MGT 431 Final EXAM - Ellram PDF

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MGT 431 FINAL EXAM TOPIC 8 -- The Basics of Inventory Management 1. The importance of inventory and having the right amount of inventory -

3 facts about inventory -

Fact #1: Inventory is a good and necessary thing. Fact #2: Remember the Goldilocks rule—you want to have just the right amount of inventory Fact #3: Great inventory management is a source of competitive advantage.

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Inventory is an ASSET on financial statements

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Inventory is also an INVESTMENT

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That means that it TIES UP $$$$ Comes with holding costs and ordering costs, ties up capital Can change in value (depreciation)

Too much v too little inventory Too Much Inventory represents an opportunity cost, the $ is tied up in inventory but its not earning interest

Too Little Stockouts (HARD to quantify), which lead to backorders, lost sales, or lost customers

Why do we have inventory? -

Helps meet demand so someone else doesn't take the sale Buffers uncertainty Helps to spread out costs = economies of scale

2. What are some of the ways that companies meet customer demand? -

One thing we know for sure about forecasting is that it is WRONG Some companies use anticipatory shipping (Amazon) - products are located in an area it expects customers will want it; based on past sales data Walmart started using RFID for inventory management

a. Affecting demand and supply Affect Supply -

Inventory Multiple suppliers Fast shipping Expedite processing/mfg: Excess capacity, Overtime Postponement Inventory pooling

Affect Demand -

Sales Free shipping: If delayed; Certain $ threshold Discount: For waiting; Future sale Offer a better substitute- same price Order a custom item (MTO policy) Subscriptions with discounts

Tools for Integrated Business Planning: - Internal: S&OP -

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Collab w internal departments Sharing info = better execution Helps to break down barriers and promote responsibility

External: CPFR -

Collab w major (EXTERNAL) customers Sharing info = lower inventory and higher customer service levels Can be applied to both customers and suppliers

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b. Problems with sharing info **Table from discussion in class

PROS -

CONS -

Better info Visibility Better inventory levels

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Might not want suppliers to know about a promo for competitive products Can be used against you

3. Inventory & firm performance a. Why is it important to have he right amount of inventory (hidden problems) i.

One of the major issues with inventory is that it can hide other issues 1. 2. 3. 4.

Quality Inaccurate forecasts Unreliable suppliers Bottlenecks

b. Holding Cost and Ordering cost trade-off; simplifying assumptions -

Holding: consist of financial opportunity costs and physical costs Ordering: costs of placing order; costs include admin costs, supplier ordering charges, machine downtime + retooling

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Goal: min TOTAL costs (holding + order costs) that is the EOQ Larger Q= larger avg inv & a higher annual holding cost, BUT fewer orders/ yr (lower order costs)

c. Key metrics Metric

Definition

Meaning

Inventory turnover

COGS/Inventory

# of times inventory is depleted + replenished in yr. Greater numbers= less inventory needed to generate a given sales volume (valued at purchase or production costs).

Dwell time

(Days inventory sits idle)/ (Days inventory moves in SC)

how efficiently inventory moves through SC. Higher dwell time ratios =unnecessary delays in getting inventory to destination.

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In-stock rate

% order cycles w/out stockout occurrences

frequency of in-stock occurrences. it is a commonly used measure of customer service.

Fill rate

% of customer demand filled from onhand inventory

extent to which customer demand was satisfied w/out stockouts. measure of customer service, fill rate = the magnitude of in-stock occurrences (complement to the in-stock rate)

d. Linking inventory changes to the strategic profit model (ROA impact) Example: reducing inventory levels by 25%; shown below is 2 scenarios that show its effect on ROA

Best Case

Worst Case

25% reduction in inventory results in no change in sales; reduction in transportation, handling, and storage by $20

25% reduction increased stockouts + negatively impacted sales by 10%; Sales rev decreases to $1,800; COGS goes down to $1,350

4. EOQ- Understand what it calculates, the idea that it is robust—basic calculations here Basic EOQ Model

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The basic EOQ model can be used to view the tradeoff btw holding and ordering costs This model is a plan based model, assuming that demand is constant (does not deal with variability)

EOQ Model Notation

a. Concept of independent demand -

EOQ is good to use with INDEPENDENT DEMAND -

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Independent demand comes from actual customer forecases, from an end item that is not a part of something else (MRP) - Forecast Dependent demand: inventory whose demand is derived from demand for an end product and becomes part of an end product - Calculate demand using an MRP system

b. Formulas provided: EOQ (Q*), holding cost and ordering cost D

Annual demand in units

K

Order cost in $

h

Holding cost per unit per year; $ per year ** this is the sum of the cost of an item (c) x the holding cost (i)

Q

Order quantity in units

Q*

EOQ units, will be used in the total cost equation as the quantity - Q increases with both K (order cost) and D(annual demand) and decreases with h (holding cost per item) - Q changes as the square root of these values - Q is independent of the total acquisition cost, c (except as it relates to the value of h = i*c) When it costs more to place an order, order less & EOQ increases

G(Q)

As the product value or interest rates increase, EOQ decreases, since it becomes more expensive to hold inventory so you want less Total cost function, this is the minimum total cost found using the EOQ

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5. Evaluating inventory performance a. Square root law: inventory does not increase proportionately with demand i. ii.

Cycle stock increases with the square root of demand (demand grows by 9, cycle stock grows by 3) Average inventories (I) = F * sqrt D 1. F is a constant, since you assume ordering costs (K) and holding costs (h) are the same across all DCs

Importance -

This is important because it shows that you can’t compare warehouses that are different sizes DCs with higher demand = higher inventory turns DCs with smaller stocking locations = lower inventory turns may be a result of economies of scale

6. In stock rate vs. fill rate NO calc, but explain why multiple measures are important

TOPIC 8B -- CASHFLOW 1. What is the cash to cash (C2C cycle, and what is included?---three pieces) -

Operations Investments Financing

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a. No calculations—but I may ask about what affects it---ex if inventory does down, what is the effect on C2C? What increases the cash-to-cash cycle? -

Selling more Raising the selling price (this is high risk) Collecting money faster Selling assets (inventory) without replacing Reducing costs Pay suppliers slower (could result in punishment from suppliers) Finance through equity or loans

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b. How do companies make their own C2C cycle look better? (Power vs. efficiency) i. ii. iii.

Have lots of cash on the books Extend payment terms Have suppliers hold/finance inventory for you

2. Why does finance want a short C2C cycle?

3. How can having a very low/negative C2C cycle affect your supply chain relationships?

TOPIC 10 -- Warehousing and DC management Warehouse: is a generic term for a facility where materials and goods are stored (long term and short term) until they are ready to be used -

Allow you to separate production from consumption → able to take advantages of production economies (production in large lots and storing until customers want it)

1. Roles & Types of warehouses -

Holds inventory for security against demand changes Protects products and provides security Cheaper to store items in warehouse in more rural locations (cities = high price of land high) Helps eliminate uncertainty due to logistics Kanbans to decouple production (JIT)

a. Economies provided- transport & production PRODUCTION ECONOMIES

TRANSPORTATION ECONOMIES

You can produce in large lots, storing product until customers want to use it.

You can ship in full truckloads. Inbound shipments are broken down and stored at the warehouse; outbound shipments are consolidated and shipped at the WH.

b. Value-added Services that occur Mass Customization

Final Assembly

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Use form postponement (delay final form until order comes in) Often involves unique packaging Promotions and shrink wrapping (transparent wrapping around case) → helps deal with the risk of a bad promo - respond to market needs without the risk of overcommitting to a poorly conceived promotion. Helps support regional preferences and differences

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Light mfg at the WH

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Returns and Repairs

Takes less time to get out and back to the customers

Helps get repaired items to the customer faster Dell computers being repaired by UPS workers

Growing Value Added Services -

DC - mixing for distribution Cross Docking - flow through center Kanban - kitting (put a kit together of products)

c. Various types of warehouses (cross-dock, break-bulk, etc…) TYPE

WHAT IS IT?

NOTES

Warehouse

generic term for a facility where product is stored. Raw materials WH: store inventory on the inbound side of production. Finished goods WH: protect goods that are waiting to sell to customer

Store goods for any length of time

Distribution Centers

combine inventory from multiple locations to mix and match to fulfill customer orders

Perform break bulk and consolidation → achieve high levels of order fulfillment and take advantage of shipping economies

Cross-dock Facilities

A WH where matl from different suppliers are unloaded, sorted and shipped to diff destinations

Goal is to keep the product moving → helps achieve multiple inventory turns per day

Breakbulk WH

receive large-volume truckload (TL) shipments that are destined for several customers. Shipments are broken down into the smaller quantities and delivered to customers using less-than-truckload (LTL) services

Minimize the total ton-miles shipped by the much more expensive LTL option

Customs WH

facilities where you can store imported or exported materials in order to delay the payment of duties (taxes). These facilities are sometimes called bonded warehouses

- Eliminates duties for in/out ops where items don’t stay in country - Secure, must pay duties if item leaves - 5 yr storage maximum

2. Warehouse operations and Technology a. Technology- think of videos b. ARS systems, WMS key features- video i.

ARS Systems: automated storage and retrieval systems

ii.

Warehouse Management Systems: WMS software choreographs (controls) the movement

1. Robots are used to moves cases and pallets and storage of materials within your warehouse. It also processes all of transactions associated with day-to-day warehouse operations 1. What does a WMS do? a. Automates warehouse paperwork, like order receipt and order processing.

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b. Directs work activity, like inventory put-away, order picking and packing. Helps you optimize space utilization and minimize labor costs by directing work like putaway as well as order picking and packing. c. Tracks inventory. d. Communicates with all of your other IT systems, including your firm's enterprise resource planning (ERP) system

c. Importance of people -

People = pickers, the WMS can send signals to people to tell them what to pick Pickers scan items and the system checks if they picked the right item Also need people to act as managers

d. What tasks are robots doing now, and what they might do in the future Amazon picking robots (KIVA) Ocado picking robots Shows the info connection (the robots scan items)

i. ii. iii.

e. Advantage of robots -

Robots can work 24/7 Robots do not need light or heat/cooling = lower costs than humans

3. Warehouse ownership a. Pros and cons Pros -

Security Large volumes Greater control Economies of scale Good location = appreciate in value Tax breaks? Fixed costs go down over time

Cons -

Expensive Increased footprint (scope 1) Large fixed asset Risky Land liability Wasted space Limits options Can damage your ROA

b. Relative costs

4. Location analysis 8

a. Number of warehouses & how that impacts inventory i. ii.

With more warehouses, inventory carrying costs increase One warehouse has to serve all customers → the overs and unders will cancel each other out (benefit from a portfolio effect) 1. Total variation is reduced, but when more warehouses are added you reduce the portfolio effect

iii.

Square root of N rule: states that your systemwide safety stock is directly related to the square root of the number of warehouses in your network 1. If you operate a single WH w 100 units of safety stock, and you add 3 new WHS, you only double the amount of safety stock → so the actual amount of safety stock at EACH WH will decrease

b. What influences location choice- how it is different for different types of DCs Regional Determinants

Specific Site Determinants

Labor climate (and rates)

Transportation access:

Availability of transportation

Freeway access

Proximity to markets

Inside/outside metro area

Quality of life

Traffic congestion

Taxes & industrial development incentives

Availability of workforce

Supplier networks

Land cost and taxes

Land costs and utilities

Utilities

Company history/preference

Need for same/next-day delivery to regional location

c. How are these influences evolving?

d. Warehouse layout and how that is changing?

5. What influences Facility layout a. General principles Minimize Distances

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Fast moving items closer to the door Less waste of movement Dedicate rack space to your 10% highest-volume, fastest-moving items. store less-frequently moved (B and C) items in random storage slots

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Smooth Flow

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Design the WH so you can move the product in and out in a straight line

Minimize Isle Space

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Especially when combined with automation Want as many racks as possible to optimize space

Use a single story

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More than one story is expensive, slow and creates congestion

Max the use of height

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Costs more to build horizontal v vertical Can stack racks high w modern tech

Efficient Matl Handling Equipt.

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To pick the right equipment, you need to know what you will be storing, what the volumes will look like, and what your service targets (picking and throughput) will be

b. Visual management, Poka yoke & 5 S’s Basic ideas behind these 1. Visual management: refers to your effort to "see" and make sense of an activity or process.

i.

a. Can help you find easy fixes and get to the root cause quickly 2. Poka Yoke: a simple method used to detect, prevent, or control a defect in the

operation -- an abnormality or something that isn't quite right. Japanese concept a. helps you avoid a costly mistake 3. 5S: “A place for everything and everything in its place." Sort

Clearly separate necessary from unnecessary; abandon unnecessary.

Set

Neatly arrange and identify things for ease of use.

Shine

Always maintain tidiness and cleanliness. scheduled clean-ups.

Standardize

Constantly maintain the 3S’ mentioned above.

Sustain

Create vehicles to enforce the above rules.

How these apply well to warehousing; think of the tool board example - Critical concept for safety, efficiency and effectiveness Can be part of Kaizen process

ii. iii.

c. Six sigma—as complementary, standardizing -

Used for eliminating variation Complements lean practices

6. Measuring warehouse performance a. Measures tend to be very operational Warehouse Productivity Measures -

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Orders per hour picked/packed (Avg. number of orders picked and packed per person-hour) Lines per hour Items per hour Cost per order (Avg. cost to fill and order

Measures of Order Fulfillment -

On-time delivery Order fill rate Order accuracy Line accuracy Order cycle time Perfect order completion (Orders

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given total warehouse cost) Cost as a % of sales (Total warehousing cost as a % of total company sales)

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delivered without changes, damage, or invoice errors)

b. Safety i. ii. iii.

Days of work missed due to injury # of injuries; Days injury free These are important to WH, especially manufacturing

c. Inventory turnover

d. Perfect order concept Perfect Order Busters -

Order entry errors, Ordered item is not available, Incomplete paperwork, Picking error, Damaged shipment , Overcharge error, Error in payment processing, Missing information, Late shipment , Inability to meet ship date, Early arrival, Inaccurate picking paperwork, Invoice error Perfect Order Elements

Average

Percent On Time Delivery (OTD) OTD to DC w/in 30 minutes

93%

Percent Orders Shipped Complete (Order Line Item Fill Rate)

97%

Percent of Orders Shipped Damage Free

99%

Percent of Orders Sent with the Correct Documentation Invoice Accuracy

94%

TOTAL PERFECT ORDER (0.93 x 0.97 x 0.99 x 0.94 = 0.84)

84%

TOPIC 11 -- Reverse Logistics 1. Nature of Reverse logistics the process of planning, implementing, and controlling the efficient, cost-effective flow of raw materials, in-process inventory, finished goods, and related information from the point of consumption to the point of origin for the purpose of recapturing value or proper disposal -

How firm moves product from a forward point in the SC to a point where it can be recycled, reused, or appropriately disposed. The goal is to capture value (recycle or reuse) or reduce cost (disposal)

a. Drivers/trends Driver

Value

Cost