Inventory ControlThe Logistics of Risk
or
When a Refrigerator isn’t!
What is Porter’s value chain?
• A representation of a firm’s internal structure made up of primary & support activities.
Primary - inbound logistics, operations, outbound, marketing, sales and service.
Support – procurement, technology development, HR management, accounting & general management.
Inventory Risk Objectives• Explain why inventory management is referred to as the
logistics of risk. (too much or too little!)• Give examples of how logistics provides/creates form,
time and place utility. • Define economic order quantity (EOQ), cycle, in-transit,
safety and dead stocks.• Calculate and illustrate average total (with and without
safety stocks) and pipeline inventory as well as EOQ.• List components of Inventory carrying costs.
Good Inventory Management
Inventory decisions which incorporate the:• The right _______• The right ________• At the right __________• _______________
When is a refrigerator not a refrigerator?
• When it is in Cincinnati but it is wanted in Lexington.
• When it is in the crate in the backroom as the potential buyer is shopping
__________________• When it is white rather than the desired mauve.• When it is 10 ft3 rather than the desired size. _________________• When it is manufactured in December but
demanded in July___________________________________
The Nature of Inventory
Inventory Shortages (stock outs) cause • _________________,• Extended shut downs of
_________________________• ________________________ • ________________________
The Nature of Inventory (cont.)
Excess inventory causes ____________________________• Opportunity cost of capital (interest on
investment)____________________________________________________________________________________________________________________________________________
Average Inventory
• Graphic
• Algebraic; I = OQ/2 where I = average inventory and OQ is order quantity.
_____________________________
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Determine Order Quantity
Two major influences
____________________________
The more product we order each time the
____________________________- The more we order each time the
____________________________
____________________________
Example
• Each Item is valued at $600• ICC is 25% of that or $150• Transaction Cost or OC is $100• We move 4 units per week (208/year)• We could order from 1 unit ~ every 2 days
(4/week)or 208 units for the year.
Inventory Carrying Cost -
ICC = (OQ x V x R)/2
OQ=Oder Quantity, V=price & R=ICC rate
Or (you try)
____________________________
____________________________
Or
____________________________
Order Cost -
• Total OC = OC x S/OQ
Where S = yearly sales
At 10 units / order what is OC?
____________________________
Or
____________________________
Calculate the Total CostWhat is TC = ?____________________________
TC = ____________________________
TC = ____________________________
TC = ____________________________TC = total costOQ=quantity ordered/orderV= average unit value of productR=annual inventory carry charge as a %OC=ordering cost or $cost per orderS = Annual sales
Calculate from the example
• 2 orders per year• ICC = ____________________________• OC = ____________________________• TC = ____________________________• 104 orders per year• ICC = ____________________________• OC = ____________________________• TC = ____________________________
04/19/2304/19/23
Annual D # of Orders units/order Ave Inv Ave Inv Value Annual ICC Annual OCAnnual Total Cost
208.00 2 104 52 $31,200.00 $7,800.00 $200.00 $8,000.00208.00 8 26 13 $7,800.00 $1,950.00 $800.00 $2,750.00208.00 10 20.8 10.4 $6,240.00 $1,560.00 $1,000.00 $2,560.00208.00 12 17.33333 8.666667 $5,200.00 $1,300.00 $1,200.00 $2,500.00208.00 16 13 6.5 $3,900.00 $975.00 $1,600.00 $2,575.00208.00 104 2 1 $600.00 $150.00 $10,400.00 $10,550.00
Inventory Carrying and Ordering Costs
Inv Carrying & Ordering Cost
$0.00
$5,000.00
$10,000.00
$15,000.00
$20,000.00
2 27 52 77 102 127
# Orders/Year
Costs
Inv Carry Costs
Order Costs
Total Costs
Economic Order Quantity• TC = (OQ x V x R)/2 + (OC x S)/OQ• Solve by taking the
____________________________
____________________________
____________________________
____________________________
____________________________
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Cycle stocks
• Are those items
____________________________
• They meet the
____________________________
assuming we can predict demand & replenishment times.
• Now back to reality!
In-Transit stocks
• Items ____________________________
• They are not available for sale but are ____________________________• Sometimes called ____________________________• Do I want to receive supplies f.o.b. destination or f.o.b.
origin?• Can this be substantial? Lets look.
Average Pipeline Inventory
• Shipping time is 30 days,• The order cycle is 5 days,• A shipment is 100 units• What is the average pipeline inventory?• A shipment begins on days, 0, 5, 10, 15, 20, 25 & 30, …. .• They arrive on days 30, 35, 40, …
• FORMULA TO CALCULATE # SHIPMENTS IS St/OC
• 30/5= # shipments in transit• 100 units per shipment = 600 units of transit inventory at
$3,000 per item = $1,800,000
Average Pipeline Inventory
• Shipping time is 10 days,• The order cycle is 2 days,• A shipment is 300 units• What is the average pipeline inventory?You calculate in transit inventory• A shipment begins on days, 0, 2, 4, 6, 8, 10, …. .• They arrive on days 10, 20, 30, …________________________________________________________
Safety Stocks
• Demand may exceed what we expect so
____________________________
• Product may be in transit
____________________________
Dead Stocks
• An SKU that
____________________________
Uncertainty
• Demand varies
____________________________• Order cycle times are
____________________________• Communication time
____________________________
Transportation times are
____________________________• So, we have a new trade-off.
ICC versus Stock Out Costs!• Safety stock ________________________________________________________per year (too many OC’s w/ lumpy demand can hurt)• Demand probability varies during an order cycle.____________________________various order cycle times.• Gross savings ____________________________• Back-Order costs________________________________________________________________________________________________________________
Components of Inventory Carrying Cost
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