Exam summary block 2 - Operations & Supply Chain Management (OPS)

Exam summary Block 2 – Operations & Supply Chain Management
(OPS)

Contents
Chapter 7 – Inventory Management......................................................................................................2
Chapter 8 – Facility location...................................................................................................................8
Chapter 9 – Warehouse management..................................................................................................11
Chapter 10 – Packaging and Materials Handling..................................................................................14
Chapter 11 – Procurement...................................................................................................................18
Chapter 7* - Demand Management & Manufacturing.........................................................................24




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,Chapter 7 – Inventory Management
Inventory  Stocks of goods and materials that are maintained for many purposes, the most
common being to satisfy normal demand patterns.

- Inventory is a key component in logistics because inventory decisions are often a starting point for
other business activities, like:
 Warehousing.
 Transportation.
 Materials handling.

- Classifications of inventory:
 Cycle, or base, stock  Inventory that is needed to satisfy normal demand during the course
of an order cycle.
 Safety, or buffer, stock  Inventory that is held in addition to cycle stock to guard against
uncertainty in demand or lead time.
 Pipeline, or in-transit, stock  Inventory that is en route between various fixed facilities in a
logistics system such as a plant, warehouse, or store.
 Speculative stock  Inventory that is held for several reasons, including seasonal demand,
projected price increases, and potential shortages of a product.
 Psychic stock  Inventory carried to stimulate demand.

Assets cost money  Inventory costs money.

Inventory carrying (holding) costs  The costs associated with holding inventory.
 In the twenty-first century, represent approximately one-third of total logistics costs.
 Should factor into an organization’s inventory management policy.
 Include:
o Ordering cost
o Carrying (Holding) cost
o Stockout cost

Components of Inventory carrying costs:
 Obsolescence costs  Products lose value through time.
 Inventory shrinkage  More items are recorded entering than leaving warehousing or
retailing facilities.
 Storage costs  Costs associated with occupying space in a plant, storeroom, or
warehousing facility.
 Handling costs  Costs of employing staff to receive, store, retrieve, and move inventory.
 Insurance costs  Insure inventory against fire, flood, theft, and other perils.
 Taxes  Calculated on the basis of the inventory on hand on a particular date; considerable
effort is made to have that day’s inventory be as low as possible.
 Interest costs  Money that is required to maintain the investment in inventory.




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, Orderings costs  Costs associated with ordering inventory, such as order costs and setup costs.
 Examples:
o Costs of receiving an order (wages).
o Conducting a credit check.
o Verifying inventory availability.
o Entering orders into the system.
o Preparing invoices.
o Receiving payment.

- Trade-Off Between Carrying (Holding) and Ordering Costs:
 An increase in the number of orders leads to higher order costs but lower carrying costs.

- When deciding what levels of inventories to maintain, companies try to minimize the costs
associated with both too much and too little inventory.

- Too much inventory leads to high inventory carrying costs; too little inventory can lead to stockouts
and the associated stockout costs.

- The worst outcome of a stockout is to lose both a sale and all future business from the customer.

- Formula ORDERING COST:
ORDERING COST =number of orders per year∗ordering cost per order
- Formula CARRYING COST: CARRYING COST =avarage inventory x carrying costs

Stockout costs  Lost income and expense associated with a shortage of inventory.
 The higher the probability of a stockout, the better it is for the company to hold some
amount of inventory (safety stock) to protect against stockouts.
 The higher the probability of slow sales, the better it is for a company to carry less inventory.

Back order  Placed order for an item that is out of stock.

Trade-Off Between Carrying (Holding) and Stockout Costs:
 Higher inventory levels means higher carrying costs, which result in lower chances of a
stockout (lower stockout costs).

- Understanding of a customer’s reaction to a
company being out of stock when a customer
wants to buy an item is important (Table 8.3).



- By keeping extra inventory, businesses are able
to respond quickly to consumers' needs, therefore they are able to minimize the opportunity of lost
sales and/or customers.

Fixed order quantity system  Order of fixed amount of inventory.

Fixed order interval system  Orders placed at fixed time intervals.

Reorder (trigger) point (ROP)  The level of inventory at which a replenishment order is placed.
 Formula: ROP=DD x RC
o DD = Daily Demand
o RC = Length of replenishment cycle


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