FINANCIAL & SUPPLY CHAIN DEFINITIONS

FINANCIAL & SUPPLY CHAIN DEFINITIONS

Instructions: The definitions presented in this glossary are provided as a basis to understand the articles in the Supply Chain Systems site (including Members Only area) and as a foundation to understand modeling terminology in Advanced Planning Systems. Therefore, the definitions may differ from those presented by other organizations and companies. When a parameters are set and assigned values in APS systems the assumptions underlying these must be clearly understood and be as unambiguous as possible. The below definitions are intended to support this premise. Further, as questions are asked, the definitions will be expanded to clarify the terms as much as possible, always from a modeling perspective.

ACCOUNTS PAYABLE
The net cost of purchased raw materials, components, supplies or services which have not yet been paid.

ACCOUNTS RECEIVABLE
The net sales from products or services for which payment has not yet been received.

ADVANCED PLANNING SYSTEMS
A set of mathematical calculations and logic embedded in computer programs, that aid decision-making for supply chain planning and scheduling. Typically, forecasting algorithms; demand management logic; distribution & sourcing optimization; and finite capacity scheduling are include in this class of software.

ALLOCATION OF COSTS

The procedure whereby certain overhead and other indirect costs are assigned to individual products or projects on the most equitable practical basis. Allocation of overhead, G&A and research are somewhat arbitrary and decisions should generally, not be made as a result of these indirect items of difference alone. Often used interchangeably with prorated (distribution proportional to use).

ALTERNATIVE COURSES OF ACTION (Real Alternatives)

A choice between two or more ways of responding to a given business situation, any one of which might be pursued. In defining and quantifying the economics of each way of responding, we necessarily show the impact an the whole corporation.

ALTERNATIVE VALUE

Net equivalent economic value of a tangible or intangible item for uses other than the current use.

AMORTIZE

To write off a given expenditure by prorating over a fixed period or a fixed quantity consistent with anticipated economic life. (See Depreciation.)

Book value of Capital Assets (accounting use): The undepreciated capital on the property accounts at any given time.

Transfer Cost. Plant Cost or Cost For Sale (economic evaluation use): These terms when coupled with "project". "latest facilities". "future facilities', etc.. should be used in economic evaluation parlance. (See Costs; Capital.)

ASSET UTILIZATION

The percent of equipment/plant capacity that is consumed by the activities engaged in producing product. The activities include setup, startup, running, shutdown, clean-out and changeover. The capacity is assumed to be based on the equipment availability and would be independent of labor availability (shift structures). Sometimes, management will use labor as a capacity factor, particularly in a job shop environment or when labor is a significant constraint and can not be changed easily. BOTTLENECK

A restriction or limit to capacity in a portion of a plant which can be expanded separately from the whole plant, usually at a nominal capital expenditure relative to the original plant. This action is referred to as de-bottlenecking.
BREAK-EVEN CHART (Economic Evaluation Use)

A graphical presentation of costs, sales and return on investment as a function of operating rate for a plant, product or company. Ordinarily shows the impact of a company recession of 2-3 years after a product has reached a high level of operation rather than building up during the start-up years.
BREAK-EVEN CHART - (Accounting Use)

A graphical presentation showing the relationship between revenues, fixed costs, variable costs. and the point at which revenue sales will defray all costs and thus produce no profit or loss (break-even).
BY-PRODUCT

A product or products unavoidably produced with the chief product sought. Value is contingent on projected outlet or source to be displaced. If the by-product displaces purchases, value at projected net delivered purchase cost. If it displaces internal production, value at cost and capital from primary facilities. If it is sold, value at average projected net sales return. (See CO-PRODUCT.)
CAPACITY

The maximum annual production of prime product (s), which may reasonably be expected to be produced with normal allowance for downtime for maintenance (and projected product mix) with no shortage of raw materials and without restriction of product disposal. Usually accepted as the sustained capacity as defined below. See Asset Utilization. Capacity is directly impacted by product mix. As product mix gets higher effective capacity for producing product goes down due to the loss of capacity from changeover time.
Nameplate: Expected production capability, in units of product, when the plant was commissioned into service. Based upon the original product mix.
Book: Expected production capability, in units of product, as stated in the accounting books for calculation of standard costs.

Effective Capacity: The amount of production stated in terms of produced units rather than time.

Sustained: Units of production as experienced over a extended period of time.

Instantaneous: The highest capacity for a short period of time as experienced recently.

CAPITAL, ALLOCATED FIXED

The total fixed capital investment in plant facilities for utilities, raw materials, division overhead, selling, G&A and research facilities that are prorated to the end product under consideration. Associated working capital should @e accumulated and combined with working capital in the end plant.
CAPITAL, BORROWED

Cash requirements supplied by outside sources.
CAPITAL, COST OF

The cost to the corporation of obtaining or using all funds. These funds include retained earnings, depreciation, short term loans from suppliers (accounts payable). etc., in addition to loans and equity. Ordinarily, a weighted average will be employed and expressed as a compound interest rate.
When referring to inventory, it includes the storage, handling, insurance, obsolescence, damage and environmental costs associated with the maintenance of the inventory.
CAPITAL, DIRECT FIXED (Economic use)

The total estimated capital cost of production facilities for the end product being considered. Includes facilities both inside and outside battery limits, and (1 - tax rate) times expensed costs when expensed items exceed 10% of depreciable capital. It should include all equipment and labor to design, obtain bids, make drawings, build, administer, purchase, expedite and supervise the construction of the facility. All associated costs such as overheads should be included. (Detailed rules for handling in economic studies included in methods section.)
CAPITAL, DIRECT FIXED - (Accounting Use)

The total cost of capital production facilities for any given product.
CAPITAL, EQUITY

Total of the capital stock and capital surplus contributed by the stockholders and retained earnings.
CAPITAL, TOTAL

The sum of direct and allocated fixed capital at original cost plus working capital required for sustained operation.
CAPITAL, WORKING - (Economic Use)

Spare parts; raw materials, in process and finished inventory; and accounts receivable minus accounts payable plus cash required for the product being considered. Also should include working capital associated with raw material and utilities or any other items of cost.
CAPITAL, WORKING - (Accounting Use)

The excess of the current assets over current liabilities.
CASH (IN WORKING CAPITAL)

Requirements for money to operate a corporation and considered a part of working capital.
CASH (IN CASH FLOW)

After tax dollars that flow out of or into the corporation (project) after allowance for all cash costs and capital requirements, after consideration of non cash costs for tax purposes and after payment of all federal taxes.
When analyzing a project, normally cash flows exclude consideration of interest and dividends.

CLASSIFICATIONS

Grouping demand, supply and inventory into categories where product share common characteristics, markets or uses. The designations are used to add database queries so that the data can be aggregated into a smaller number of items and permit a higher level view of the business performance. Common levels are: business, division, market, country, region, district, product family, product, product/package.

COMPOUNDING (INTEREST)

To compute interest and the sum of the principal and the accumulated interest which has accrued, at regular intervals. As this interval gets shorter we ultimately arrive at a continuous interest situation.
CONSERVATISM

An often misused word generally implying the economics of a project may be better than shown or implying a resistance to change based on preconceived notion rather than fact. Evaluators should espouse realism based on fact rather than conservatism.

CONSTRAINT, PHYSICAL
A limiting factor when generating a schedule that is based upon physical attributes found in the supply chain. The primary constraint is equipment capacity. The ability to satisfy demand is limited by the rate that equipment can be operated. E.g. If demand in one month is 2000 units and the capacity of the equipment is 1000 units per month then it would take two months to produce the product. Therefore, production must start one whole month earlier than if capacity was infinite (or greater than the demand). Other potential constraints are labor, inventory storage space, raw material availability, environmental permits, utilities and specialized critical resources.

CONSUMED RESOURCE
A raw material/ingredient, utility, or capacity use during a manufacturing process. Anything required for production, which is placed into the process (as opposed to taken out of the process).
Consumable Resource: A resource that can be used in the manufacturing of a product and changes state (characteristics) during the processing.
Renewable Resource: A resource that is used a discrete period of time but can be used again later. E.g. labor, environmental permits, capacity.

CONTINGENCIES

An allowance for unforeseeable or omitted elements of cost, particularly in fixed investment estimates, which previous estimates have shown statistically likely to occur. May or may not include escalation allowances.
CONSTRUCTION "S" CURVE

A correlation between fraction of project cost and percentage plant completion, which graphically takes on an "S" shape.
CO-PRODUCT

Two or more materials produced simultaneously in a common piece of equipment or plant, where both materials are recognized are desirable products and have demand. Plant cost and capital are divided between the products by the most logical method applicable. If demand for the co-products becomes out of balance, the one in least demand may revert to a by-product. (See By-Product.)
COST ESTIMATE

A projection of the individual items of cost as well as the sum of manufacturing and total cost to produce a given product under specified conditions and location. Normally estimated primarily at plant capacity and includes depreciation on a straight-line basis. Sometimes confused with capital estimate, a projection of capital to build a given facility.

COSTS

Conversion: Total plant costs excluding raw materials cost, by-product credits. and packaging. (See plant cost.)

Plant: Manufacturing costs incurred in the production facility or division. This includes raw materials, labor, utilities, maintenance, overhead, miscellaneous costs and depreciation on a straight-line basis for economic evaluation studies but declining balance for accounting records. Packaging is normally included here, also.

Transfer: Plant costs (in bulk or suitable container for transfer) plus freight costs to move product to the point of use.

For Sale (Accounting use): Plant costs at standard plus any container and selling costs associated with sale of a product, plus allocated G&A and research costs, plus cost variances.

For Sale (Economic Evaluation use): Plant costs (in suitable container for sale) plus selling costs associated with sale of a product, plus allocated G&A and research costs.

DEMAND
Dependent: Internal demand generated by downstream operations that require an intermediate or a component be produce to satisfy a requirement from a bill of materials.
Independent: External demand from either a customer order or a forecast. Usually represents demand that will go directly to a customer, however, sometimes businesses within a company sell to foreign subsidiaries. When this occurs the demand is treated as it would to another customer. See also Export Demand.
Distribution: Internal demand that is generated by a warehouse or terminal inventory that goes below its safety stock or reorder point. The net requirement is "sourced" on a either a central warehouse or a manufacturing plant. The demand requirement received by one of these two entities is considered distribution demand.
Joint Venture: A special internal distribution demand generated by a partially owned subsidiary in the form of a replenishment order or a forecast.
Export: A special internal distribution demand that is usually large shipment that have the potential to be very disruptive and may have a lower margin. This demand is broken out to help decide the risk factors associated with it (sometimes requiring letters of credit) and it is used as a fly-wheel depending on the supply / demand balance.

DEPLETION

A legitimate item of cost which results in a reduction in taxable, income on a limited natural resource utilized in a product which is sold.

Cost Depletion: A method of computing depletion where cost of the oil, gas. mineral or limited natural resource, excluding equipment, is divided by the estimated recoverable reserves. This unit depletion times annual production gives allowable annual depletion.

Percentage Depletion - Method of computing depletion (called statutory) where a specified percent of gross income is allowed as a "cost" but not to exceed 50% of taxable income before depletion. Federal regulation limits the range from 5 - 27-1/2% of sales on the first salable product. Criteria for computing net income are carefully spelled out and advantages lie in the fact that more than 100% of the cost of the asset may be charged as a reduction in taxable income.

It should be recognized that Cost Depletion is a time dislocated cash cost like depreciation while Percentage Depletion is a non-cash "cost" or an allowable reduction in taxable income. Time dislocation is often referred to as "non-cash" expense.
That method giving the greater allowance each year should be used. It is often necessary to switch methods of computing depletion on a given reserve.

DEPRECIATION

A real and allowable non-cash expense which permits partial recovery of fixed capital from investments whose productive life is greater than one year, but for which are considered to be gradually "consumed" in the business operation for accounting purposes.

Straight-Line: Acceptable method of declaring the original investment minus salvage value as a cost in equal annual amounts over the life of the facility.

Declining Balance: Acceptable method of declaring the original investment minus salvage value as an annual cost on tangible assets with a three-year or greater life. This method enables taking up to twice the straight line rate on the undepreciated balance until that amount is less than the undepreciated balance divided by the remaining years of life. At this point the undepreciated balance is declared in equal amount over the remaining years of life.

Sum of the Year's Digits: Acceptable method of declaring depreciation on tangible assets where the fraction, remaining years over the sum of the year's digits of total life. is declared each year. This method follows declining balance very closely.

Unit of Production: Predominant practice of declaring depreciation on oil. gas and mineral field equipment where useful life depends on producing life of the reserve. Unit depreciation is computed by dividing the equipment cost lens salvage by the estimate of recoverable reserves.

Note: Economic Evaluation Use - Straight line depreciation is used to reflect the average cost over the life of a project for studies that are expressed as profit ratios. For cash flow analysis. declining balance is used.

Note: Accounting Use - The declining balance method is used whenever possible.

DISCOUNTING

Use of continuous compounding to make allowance for time displacement of cash flow.

DISCOUNTED CASH FLOW

The economic evaluation method employing continuous discounting of after-tax cash flows to appraise anticipated project profitability performance.

DISCOUNTED CASH FLOW PERCENT OR RATE OF RETURN (Interest rate of return, profitability index)
The discount rate in project analysis in which the discounted positive and negative cash flows equal zero.

DIVISION OVERHEAD

The sum of division factory expense and division general and administrative expense which consists of a diverse group of production and division management costs impractical to charge directly. These costs are allocated on the most practical equitable basis.

EARNINGS

Profit after tax - usually applied to the whole corporation. (See Rate of Return on Investment.)

ECONOMIC LIFE (Project Life)

The estimated profitable life span of a proposed process of product. This may be limited by product or process obsolescence, physical life of equipment or changing economic conditions. (See also physical life and obsolescence.)

EXPANSION EXPENSE . (Accounting Use)

Expenses related to the construction and start-up of new or expanded facilities. These expenses are related to the expenditure of capital and start-up of physical facilities and do not include market or product development, training of marketing personnel, etc. Expansion expense is collected in two categories:

1. Construction expense, which includes all expenses related to the design and physical construction of a facility.

2. Start-up expense. which includes expenses preparatory to, as well as those resulting from, actual start-up of a facility. Included are such expenses as operator training, abnormal yields, abnormal maintenance or field changes, etc.

EXCHANGE
A one-for-one transfer of material between companies and each other's customers. This transaction usually happens when two competitors have customers in different geographic areas and each companies saves distribution costs by providing product to the other company's customers that are local to their facilities.

FINITE CAPACITY SCHEDULING
A computer program that attempts to represent the scheduling variables and physical constraints found in real life (within a manufacturing facility) and attemts to generate the best possible schedule. Solving the scheduling problem is done by either sequentially or simultaneously solving for the lot size, product sequence (through each piece of equipment), sourcing and multi-level coordination variables.

FIXED COSTS (Accounting Use)

Those elements of manufacturing cost which do not vary with volume of production, but rather remain constant at any level of production, assuming the plant is not shut down for an extended period of time or placed in a standby condition.

FORECASTING
Process of estimating future demand on product, resources, and fixed & working capital. Many times the source information must be converted. Demand can be stated in terms of the resource being planned - engineering hours, labor, lbs. Active equivalents, equipment hours, dollars, and warehouse square footage. Part of the forecast can be from independent product sales estimates while the rest may come from dependent use estimates.

FORECAST RECONCILIATION
Matching order pattern to forecasts so as an early warning indicator to determine if forecasts should be adjusted.

FUTURE FACILITIES

An estimate of cost and capital at capacity to produce a given product at a given location. (a) employing the most economic technology. (b) sized to be compatible with projected need, (c) product study in nature, but, (d) not necessarily tied to historic practice or cost. Our attempt to place future decisions in proper perspective.

INCREMENTAL COST

The added short term cash costs of making a specified amount of material over a specific period of time (less than one year) without additional investment in facilities. (See Variable Costs.)

INTEREST RATE OF RETURN

See Discounted Cash Flow.

INVENTORIES (Accounting Use)

Consists of raw materials, work in process. finished goods and supplies.

INVENTORIES (Economic Evaluation Use)

See Capital. Working.

LATEST FACILITIES

Cost and capital to produce a given product at capacity from a recently built

plant. Should fulfill all criteria required of future facilities.

LOT SIZE
A discrete amount of material that is used for replenishment of stock or manufacturing. Lot sizes can be varied and can be determined by the economic impact that comes from inventory carrying cost and changeover cost. Sometimes references a a discrete quantity that has had a quality analysis. Then all material within that lot is assumed to have the same quality characteristics. See EOQ.
Batch Size: A quantity that is constrained by the equipment. A batch in the process industry means the amount of material in one reactor or mix tank. Several batches can be aggregated into a storage tank to make a quality lot.
Campaign Size: A contiguous run of material either made by a continuous operation or a series of batches, before a different product is made on the equipment.

Increment: A discrete amount of material / product that when more product is made it must be a multiple of the increment. E.g. In a packaging operation the increment might be the bottle, box or pallet. If the bottle is one gallon and the box 4 bottles, then the increment would be that quantity.

LUMFXI (Lum-fix-ee)

An abbreviated and versatile unit economic analysis using unit ratios for each item of cost and capital contributing to a given product. Named from the acronym for LABOR, UTILITIES, MAINTENANCE, FACTORY EXPENSE AND INVESTMENT.

NET PRESENT VALUE (Present Worth)

Time zero net discounted value of cash flows as obtained by discounting all cash flow components at a specified compound interest rate (usually historic corporate performance - time zero set at start-up).

NONCASH COST

An item of cost which does not require an outlay of funds of the some amount in the same year but which is allowable as an item of cost or a reduction in taxable income for tax purposes. (Depreciation, prepaid insurance. royalties, etc.)

OBSOLESCENCE

The occurrence of decreasing value of physical equipment or products due to technological advance or inferior competitive properties, respectively, rather than physical deterioration. (See also Economic Life and Physical Life.)

OUT-OF-POCKET COSTS

See Incremental Costs.

PAY-OUT-TIME

See Years to Recover Capital.

PAYROLL ASSESSMENTS

Direct and indirect costs incurred related to labor costs.

Generally. these consist of paid non-work time such as vacation, holidays. sick leave: payroll taxes and insurance contribution; overtime and shift differential; pension and profit sharing and other social costs. Items included are not the same at all locations.

PHYSICAL LIFE

The practical period over which a plant is expected to operate or has operated before shutdown due to physical deterioration. The criteria generally practiced by the government in establishing depreciation rates.

(See also Economic Life and Obsolescence.)

PLANNING
The process of determining the level of tactical (can be adjusted within 3 to 18 months) resources necessary by forecasting demand and measuring the relative availability of critical resources. Acquiring the resources needed, so that the organization can respond better at the time when commitments need to be made. Anticipating possible business, economic or financial scenarios and preparing for the most likely situation. Preparing the supply chain for expected changes in the market ahead of the lead-time required to make these changes. Conversely, making ther changes as the situation unfolds is reaction, not planning.

PLANT COSTS

See Costs - Plants.

PRICE

(See Selling Price and Purchase Cost.)

PRICE-VOLUME STUDY

The process of analysis and estimation of future market conditions which
results in projections of weighted average unit selling price and total sales and use volume for each year under study. The projections are used for timing sales revenue in the cash flow calculation.

PROBABILITY

The statistical concept which takes into account the likelihood of an event happening as stated. out of a large number of occurrences or estimates. Absolute certainty has a probability of 1.0. and an impossibility has a probability of 0.0.

PRODUCT CYCLE
A sequence of product that is manufactured before any of the products in the sequence can be made again. Sometimes referred to as a product wheel. The sequence or which products are made does not always have to be the same in every cycle.

PROFIT (Profitability)

Before Tax - The dollars by which net sales revenue exceeds cash and
Non-cash costs as defined. when operating at a stated capacity and before U.S. income tax.

After Tax - The same except after allowing for U.S. income tax. (Presently assumed to be 48% in U.S.A.)

Taxes other than income should be included in costs.

PROFITABILITY INDEX

(See Discounted Cash Flow Percent.)

PROJECTION

An estimate out into the future of all elements that bear on a given business decision. This includes net sales price. demand. capital requirements, costs, etc,

PROJECT LIFE

(See Economic Life.)

PURCHASE COST

The total amount paid to the seller plus cost of delivering the material into inventory for the consuming plant. Delivery may include freight, sales or turnover tax and handling and container rental costs depending on conditions of purchase. Generally, purchasing department effort is excluded and is a part of G&A.

RAW MATERIALS

Starting materials (purchased) or intermediates in the manufacture of a given product. Can be relative to the unit operation/work center or the plant.

RESEARCH

The investment of corporate resources (money and talents) in the search for new and improved products and processes. the cost of which is expensed as incurred for tax and accounting purposes. (See methods used in Return on Investment.)

RETURN ON INVESTMENT (Rate of Return on Investment or ROI)

Before Taxes - The ratio of annual profit. before federal income taxes, to total capital, generally at capacity operation, expressed as a percent. The term "rate of return" alone is not to be used generally to define the discounted cash flow or net present value result. The basis for estimating profit must be carefully spelled out.

After Taxes - The ratio of annual profit, after federal income taxes, to total capitals generally at capacity operation, expressed as a percent.

RETURN ON SALES

The ratio of annual profits to net sales on a project expressed as a percent. Generally useful as a secondary measurement to complement return on investment or discounted cash flow measures.

RISK

The cumulative uncertainty or unknowns in a business decision left to chance; the likelihood that projections will not be realized or that detrimental events are not foreseen.

SALES RETURN

(See Selling Price.)

SALVAGE VALUE

The net value of process or other facilities at the end of the useful life and allowing for all costs to achieve this value. (See Alternative Value.) It should always express the true economic alternative.

SCHEDULING
The process of committing all pre-planned resources in the short term (less than three months), to satisfy demand and optimize cost/profits within all real constraints. Doing the best with what you have!

SCHEDULE FREEZE FENCE
A rolling period or a fixed date in the future. The period between today and the fence tells the ERP system’s MRP calculation to not calculate changes to the existing schedule despite the fact that demand might have changed during this same time.

SEASONALITY
Periods where demand exceeds supply.

SELLING EXPENSE

The expense of selling a product to a customer. Generally, this covers advertising, promotion and sample costs. and other sales department costs but excluding technical service and development which is a part of research.

This cost is included in total cost for sale but excluded from plant cost.

SELLING PRICE (Net Selling Price or Net Sales Return)

The value of a product on the open market as determined by supply and demand.

Net : The past, present or expected future revenue received for a unit of product after allowance for commissions, discounts and company paid freight and border crossing costs considering a weighting of domestic and foreign business. Net F.O.B. plant gate.

Gross : Amount paid by the purchaser to the seller.

SOURCING

The process or mathematics by which an individual determine where (equipment or location) to make a product or where to get more (from a stocking location). An alternate source assumes that the product is normally made or located there, however, would not normally be the preferred location.

SOURCING OPTIMIZATION

Determining how to provide product to the customer at lowest cost; determining when and where to add incremental resources; or determining when and where to invest major capital to build a manufacturing facility or close one down.

START-UP EXPENSE (Economic Evaluation Use)

Non recurring costs associated with (a) establishing a new company or subsidiary. (b) training of production or marketing people. (c) extra research assistance. and (d) premium production costs above those experienced during smooth operation. These costs should not be confused with higher unit costs associated with low operating level, alone.

START-UP EXPENSE (Accounting Use)
The costs associated with starting up a brand new facility (production plant, treatment plant, storage or a shipping facility. (See Also Expansion Expense.)

SAFETY STOCK

A quantity of inventory used to minimize the impact of variations in the supply chain. Safety stock is commonly used to account for forecast error and supply variability. Additional elements of safety stock might also be used to account for seasonality and product mix manufacturing lead-time.

SEQUENCE
The order by which product is made on an individual work center. The order is picked to minimize the the impact of changeover, asset utilization and costs. A classic example is red paint would be made after white but white would rarely be made before red.

SUNK COSTS

Past or continuing expenditures resulting from past decisions but not important to present and future alternative courses of action.

SUPPLY
Various sources for satisfying demand and providing product to customers. Typical types of supply are: internal production, contract manufacturing, exchanges, swaps, imports and inventory.

SUPPLY CHAIN
The complete process of activities and functions from suppliers to customers. Functionally it includes purchasing, procurement, manufacturing, distribution, storage, sales and shipping.
Supply Chain Management: The process of planning and executing the plan in a coordinated way across all the activities from suppliers to customers.
Supply Chain Systems: A class of planning, scheduling and execution systems that help ensure that products are provided to customers as quick as possible and at the lowest cost. This includes the planning of all resources so that they are controlled to an appropriate level to meet expected demand.
Supply Chain Optimization: The process of analyzing the supply chain for areas that can be improved such as: reducing order lead-time; reducing overall costs; reducing inventories without sacrificing sales or customer service; and reducing the time it takes to react to market changes while efficiently utilizing assets.

SWAP
A transfer of at least two different materials between companies and each other's customers. This transaction usually happens when two competitors have customers in different geographic areas and each companies saves distribution costs by providing product to the other company's customers that are local to their facilities.

SUPPLY/DEMAND BALANCE

A mathematical table that nets out demand from supply (and on-hand inventory) to project expected supply requirements into the future over a range of periods (typically months). Spreadsheets and off-the-shelf computer programs are generally used for this purpose. They take the supply of a product/resource, nets demand over time from that availability to determine the remaining balance available. The intent is to determine if more or less product, resources or pre-built inventory is needed to satisfy demand. This format is used to generate both MPS (Master Production Schedules) and a Rough-cut Production Plan (used in Sales & Operation Planning).

TAX CREDIT

A provision in the U.S. income tax regulations which allows a company to reduce the federal income -taxes in proportion to new investment in equipment in accordance with a prepared schedule. (See Cash Flow Methods.)

TIME BUCKETS
A discrete repeating period of time that is used to relate plans with a specific time frame. For strategic planning the bucket is usually one year. For tactical resource planning the bucket is usually one month. The MPS time bucket is typically one week. Operational scheduling can be one day, one hour or one minute. The smallest unit of time that is used to plan resources or schedule facilities and people.

TIME HORIZON
A rolling period of time or a fixed date in the future that is used to limit the generation of plans and schedules. For strategic planning the horizon can be five to seven years. For tactical resource planning the horizon can be six to thirty-six months. The MPS time horizon can be twelve to 104 weeks. Operational scheduling can be 3 weeks to one year. The furthest time in the future where resources can be planned and acquired (given lead-times) or materials can be scheduled and acquired (given lead-times).

TOLL
A transfer of material between companies and each other's customers. This transaction usually happens when two competitors have customers in different geographic areas and each companies saves distribution costs by providing product to the other company's customers that are local to their facilities. This includes contract manufacturing and other activities where there is either part or whole monetary compensation for the transaction.

TURNOVER RATIO

The ratio of annual net sales, including by-products, to total fixed and working investment in a project expressed as a decimal.

UNIT CAPITAL

Dollars of capital per unit of product per year. Generally. the sum of all fixed and working capital at capacity for transfer or sale. Avoid using capital ratios in units per month.

UNIT COST

Dollars of cost per unit of product or raw material. Generally, cost for transfer or for sale at capacity with straight-line depreciation. Includes both fixed and variable costs.

VARIABLES
Degrees of freedom to solve a scheduling problem, satisfy demand or provide needed resources. Scheduling variables are start time, run rate, lot size, sequence, multi-level coordination between operational steps and level-loading via sourcing production on similar equipment.
VARIABLE COSTS (Break-even Chart - Economic Use)

Those elements of costs which vary in production to volume produced during a recession at about two years' duration.

VARIABLE COSTS - (Accounting Use)

Those elements of manufacturing costs, which vary directly, with volume of production. Raw materials, components and utilities are normal variable cost elements. Labor is arguably a variable cost element. It depends on whether the labor force is frequently and easily adjusted based on demand.

VARIABLE COSTS (Long Term Variable Costs)

Those elements of costs which vary in proportion to volume produced such as raw materials. Generally, and part of utilities, labor and maintenance' Contrasted to fixed costs which do not vary with production. Applies to a period of one to five years into the future. Note that variable costs are fixed per pound and that fixed costs are variable per pound over unequal production quantities in a given time period. (See Incremental Costs.)

WORK CENTER

A discrete part of a manufacturing plant that is either a single piece of equipment, set of people or a natural set of people/equipment (that runs simultaneously as a unit). The smallest part of a part that is scheduled as single entity.

YEARS TO RECOVER CAPITAL (Payout Time, Payback Period)

The period in years after plant start-up at which total fixed and working capital committed to a plant has been returned to the corporation on a cash basis. This means after tax and including depreciation.