Inventory Control The 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 ft 3 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. _____________________________ ____________________________

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 Cost What is TC = ? ____________________________ TC = ____________________________ TC = total cost OQ=quantity ordered/order V= average unit value of product R=annual inventory carry charge as a % OC=ordering cost or $cost per order S = Annual sales

Calculate from the example 2 orders per year ICC = ____________________________ OC = ____________________________ TC = ____________________________ 104 orders per year ICC = ____________________________ OC = ____________________________ TC = ____________________________

8/7/2015

Economic Order Quantity TC = (OQ x V x R)/2 + (OC x S)/OQ Solve by taking the ____________________________

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 S t /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 ____________________________