Inventory Management

Why do we have inventories?

Inventory Positions in the Logistics System Raw Materials Inventory In-Process Inventory Finished Goods Inventory at plant Finished Goods at Field Locations Finished Goods at Wholesale Locations Finished Goods at Retail Locations

Inventory Carrying Costs The cost of maintaining inventory in a company's warehouse. Opportunity Costs Hurdle Rate (Definition) The required rate of return in a discounted cash flow analysis, above which an investment makes sense and below which it does not. Often, this is based on the firm's cost of capital or weighted average cost of capital, plus or minus a risk premium to reflect the project's specific risk characteristics. also called required rate of return. opportunity cost of having your capital tied up in. Out-of-Pocket Costs Cost requiring cash disbursements in the current accounting period. Thus, depreciation is not an out-of-pocket cost because it does not require spending of cash. Risk Costs

So…When to order? R = D x T Reorder point = avg. daily x avg. performance (in units) demand cycle length Reorder point = 10/units x 20 days day Reorder Point = 200 units

Cost Trade-offs Required to Determine the Most Economical Order Quantity Annual Cost (Dollars) Total Cost Inventory Carrying Cost Lowest Total Cost (EOQ) Ordering Cost Size of Order

Economic Order Quantity (EOQ Model) 2 CoD CiU Where: Co = Cost per order Ci = Annual inventory carrying cost (%) D = Annual sales volume (units) U = Cost per unit EOQ =

Other Inventory Approaches Re-order Point Re-order Interval Automatic Replenishment Programs (ARPs)

What can happen when we stock out? Backorders Loss of sales Loss of future sales Loss of customer goodwill Idle machinery & workers / lost production capacity