2. Introduction into Logistics
PhD Natasha Lutovinova
Logistics Lecturer
Room: G1.006

3. Handbook: Paul R. Murphy & Donald F
Handbook: Paul R. Murphy & Donald F. Wood, Contemporary logistics (New Jersey 2011), 10th edition 3

4. Introduction into Logistics Course Outline
13.05 SCM Concept, Inventory
14.05 Demand Management, Warehousing Management
15.05 Transportation Management, International Logistics
16.05 Poster Session

5. CHAPTER 8
Inventory Management
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6. Learning Objectives To understand the costs of holding inventory
To understand reordering concepts
To differentiate the various inventory flow patterns
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7. 350 g
€ 1.32
600 g
€ 1.84
15 g
€ 0.36
10 g
€ 0.22

8. Customer’s order cycle
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Procurement
Manufacturing
Delivery
Logistics lead time
5.14 The lead-time gap
Customer’s order cycle
Order fullfilment
Lead-time gap
Logistics lead time
5.15 Closing the lead-time gap
Customer’s order cycle

9. Inventory Management
Inventories are stocks of goods and materials that are maintained to satisfy normal demand patterns
Inventory management
Decisions drive other logistics activities
Different functional areas have different inventory objectives
Inventory costs are important to consider
Inventory turnover
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10. Inventory Management Inventory management (continued)
Inventory costs are important to consider
Inventory turnover: cost of goods sold divided by average inventory at cost
cost of goods sold = inventory turnover
average inventory
$200,000 = inventory is sold 4 times per year
$ 50,000
Compare with competitors or benchmarked companies
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11. Visser, Logistics: Principles, fig. 1
Visser, Logistics: Principles, fig.1.8 cost structure of physical distribution
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12. Reduction lead time reliability Total cost approach Increase
of the
lead time
Improve
delivery
reliability
Total cost approach
Increase
flexibility
Logistics objectives are mutually interdependent
Low inventory turnover = high inventory carrying costs, little (or no) stockout costs
High inventory turnover = low inventory carrying costs, high stockout costs
Managing the trade-off is important to maintain service levels
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13. Inventory Classifications
Cycle (or base) stock
Safety (or buffer) stock
Pipeline (or in-transit) stock
Work in process
Speculative stock
Strategic stock
Dead Stock
Psychic stock
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14. 14 - 3

15. Inventory-Related Costs
Inventory carrying (holding) costs
Obsolescence
Inventory shrinkage
Storage costs
Handling costs
Interest charges
Insurance costs
Taxes
Opportunity cost
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16. Inventory-Related Costs
Stockouts
Stockout costs
Trade-offs Exist between Carrying and Stockout Costs
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17. When to Order ROP = DD x RC (under certainty)
Fixed order quantity system
Fixed order interval system
Reorder (trigger) point (ROP)
ROP = DD x RC (under certainty)
ROP = (DD x RC) + SS (under uncertainty)
Where DD = (average) daily demand
RC = length of replenishment cycle
SS = safety stock
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18. When to Order ROP = DD x RC (under certainty)
ROP = (DD x RC) + SS (under uncertainty)
DD = daily demand =30 pieces
RC = replenishment cycle =2 (days)
SS = safety stock =60
Reorder point = 120 pieces
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19. Quantity Ordering Reorder (trigger) point Fixed Variabel
Fixed
Variabel
Order quantity
R, Q
R, S
Order interval
T, Q
T, S
Ordering
R = Variable order interval
Q = Fixed order quantity
T = Fixed order interval
S = Variable order quantity
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20. How Much to Reorder Economic order quantity (EOQ) in units
EOQ = √2DB/IC
Where
EOQ = the most economic order size, in units
D = annual demand, in units
B = administrative costs per order of placing the order
C = carrying costs of the inventory (%)
I = dollar value of the inventory, per unit
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21. How Much to Reorder Economic order quantity (EOQ) in dollars
EOQ = √2AB/C
Where
EOQ = the most economic order size, in dollars
A = annual usage, in dollars
B = administrative costs per order of placing the order
C = carrying costs of the inventory (%)
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22. Figure 9-2: Determining EOQ by Use of a Graph
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23. How Much to Reorder Economic order quantity (EOQ) in dollars
EOQ = √2AB/C
A = annual usage = $1000
B = administrative costs = $25
C = carrying costs = 0.2 (20%)
EOQ = √2*1000*25/0.2 = $500 order size
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24. How Much to Reorder? Economic order quantity (EOQ) in dollars EOQ A B
EOQ = √2AB/C
A = annual usage
B = administrative costs
C = carrying costs
EOQ A B C
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20%
155 12
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25%
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25. How Much to Reorder Economic order quantity (EOQ) in units
EOQ = √2DB/IC
D = annual demand, in units = 200
B = administrative costs = 25
C = carrying costs = 5
I = value per unit = 0.2 (20%)
EOQ = √2*200*25/.20*5 = 100
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26. How Much to Reorder? Economic order quantity (EOQ) in units
EOQ = √2DB/IC
D = annual demand (in units)
B = administrative costs
C = carrying costs
I = value per unit
EOQ D B C I
183
5.000
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20%
€ ,00 22 12
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25%
105
365
€ ,00
270
3.650
€ ,00
€ ,00
322
5.200
15%
165 – 178 – 183 – 192
20 – 22 – 24 – 26
90 – 95 – 100 – 105
270 – 280 – 290 – 310
300 – 322 – 336 – 344
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27. Table 9-3: EOQ Cost Calculations
Number of orders per year
Order size ($)
Ordering cost ($)
Carrying cost ($)
Total cost (sum of ordering and carrying cost) ($) 1
1,000 25
100
125 2
500 50 3
333 75 33
108 4
250 5
200 20
145
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28. Inventory Flows Safety stock can prevent against two problem areas
Increased rate of demand
Longer-than-normal replenishment
When fixed order quantity system like EOQ is used, time between orders may vary
(When reorder point is reached, fixed order quantity is ordered)
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29. Average inventory in units = Q/2 (+ SS)
Figure 9-3: Inventory Flow Diagram
Reorder point
Average inventory in units = Q/2 (+ SS)
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30. Contemporary Approaches to Managing Inventory
ABC Analysis
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31. Visser, Logistics: Principles, fig.5.4 ABC analysis
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32. Contemporary Approaches to Managing Inventory
ABC Analysis
Just-in Time (JIT) Approach
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33. Figure 9-4: Trailer that opens on the side and is used for rapid discharge of parts
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34. Contemporary Approaches to Managing Inventory
ABC Analysis
Just-in Time (JIT) Approach
Vendor-Managed Inventory (VMI)
Inventory Tracking
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35. Inventory Management: Special Concerns
FiFo
Complementary items
Dead inventory
Deals
Defining stock-keeping units (SKUs)
Informal arrangements outside the distribution channel
Repair and replacement parts
Reverse logistics
Substitute Products
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36. Assignment Obligatory:
Next time:
Assignment Obligatory:
Choose a product, draw an inventory flow diagram and describe it
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