

Risk management involves identifying risks that can occur, assessing the likelihood that they will occur, determining the impact on the firm and its customers, and identifying steps to mitigate the risks.

On the tactical side:

1.Inventory Risks

2.Capacity Risks

3.Logistics and Scheduling Risks

Tactical Supply Chain Risks and possible Management Actions

                                  

On the strategic side:

1.Global Economic Risks

2.Government Risks

3.Product Risks

4.Security Risks

Strategic Supply Chain Risks and Possible Management Actions

                                           

10. Supply chains in e-commerce

 E-commerce has greatly influenced the design and management of supply chains.

There are many types of supply chains other than business to customer (B2C).

Other major e-commerce relationships and supply chain structures include B2B—business to business; C2C—customer to customer; G2C—government to customer; G2G— government to government; and G2B—government to business.

E- Commerce View of Supply Chain

                                     

The e-commerce view of the supply chain shown above features details concerning intermediaries. An intermediary is any entity—real or virtual—that coordinates and shares information between buyers and sellers.

UPS Supply Chain Solutions (SCS), a subsidiary of the giant delivery company United Parcel Service (UPS), is a third- party logistics provider that can act as a return facilita- tor. UPS-SCS focuses on all aspects of the supply chain, including order processing, shipping, repair of defec- tive or damaged goods, and even staffing customer service phone centers.

 Return facilitators specialize in handling all aspects of customers re- turning a manufactured good or delivered service and requesting their money back, repairing the manufactured good and returning it to the customer, and/or invoking the service guarantee. 

11. Measuring supply chain performance

Supply chain managers use numerous metrics to evaluate performance and identify improvements to the design and operation of their supply chains. Business analytics is used to create a visual dashboard for supply chain managers to gain insights into the relationships between these metrics.

Common Metrics Used to Measure Supply Chain Performance

                                          

Supply chain metrics typically balance customer requirements as well as internal supply chain efficien- cies, and fall into several categories, as summarised.

12. Sustainability in supply chains

Today, sustainability is one of the key goals of supply chains.

Large amounts of harmful emissions and pollutants emanate from the supply chain.

Research suggests that upward of 60 to 70 percent of a company’s carbon footprint is found along their supply chain.

How much value does your company place on its supply chain?

Is that value at risk from blind spots or practises that could make you the next poster-child for corporate irresponsibility?
Will your Chief Procurement Officer be taking the rap for a reputational disaster for

your brand of potentially epic proportions?

Sustainable Supply Chain

Uses environmentally friendly inputs and transforms these inputs through change agents

Byproducts can improve or be recycled within the existing environment

Resulting outputs can be reclaimed and reused at the end of their life-cycle

Supplier Certification

Certified supplier: Supplies material of such quality that routine testing on each lot received is unnecessary

Provides recognition for high-quality suppliers, which motivates them to improve continuously and attract more business

Driven by performance measurement and rating processes

Examples of a Manufactured Goods Recovery (Reverse Logistics) Supply Chain

                              

Recovering manufactured goods that will be discarded or unusable

Reuse or resell an equipment

Repair and refurbish a manufactured good

Remanufacture a good

Cannibalize parts

Recycle goods

Incineration or landfill disposal of goods

Reverse Logistics

Manages the flow of finished goods, materials, or components that are unusable or discarded

Uses supply chain from customers toward either suppliers, distributors, or manufacturers

Purpose - Reuse, resale, or disposal

Activities - Logistics, marketing/sales, accounting/finance, call center service, and legal/regulatory compliance