Supply Chain Management 2
Summary
2.1 Inventory and Supply Chains
Inventory: The quantity of goods that is available on hand or in stock
Main formats of inventory:
1. Raw Material
2. Work in Progress
3. Finished goods
Why hold inventory?
1. Protect against uncertainty
Uncertainty can be caused by variations in demand or by restriction in supply.
see 2.1.1.2
2. Cost reduction
Is achieved when stock is held close to the customer. So whenever a company
makes it able for the customer to pay and immediately take the products home.
Hereby a company have to spend transportation cost to customers.
3. Protect against quality defects
A product that is faulty can be substituted quickly when inventory is held. If there
was no inventory in the supply chain and a product was damaged on the way to
its customer, the customer would have to wait a long time until a substitute was
available. (substitute- replacement)
4. Stabilize manufacturing
An ongoing production throughout the year and kept in stock in order to meet a
demand. This approach is mainly with seasonal items, hereby manufacturing
technology is important and expensive, therefore it needs to be utilized
throughout the year in order to get a good return on investment.
5. Anticipation stock
The reason for this sort of inventory is rather
demand than supply driven. Before a launch of a
product innovation for which the level and rate of
demand is fairly unknown. A company can decide
to pre-launch this stock in order to go against
demand uncertainty. Hereby they can see how
their segment is reacting to the product and based
on this decided how they are going to keep their
inventory based on the demand responds.
,2.1.1 Different types of Inventory
Types of inventory
1. Cycle or replenishment stock
This stock keeps the supply chain moving. Cycle stock is the inventory necessary
to meet the normal daily demand.
2. Safety stock
This stock buffers against forecast error and the supplier’s unreliability.
3. In transit stock
This stock is in the process of being transported to a stocking or delivery point.
4. Seasonal stock
This stock is built up in advance to meet increased sales volumes during a
particular time of the year.
5. Promotional stock
This stock feeds into marketing campaigns and advertising.
6. Speculative Stock
This stock is held to protect against price increases or periods of limited
availability
7. Dead or obsolete stock
This stock is no longer usable or saleable in the market
Cycle stock and safety stock are those types that are most looked after in
inventory management.
2.1.2 Cycle stock
Definition: Stock that is needed to meet the normal daily demand. Receiving
the right amount of product/service material in order to cover cost/ activities to
meet customers’ demand.
What do you need to keep into account when using the inventory type
cycle stock?
1. Looking at how much stock you hold throughout the year.
Average stock holding calculation
1. Based on the order quantity
2.As the level of stock varies between the maximum at the time of receipt and
the minimum just before the next delivery we can define the average
stockholding.
3.The average stock is the order quantity divided by 2( minimum & maximum)
, Q: selling 400 items
Average stock holding: 400/2= 200
derive the average cycle stock investment taking into consideration the product
price of one unit of stock. Assuming that 1 item costs 5000. Then the average
cycle stock investment would equal average stockholding multiplied by the cost
of one TV, hereby the calculation will be:
200 *5000= 1.000,000
One million Euros of average capital investment might be quite a stretch for a
small electronics retailer. Instead of ordering once a year, the electronics retailer
could order twice a year and this reduce its cycle stock investment. By ordering
more often, the average inventory costs would now be:
200/2*5000=500,000
2.1.3 Safety Stock
1. There are two parts of the equation to account for in the safety
stock calculation:
A) Safety stock supply that covers unplanned production and delivery delays
b) Safety stock demand that covers unplanned changes in demand
1.a: For the first part of the formula safety stock supply you need
two input variables:
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