Review.docx - 11 Introduction Inventory u2013 Those stocks...

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11 Introduction + Inventory – Those stocks or items used to support production (raw materials and work-in-process items), supporting activities (maintenance, repair, and operating supplies) and customer service (finished goods and spare parts). 11.1 The Role of Inventory + Cycle stock- Cycle Inventory: Components or products that are received in bulk by a downstream partner, gradually used up, and then replenished again in bulk by an upstream partner. + Assumptions and Implications: At the beginning of a cycle, Inventory is Q. At the end of a cycle, Inventory is 0. Inventory is replenished at the end of a cycle of a Lot Size, Q The longer the time between orders (cycle) the greater the Cycle Stock must be. When the demand rate is constant, the average Inventory level over time is half of Q….or Q/2 + Safety stock- Safety Inventory: Extra inventory that a company holds to protect itself against uncertainties in either demand or replenishment time. + Assumptions and Implications: Safety Stock is extra inventory held “just-in-case” At the beginning of the cycle, Inventory is Q + S At the end of the cycle, Inventory is S Inventory is replenished at the end of each cycle in quantities of a lot size, Q The more unpredictable variation in demand or replenishment, the greater Safety Stock must be. When the demand rate is constant, the average Inventory level over time is Q/2 + S + Anticipation Inventory – Inventory that is held in anticipation of customer demand, allowing instant availability of items when customers want them. For example: creating finished goods in advance of a major sport event. + Hedge Inventory – A form of inventory buildup to buffer against some event that is speculated to happen. For example: in advance of a hurricane. + Transportation (Pipeline) Inventory – Inventory that is moving from one link of the supply chain to another. For example: raw materials that have been ordered but have not yet arrived. + Smoothing (Buffer) Inventory – Inventory that is used to smooth out differences between and fluctuations of upstream production rates and downstream demand rates. + Inventory Drivers: + Forces to Increase or Hold Inventory + Supply Uncertainty: The risk of interruptions in the flow of components/materials from upstream suppliers; unreliable supply management. + Purchase Discounts– Purchasing extra inventory to receive a price discount or transportation discount. For example: 10% discount if you buy a truckload. + Production Uncertainty: The risk of interruptions in the flow of production due to unreliable or highly variable process outcomes; unreliable productivity & quality. + Demand Uncertainty: The risk of significant and unpredictable fluctuations in downstream demand; unreliable forecasting. + Forces to Decrease Inventory + Tied Up Cash: There is an “opportunity cost” when we choose to have money in inventory instead of productive activities that generate Return on Investment + Additional Related Purchases: The more we spend on inventory, the more we MUST spend on

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