Basics of Supply Chain Managment (Lesson 6)

UUnit nit 11 BBasics asics ooff SSupply upply CChain hain M anagement Management Lesson 6 Basics of Inventory Management

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Basics of Supply Chain Management

Preface............................................................................................................3 Course Description................................................................................................................. 3

Lesson 6 – Basics of Inventory Management...................................................4 Introduction and Objectives.................................................................................................. 4 Characteristics of Inventory .................................................................................................. 4 Types of Inventory ................................................................................................................. 4 Aggregate Inventory Management ....................................................................................... 7 Item Inventory Management ................................................................................................. 8 Reasons for Holding Inventory ............................................................................................. 8 Inventory Functions and Objectives..................................................................................... 8 Costs of Inventory ................................................................................................................ 11 ABC Inventory Control ....................................................................................................... 13 Inventory and Financial Accounting .................................................................................. 14 Summary ............................................................................................................................... 16 Further Reading ................................................................................................................... 16 Review ................................................................................................................................... 17 What’s Next? ........................................................................................................................ 18

Appendix.......................................................................................................19 Answers to Review Questions .............................................................................................. 20

Glossary ........................................................................................................22

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Basics of Supply Chain Management Preface Course Description This document contains the sixth lesson in the Basics of Supply Chain Management unit, which is one of five units designed to prepare students to take the APICS CPIM examination. The Basics of Supply Chain Management unit provides the foundation upon which the other four units build. It is necessary to complete this unit, or gain equivalent knowledge, before progressing to the other units. The five units, which together cover the CPIM syllabus, are: Basics of Supply Chain Management Master Planning of Resources Detailed Scheduling and Planning Execution and Control of Operations Strategic Management of Resources Please refer to the preface of Lesson 1 for further details about the support available to you during this course of study. This publication has been prepared by E-SCP under the guidance of Yvonne Delaney MBA, CFPIM, CPIM. It has not been reviewed nor endorsed by APICS nor the APICS Curricula and Certification Council for use as study material for the APICS CPIM certification examination.

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Basics of Supply Chain Management Lesson 6 – Basics of Inventory Management Introduction and Objectives In this lesson the requirement for effective inventory management is examined. The lesson looks at the functions of various inventories, the objectives of inventory management and the costs related to carrying inventory. It also covers various methods of inventory management. On completion of this lesson you will be able to: Explain the importance of effective inventory management in a manufacturing organization Classify inventory based on flow of material Identify the functions of various types of inventory State the objectives of inventory management Identify cost factors when making inventory decisions Determine the costs of ordering and carrying inventory Analyze and explain simple financial stateme nts Calculate inventory turns

Characteristics of Inventory Inventory is defined by APICS as stocks or items used to support production, including raw materials and work- in-progress items. It also covers stocks or items for supporting activities such as ma intenance, repair and operating supplies. Finally, inventory also includes stocks of finished goods and spare parts. The way in which inventory is managed influenced by the purpose of the inventory, importance and the relative costs purchasing and storing the inventory item question.

is its of in

Types of Inventory Raw Materials APICS defines raw materials as ‘purchased items or extracted materials that are converted via the manufacturing process into components and products.’ Raw materials are always changed or converted during production in contrast with purchased components, which are used in their original state as part of the build for a more complex product. For example, in the production of an electric kettle, a company buys in plastic and heating elements. The plastic must be moulded to the correct shape for the © Copyright Leading Edge Training Institute

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kettle. The element is inserted but is not modified in any way. In this case the raw material is the plastic and the element is a purchased component. In engineer-to-order or make-to-order environments, raw materials may be ordered only when a customer order is received, resulting in long lead times. More often, replenishment systems are often used to ensure that raw material is always available when a customer order is received. Assemble-to-order and make-to-stock organizations tend to use MRP to calculate top level requirements, then calculating the amounts to order by using netting and order rules. Work-In-Process (WIP) WIP inventory is any material in production. That is all raw material that has been released for initial processing, any material throughout the production process up to completely processed material awaiting final inspection and sign off as finished goods. This classification may include partially finished stock and components. WIP covers any material out on the factory floor and allocated to a manufacturing order or work center account. It also covers partially finished product that has been manufactured and then stored for use at a later stage of production. Material held in stock has three cost elements: material, labor and overhead. Parts in process in manufacturing should carry any costs they have incurred up to the current point of their progress through the production process. WIP increases as the levels in a BOM increase. By reducing BOM levels so there are fewer sub-assembly levels, WIP can be reduced. Lead times also affect the amount of WIP inventory: the longer the lead time, the higher the level of WIP. Assemble-to-order businesses hold a higher level of WIP than of finished goods. This is because product is stored as part-finished and raw materials until a customer order is received that triggers final assembly. This can be more economical than holding finished stock of all possible product configurations. In Dell, all components of computers are stored but the final product is assembled only when a customer order is received with a detailed specification of requirements. Finished Goods Finished goods or finished products inventory comprises all items that have moved completely through manufacture and final testing and are available for shipment to customers as either end items or repair parts. End items are any items subject to a customer order or sales forecast. Completed end items that have been manufactured for a specific customer order are classed as finished goods until shipment. During shipping they are classed as goods in transit. Items that have been made for stock, have passed final inspection and have been booked into the store are also classed as finished goods. There are three reasons for holding finished goods inventory; It enables manufacturing to produce in economical lot sizes It creates a buffer between manufacturing and customer demand It reduces customer lead times. Finished goods inventory comprises safety stock, which supports customer service levels by protecting against demand variation, and lot size inventory or cycle stock, which is stock that has been manufactured for sale.

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Basics of Supply Chain Management Service Parts Service parts are components that will be used to replace an original part. Usually, the part is used in manufacturing to build an end item. However, it must also be sold by the service department to various outlets as a spare part. For such items there are two different demands: demand dependent on final product demand and independent demand for spare parts. Forecasting requirements for service parts is difficult but must be attempted if customer service levels are to be maintained. For example, in the manufacture of washing machines a heating element is needed in the production of each new washing machine. It is also required as a spare part for the repair of washing machines already sold. Maintenance, Repair and Operating Supplies (MRO) These three types of supplies are classed as one inventory category but are each treated in different ways. Maintenance parts are spare parts for the machinery on the production floor and must be held to enable the machinery to run and to be repaired quickly. Such parts are usually kept in an engineering store and are controlled by the maintenance engineering department. Replenishment of these parts may be scheduled. This is done by generating a BOM for each standard machine service when it is known that certain parts will be replaced. Repair parts will be needed to cover failure or breakdown of machines. These may be held on a simple replenishment system or bought as required. Operating supplies are all materials used in production but not included in the BOM. These are generally classed as an expense and do not add va lue to the final product but rather add to the factory overhead. Examples of operating supplies include rubber gloves needed by operators to protect against product contamination or paper towels used during production to mop up small spills. Other examples include machine lubrication oil, tape and glue for packaging etc. These items may be classed as factory consumables. Usually a max/min order point rule is used for their replenishment. Where possible, companies aim to list operating supplies on the bill of material to ensure that the supply of items is in line with demand and to charge the correct amount to each product. The diagram below illustrates the various inventories and flow of materials in a typical manufacturing facility.

Suppliers

Raw materials, purchased parts and materials

Warehouses

Customers

Finished Goods

WIP

Production Facility

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Basics of Supply Chain Management Aggregate Inventory Management Aggregate inventory management controls inventory according to its classification and by the function it performs rather than by the item itself. The most usual classifications are: Raw material WIP Finished goods Spare parts Maintenance, repair, and operating supplies (MRO) The following diagram explains the positioning of the different types of inventory in the manufacturing process. Raw materials, components, and MRO inventory are brought in by suppliers at the beginning of the manufacturing process. During production, items at various stages in the production process are termed work- in-progress or work- in-process (WIP) inventory. Finally, the stock of product that is ready to send to the customer is termed finished goods inventory. Supplier A

Supplier B

MRO

Components

Supplier C

Raw Materials

WIP

Finished Goods

Warehouse 1

Consumer

Warehouse 2

Consumer

Figure 1 Inventory Types and Their Position in the Supply Chain

Aggregate inventory management is concerned with managing inventory costs; the costs of procuring and storing inventory. It involves examination of: The flow of inventory The types of inventory required Supply and demand patterns The functions that inventory performs The objectives of inventory management The costs associated with inventory © Copyright Leading Edge Training Institute

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Basics of Supply Chain Management 1. Select the best description of MRO inventory. A. Raw materials used in production planning B. Items used in production that are not part of the product Review Q

C. Stationary and similar items used in administrative planning D. Finished goods in distribution

Item Inventory Management At individual inventory level, decision rules are required about each single inventory item. These rules will identify the importance of the inventory item, the way it which it is to be controlled, the minimum or optimum order amount and when an order should be placed for the item.

Reasons for Holding Inventory Manufacturing operations connect one inventory or stock point to another. The main purpose of inventories is to separate, or uncouple, the various sequential stages of the supply chain. This separation allows the differentiation of the types of inventories. In turn, this differentiation allows for greater control over the management of each of the following classifications of stock: Raw material inventory uncouples the manufacturer from its suppliers. WIP uncouples each step of the production process from the next step. The finished goods inventory uncouples the manufacturer from its customers.

Inventory Functions and Objectives Inventory is held to help meet three conflicting objectives. These are: Best customer service: supplying the customer with what is wanted when it is wanted. Low cost plant operation: inventory allows for more flexible outputs in different work centers, so that production may be more efficient through production levelling and reduced number of production runs. Minimum inventory investment: in both purchasing and carrying costs

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Basics of Supply Chain Management Customer Service Customer service is the ability of a company to satisfy the needs of customer service. With regard to inventory, the term describes the availability of items as needed. The customer in question may not be the final purchaser. Distributors or other plants in the organization, or work stations requiring material can be classed as customers. Customer service can be measured in several ways, depending on the needs of the organization, for example: Percentage of orders shipped on schedule Percentage of line items shipped on schedule Order-days out of stock To guard against uncertainty of demand it is often necessary to carry extra inventory, called safety stock, which is carried to ensure that customer service levels are maintained. Low-Cost Plant Operation There are several ways in which maintenance of appropriate inventory levels improves plant efficienc y: Inventories enable operations with different production rates to operate separately with inventories built up between. Each operation performs at the most efficient rate with neither operation dependent on the speed of the other. Inventories can be built up in anticipation of varying seasonal demand, allowing for a level production equal to average demand, and resulting in lower costs in overtime, hiring and firing, training, subcontracting, and capacity. Building inventories allows for longer production runs thereby reducing setup costs per item and increasing production capacity as less time is needed for setup. Maintaining inventories allows production to purchase in larger quantities, thereby taking advantage of quantity discounts and reducing order costs per unit. Maintaining inventories carries a cost and investment in inventory must be balanced with the costs of chase production, placing orders, and transporting inventory. Another factor that must be balanced against inventory costs is customer service. When inventory levels are high, customer service levels rise as the likelihood of stockouts diminishes. Inventory should be maintained at the optimum level to ensure the desired level of customer service is maintained.

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Basics of Supply Chain Management Functions of Inventory Inventory may be held for a variety of reasons and may perform several functions. For example, inventory may be held to: Anticipate future demand (to cover for promotions, peak selling season, potential strikes, holidays etc) Cover for fluctuations in supply or demand and avoid stockouts Save money (where holding costs are less than purchase costs of small lots) Cover transportation times using transportation, pipeline or movement inventories Protect against exposure to price fluctuation in critical supplies using hedge inventories In batch manufacturing, inventories are used to decouple supply and demand. Inventories buffer between supply and demand, customer demand and finished goods, finished goods and component availability, requirements for an operation and the output from the preceding operations, parts and materials to begin production and the suppliers of materials. Suppliers

Raw material buffer

Work Station 1

WIP buffer

Work Station 2

Finished goods buffer

Customer Demand

Manage Uncertainties One of the reasons why a manufacturing organization carries inventories is to manage uncertainties in supply and demand, which are part of any business. Inventory of this sort is often called safety stock. No organization can predict the demand for products and services over an extended period of time. Nor can the organization be sure that all suppliers are going to provide raw material and components on time, in the right quantity, and to the right quality. Manage Funds Efficiently Another reason for carrying inventory is that an organization may be better able to manage financial resources by high- volume stockholding. Financial gains through high- volume stockholding may include: Bulk-buying discounts Economies of transport and administration resulting from less frequent supply Possible reduction of machinery set-up and downtime Plan for Anticipated Changes The third reason why a manufacturing organization carries inventories is to plan for anticipated changes in demand or supply. This would be particularly important in industries that are seasonal by their nature.

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For example, an organization manufacturing games for the Christmas market would build up its finished goods levels in August, September, and October in anticipation of demand for its products. Some organizations, such as component suppliers, may stockpile certain components, especially if there is a fear of future shortages. Cover for Stock in Transit The fourth, and main, reason why a manufacturing organization carries inventories is to cover for stock in transit. This means compensating for transit times between the supplier and the manufacturer and between the manufacturer and the customer. For example, if a company in Europe is purchasing printed circuit boards (PCBs) from Asia, it will usually hold approximately six weeks of the PCBs in stock to allow for transit time by sea from Asia. 2. All of the following are reasons to hold anticipation inventory except: A. Price breaks B. Approaching peak season Review Q

C. Shutdown for vacation D. Potential strikes

Costs of Inventory Inventory should only be carried beyond what is currently required if it costs less to carry it than to procure it when it’s required. There are several costs associated with holding inventory. These include costs of purchasing, storage, insurance, quality, coordination, poor responsiveness, obsolescence, ordering, manufacturing, lost sales, and assessing inventories. Carrying Costs Carrying costs cover the cost incurred as a result of carrying inventory. These costs include the money tied up in inventory, the costs of storing and managing the inventory, such as warehouse costs, equipment costs, inventory management systems, personnel etc. Costs associated with the risk of damage, loss, scrap, wear and tear, and obsolescence must also be included here, along with the cost of insuring against some of these risks. Purchasing Costs An organization has to invest funds to buy the relevant components and raw materials in order to build up the inventory. This investment comes from savings, cash flow, or borrowings. Storage Costs Regardless of the type of inventory held, space will be needed to store the material. The cost of space is significant in any business, and unnecessary levels of stock should be avoided. Warehousing costs include maintenance of warehouse and equipment, the capital cost of the storage facility (for example rental), and, most significantly, the cost of labor required to manage and move materials.

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Basics of Supply Chain Management Insurance Costs Most manufacturing organizations insure their goods against losses due to factors such as fire, flood, and theft. Therefore, the higher the value of goods in storage, the higher the insurance costs. Quality Costs If there are large amounts of inventory in storage and a quality problem is identified in the manufacturing process, significant costs will be incurred in unpacking, retesting, and, if necessary, reworking, and repacking the product. Moreover, by the time a problem is identified and fixed, other volumes of product are likely to have been produced with similar or different defects. The cost associated with this could be considerable. Cost of Obsolescence The greater the level of inventory in a process, the higher the risk that components or finished products may have to be scrapped because of obsolescence. For example, if engineering personnel decide to change a feature on a product in response to customer demands, the customers might not want the older model. An engineering change may also mean that a particular component is no longer needed for the organization’s products. Cost of Ordering Inventory management can reduce the overall ordering costs of raw materials and components by ordering in larger quantities, which decreases the number of orders. However, the total landed cost of the item, and not just the price of the item itself, needs to be taken into account. This includes the cost of receivers who take in material, the costs of setting up suppliers, and the cost of material planners and buyers, and any other cost associated with placing orders on either the factory or suppliers. Cost of Items Suppliers do offer bargains and discounts for bulk buying. However, it should be remembered that the total landed cost of the component is more important than the price of the component itself. The potential cost associated with poor quality, storage space, obsolescence, and insurance for these bargain components must be considered. Cost of Production Setup In many manufacturing organizations, the setup cost is considerable. This cost can be reduced by having machines processing the same material and producing the same product for longer periods of time. Frequent changeover of the stock slows production down. Cost of Stockouts and Lost Sales If deliveries are not made on time to customers or if products are not available on the market consistently, sales are likely to be lost. The cost of a missed sale is very difficult to calculate, but the potential of losing a customer and sales must be factored into any cost analysis. Cost of Assessing Inventory Most manufacturing organizations perform a physical inventory at least annually, and production activities cease during this period. Physical inventories are time-consuming and usually require © Copyright Leading Edge Training Institute

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Basics of Supply Chain Management human and time resources for stock count and discrepancy rectification. The manual nature of physical inventories can result in counting errors and recounts. The greater the in-house inventory, the greater the resource requirement and the likelihood of error becomes. Capacity-Related Costs These costs result from changes to levels of manufacture. They include overtime and undertime costs, hiring, layoff and training of staff, and shift premiums. They can be avoided by levelling production and building inventory in slack periods that will be used to help meet demand in busy periods. 3. Which of these costs are included in the cost of ordering items? 1. Costs of setting up suppliers 2. Costs of maintaining material planners Review Q

3. Costs of buyers 4. Costs of receivers to take in the items. A. All except 4 B. All except 3 C. All except 2 D. All

ABC Inventory Control The way in which inventory items are managed will vary from item to item depending on its importance and associated costs. ABC classification is often used to categorize items by importance and assign different levels of inventory control to each classification. Usually, the importance of an item is based on annual dollar usage but other criteria may be used. ABC classification is a method derived from the Pareto principle or 80 20 rule which states that about 20% of items account for 80% of the significant measurement. Applying ABC classification to inventory involves the following approximate assumptions: A. 20% of items account for 80% of dollar usage B. 30% of items account for 15% of dollar usage C. 50% of items account for 5% of dollar usage The greatest number of items will fall into the C category although they are least significant from a financial management point of view. Those items that fall into the A class should be the focus of inventory management efforts as this is where the greatest savings may be made. There is little to be gained by closely monitoring and managing C class inventory items.

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Basics of Supply Chain Management 4. What is the major cost of operating a warehouse? A. Labor B. Maintenance of warehouse equipment Review Q

C. Warehouse system costs D. Cost of capital

Inventory and Financial Accounting Accounting systems in most organizations categorize all financial activities into five types of account: Assets, or items of value to the business, such as cash, accounts receivable, inventory, and machinery Liabilities, or money owed by the company, for example, accounts payable, salaries and company loans for equipment Owner’s equity, the net balance between assets and liabilities Revenue, which is money generated as the result of a sale of goods or services Expenses or costs incurred during the day to day operation of the company. These may be the costs incurred during production and general or administrative expenses. Balance Sheets and Statements of Income Balance sheets and income statements are used to represent the accounts information. Balance sheets explain the state of a company’ s assets, liabilities and owner equity, which income sheets detail the revenue and expenses generated as a result of making goods or providing services. Assets

=

Liabilities

+

Owner’s equity

Income

=

Revenue

-

Expenses

Cash Flow Analysis A vital aspect of a company’s financial health is its cash flow status. Even if a company is profitable, it will suffer serious difficulties and could even risk bankruptcy if the cash flow situation is poor and the company is unable, for example, to pay its bills on time. Cash flow refers to the flow of cash into and out of a business over a given period of time. If there is a shortfall of cash at any stage, the company must provide for this by raising cash from other means such as borrowing. When inventory is purchased as raw material it is recorded as an asset. When in production it is a work in progress. As the material progresses along the production line, its value is increased by the amount of direct labor applied to it and the overhead costs associated with its processing. When this happens, the material is ‘absorbing overhead’. Although it is much more valuable as finished goods, revenue is not produced by inventory until it is actually sold. However, the materials used to produce the finished goods inventory must all be paid for.

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Basics of Supply Chain Management Inventory Turns Where possible, it is a good policy to convert inventory into cash as quickly as possible. The Inventory Turns ratio is a good way of measuring the speed of conversion to cash. It is calculated as follows: Annual cost of goods sold Inventory Turns = -------------------------------Average inventory in cash ABC Beverages calculate an average cost of goods sold is $80,000. The average inventory in dollars is $40,000. Using the formula above, the inventory turns ratio is 2 ($80,000 divided by $40,000). This means that the cost of inventory is tied up for about 6 months. By improving the management of inventory, so that levels can be reduced, the inventory turns ratio will increase which will improve cash flow. Strategic Performance Measures The accounts information for a company, such as the balance sheet, income statement, cash flow analysis, and inventory turns ratio, provides a good overall picture of the company’s performance. This data is useful to both management and shareholders. In particular, the information can be used by management to measure performance against the long-range strategic objectives outlined in the Business Strategy document. The main areas of measurement for a company are: Profitability Market share Growth Productivity 5. What are the three main objectives that inventory management must help to meet? A. Provide the best possible customer service B. Reduce inventory turns Review Q

C. Reduce plant operating costs D. Minimize inventory investment

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Basics of Supply Chain Management Summary This lesson examined the functions of various inventories, the objectives of inventory management and the costs related to carrying inventory. It also looked briefly at methods of inventory management. You should be able to: Explain the importance of effective inventory management in a manufacturing organization Classify inventory based on flow of material Identify the functions of various types of inventory State the objectives of inventory management Identify cost factors when making inventory decisions Determine the costs of ordering and carrying inventory Analyze and explain simple financial statements Calculate inventory turns

Further Reading Inventory Management, The Leading Edge Group www.e-scp.com This document provides a basic overview of issues related to inventory management. Introduction to Materials Management, JR Tony Arnold, CFPIM, CIRM and Stephen Chapman CFPIM 5th edition, 2004, Pearson Education International APICS Dictionary 10th edition, 2002, APICS

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Basics of Supply Chain Management Review The following questions are designed to test your recall of the material covered in lesson 5. The answers are available in the appendix of this workbook. 6. Given that the annual cost of goods sold is $1,000,000 and the average inventory level in cash is $30,000, calculate the Inventory Turns ratio. A. 0.3 B. 33.3 C. 70 D. 970 7. Which is the best description of revenue? A. Items of value to the business, such as cash, or accounts receivable B. Liabilities, or money owed by the company, such as salaries C. Money generated as the result of a sale of goods or services D. The net balance between assets and liabilities 8. Select the best description of WIP inventory. A. Purchased items or extracted materials that are converted via the manufacturing process into components and products B. All raw material that has been released for initial processing, any material throughout the production process up to completely processed material awaiting final inspection and sign off as finished goods C. All items that have moved completely through manufacture and final testing and are available for shipment to customers as either end items or repair parts D. Components that will be used to replace an original part 9. The function of hedge inventory is to: A. Take advantage of low prices in volatile worldwide markets B. Guard against fluctuations in supply and demand C. Minimize the effect of transit lead times on operations D. Save money through quantity discounts 10. Which of the following are costs associated with carrying inventory? A. Costs resulting from damage to inventory B. costs of obsolescence C. cost of stockouts D. insurance costs

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Basics of Supply Chain Management What’s Next? Lesson 6 covered issues, concepts and costs related to inventory management. You should review your work before progressing to the next lesson which is: Basics of Supply Chain Management – Lesson 7 Order Management

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Basics of Supply Chain Management Appendix

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Basics of Supply Chain Management Answers to Review Questions 1. B MRO inventories are items that are used in production but do not form part of the final product. Examples of MRO inventories are rubber gloves, protective glasses, oil, grease and spare parts for machinery, or hand tools. 2. A Inventory may be accumulated in anticipation of events such as seasonal demand peaks, plant shutdown due to holidays or strikes, increased demand due to promotions etc. Inventory that is accumulated to take advantage of price breaks is considered lot size inventory. 3. D Ordering costs include any cost that is associated with placing an order to the factory or to suppliers, including such costs as processing the order and receiving the order. 4. A Labor is the major operating cost for a warehouse. Labor is required to receive, move and manage all inventory that enters the warehouse. It is important to closely monitor labor productivity in this area. 5. A, C and D The three main objectives that inventory management must help to meet are to provide the best possible customer service while reducing plant operating costs and minimizing inventory investment. The Inventory Turns ratio is a good way of measuring the speed of conversion to cash but companies should seek to maximize rather than minimize inventory turns as this indicates that they are turning the value of their inventory into cash more quickly. 6. B The inventory turn ratio measures the number of times that an inventory cycles during a year. It is calculated by dividing the annual cost of sales by the average inventory level (measured in cash terms). 7. C Accounting systems in most organizations categorize all financial activities into five types of account: assets, or items of value to the business, such as cash, accounts receivable, inventory, and machinery; liabilities, or money owed by the company; owner’s equity, which is the net balance between assets and liabilities; revenue, which is money generated as the result of a sale of goods or services and expenses. 8. B WIP inventory covers all raw material that has been released for initial processing, any material throughout the production process up to completely processed material awaiting final inspection and sign off as finished goods Raw materials are defined as purchased items or extracted materials that are converted via the manufacturing process into components and products. All items that have moved completely through manufacture and final testing and are available for shipment to customers as either end items or repair parts are classed as finished goods inventory. Components that will be used to replace an original part are spare parts inventory. © Copyright Leading Edge Training Institute

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Basics of Supply Chain Management 9. B Hedge inventory is bought by companies to take advantage of low prices. Hedge inventories are often used for commodities such as minerals and grains, which are subject to widely fluctuating prices. 10. A, B, and D Many costs are associated with carrying inventory, including the costs of damage, loss, obsolescence and insurance. Carrying inventory guards against stockouts making them less likely.

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Basics of Supply Chain Management Glossary

Term

Definition

Aggregate inventory management

This refers to the establishment of an overall monetary value of desired inventory and the implementation of measurements and controls to achieve this inventory level.

Inventory

Stocks or items used to support production (raw materials and work- in-process items), activities that support production (operating supplies, maintenance and repair), and customer service (finished goods and spare parts).

Inventory turns

The number of times that an inventory turns over during a year. This is calculated by dividing the average inventory level into the annual cost of sales. For example, an average inventory of $600,000 divided into an average cost of sales of 1,800,000 means that inventory turned over 3 times during the year.

Maintenance, repair, and operating supplies (MRO)

Items used in support of general operations and maintenance, for example maintenance supplies, spare parts, and consumables such as rubber gloves, machine oil etc used in the manufacturing processes and supporting operations.

Market share

The actual portion of current market demand that a company or product achieves

Productivity

An overall measure of the ability to produce a product, either goods or services. It is the actual output of production compared to the actual input of resources. Productivity is a relative measure across time or against common entities. Some ratios available to measure productivity involve adding the standard hours of labor produced plus the standard machine hours actually produced in a given time period and dividing these by the actual hours available for both labor and machines during that time.

Profitability

A measure of the excess income over expenditure during a given period of time

Raw materials

Any extracted materials or bought items that are transformed in production into products or components of products.

Safety stock

This is a quantity of stock that is planned for inventory to protect against fluctuations in demand or supply. In the context of master production scheduling, the additional inventory and capacity planned as protection against forecast errors and short term changes in the backlog. Overplanning can be used to create safety stock. It is also known as buffer or reserve stock.

Work-in-process (WIP)

Also known as work in progress, this refers to products that are in a partial stage of completion throughout the plant. This includes all material from raw material that has been released for initial processing up to completely processed material awaiting final inspection and acceptance as finished product.

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