One element of holding costs is risk. Risk costs are the risk that is assumed when inventory is acquired. In addition to this risk costs refer to loss of inventory value. This is often referred to as the shrinkage that occurs within inventory.
Storage costs are another important element of your holding costs. When you think of storage costs you should think of any of the resources that you use to handle and store your inventory. These costs may be direct or indirect money spent on the storage of your goods. Storage costs can include costs for warehousing, warehouse equipment, space, rent, electricity, software, depreciation and warehouse personnel.
Capital costs are the costs required to purchase raw material or inventory items along with financing fees, loan maintenance fees, and interest. They refer to the money that is invested in your inventory.
Like many other areas that lean is applied to a company's supply chain or "extended value stream" is a tightly linked set of processes. These processes extend beyond one's organization and connect the entire system together.
Holding costs are all of the expenses a company incurs to hold inventory items over a period of time before they are used to fill orders. Generally speaking, Inventory carrying/holding costs are the costs you incur as a result of holding inventory. It is most often described as a percentage of your inventory value. The percentage is often unique to organizations and includes the amount of capital invested in inventory as well as depreciation, space occupied, insurance and opportunity costs. Inventory carrying or holding costs generally account for 15-30% of a business’s total inventory value.
Opportunity costs are the opportunities that you may have missed out on as a result of a purchase you made. In other words it is the return on your investment that could have occurred had you chosen to invest in something else.
This is one of the basic costs that is associated with your inventory. When thinking of item level inventory, item cost typically includes the price that you pay to acquire the item as well as any costs that you may incur when purchasing. Some examples of extra costs that may be incurred as part of your item costs are taxes, duties, fees, packing and even transportation fees. Unit costs generally change based on the size of your order.
ABC inventory classification is one of the most fundamental concepts of inventory management. Many organizations use ABC inventory classification to assist with inventory management, sales of inventory and purchasing of inventory. This classification system works by placing inventory into different categories.
Ordering costs can skyrocket when managing inventory. On one hand you want to keep your inventory levels low so that you don’t tie up cash and on the other hand you want to have inventory on hand so that you are placing a high volume of orders. Both have their positives and negatives. One of the more common ways to go about lowering ordering costs is to use an approach known as joint replenishment.
Order Cost is defined as; a direct labor cost that is incurred when an order is placed. Ordering costs are different from the “Order Costs”.
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Poka-yoke (ポカヨケ) is a Japanese term that means "mistake-proofing". It is derived from poka o yokeru (ポカを除ける), a term in shogi and igo referring to avoiding an unthinkably bad move.
Zero Quality Control is a method/approach for achieving zero defects in an organization. Zero gives reference to the objective of ZQC which is to produce products/services with zero defects.
The DMAIC Method is a problem solving methodology used within a six sigma strategy. The methodology focuses on improving business processes, specifically through the improvement of quality and reducing variation. It is an Integral part of six sigma.
Single minute exchange of die is a concept developed by Shigeo Shingo which seeks to perform all setup/changeover times under ten minutes (single minute).
The standard deviation is a statistic that tells you how tight or loose the range/spread of data is in relation to the mean or average of the data. Typically when a data range is clustered tightly the "bell curve" will be tall/steep. When the data is range is spread far apart the "bell" will appear flat or short and wide.
The mean absolute deviation or MAD as it is often abbreviated, of a dataset is the average or "mean" distance between each data point from the data set and the mean/average. This will give you an idea of the amount of variability in a dataset. MAD can be calculated from both observations and the arithmetic average (mean) of those observations. Another option when calculating MAD is to calculate based on actual data minus forecasted data. If forecasting or being used for future analysis you can apply different weights to your forecast or use exponential smoothing in an attempt to make your forecast more accurate. In most cases however mean absolute deviation uses actual data.
Visual management is a way to visually communicate and manage various standards, metrics, improvements, safety requirements and expectations. All forms of visual management should be clearly displayed and understood with no explanation other than visual analysis by everyone.
Manufacturing lead time is different than lead time. Manufacturing or production lead time is the total amount of time it takes to "manufacture" or "produce" an item.
Engineer to Order, also known as design to order refers to products or services whose customer specifications/requirements contain significant customization, unique designs or innovative and new purchased materials.
Standard work in process is the minimum necessary level of items or materials needed to maintain the proper flow in a production environment.
Organizational design is the formation of an organization's structure.
One of the most important components of standard work is understanding what the cycle time of a process is. Cycle time is sometimes referred to as standard cycle time. Cycle time is the amount of time it takes to complete an individual operation or task from start to finish. In other words, the amount of time required to process one part. This includes processing time on a machine, any manual work that may be required, waiting, inspection, walking and any other activities involved in processing the one part.
Red tags are a visual tool that is used during the sorting phase of a 5S initiative. In the sorting phase of 5S, items are either gotten rid of, kept or placed in a red tag auction area.
A problem statement describes what, where, how big and when the problem occurs. The statement is intended to be very clear and concise, focusing only on the issue or opportunity that was initially discovered.
The degree or process by which a multinational organization standardizes, integrates or combines activities around the world so that they use the same methods, no matter where the activity or method is being performed.
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