1. Logistics: Elements of Inventory June 5, 2006

2. Required Discussion in Project (1) How are the channels of distribution, from supplier to consumer household, designed to meet the physical characteristics of the product? –Weight –Bulk –Perishability

3. Required Discussion in Project (2) How are the channels of distribution, from supplier to consumer household, designed to meet the consumer’s need for differentiation (or standardization) of product? –Unique product features –Positioning, brand characteristics –Seasonality

4. Service Output Levels Spatial convenience Waiting time/postponement speculation Lot size/combined shipments Assortment depth and inventory

5. SOS/SOD “Gaps” Retail formats are a standardized combination of “service output levels, format design is an optimal combination of SOLs based on assumptions of the household: Offering higher spatial convenience sacrifices efficiency in inventory management

6. Demand Gaps: SOS SOD Service level demanded by consumers is less than that supplied. Retail supply chain is not delivering the product with respect to convenience, waiting time, etc. demanded –Tupperware, a convenience good is restrictively distributed –Adult running shoes stores, minimizing waiting time and additional convenience that’s not demanded.

7. Supply-Side Gaps Total costs of performing a function is too high, a lower cost alternative is available. –Travel agents costing airlines too much for services provided to the airline and customer. –Multi-level marketing systems, “network DSOs” place costs too high on convenience goods.

8. Bucklin’s Postponement/Speculation Postponement: Differing taking title to inventory, preferring to pay additional transportation expenses. Speculation: Holding title to inventory, bearing risk of inventory obsolescence and capital costs.

9. Delivery time/waiting time Buying from supplier A Unit delivery costs

10. Delivery time/waiting time Buying from supplier B Unit delivery costs

11. Delivery time/waiting time Comparing suppliers A and B Unit delivery costs

12. Delivery time/waiting time Total costs Unit delivery costs

13. Delivery time/waiting time for household Resealable Refrigerator Containers Unit delivery costs Glad (Supercenter) Tupperware (direct)

14. Number of Intermediate Stocking Points Approach Distribution centers are the typical example for a retailer. With each additional distribution center, transportation costs (per unit) decrease. Additional inventory appears at each distribution center.

15. Number of distribution centers 1 Transportation costs Economies of combined shipments, bulky, heavy products

16. Number of distribution centers 1 Inventory costs Products that highly perishable Highly differentiated products

17. Number of distribution centers 1 Total distribution costs Optimal number

18. Number of distribution centers 1 Total distribution costs Optimal number High economies in transportation costs Low or near non-existent inventory costs Durable, low-cost goods, commodities

19. Number of distribution centers 1 Total distribution costs Optimal number Expensive products Highly perishable

20. Number of distribution centers to supply retail outlets High inventory costs

21. Number of Orders per Year Most Economical Number of Orders Maintenance Cost Ordering Cost Total cost Total Dollars Economic Order Quantity

22. Inventory Cycle Basics Shorter order cycles, more orders, smaller average inventories Longer order cycles, fewer orders, larger average inventories The order cycle decision is a "trade-off" between: –Costs of placing an order –Inventory maintenance costs

24. Economic Order Quantity C o = cost per order C m = cost of maintenance per year S = annual sales volume, units U = cost per unit

25. Example

26. Example, ½ Units

27. Inventory 0 Illustration of Sales Uncertainty

28. 2 0 12 0 12563 4 3 4 78 3 10 9 1112 13 3 4 5 Daily Sales (Units) Number of Days Total Sales, 40 Days = 243 Mean = 6.1 Std. Dev. = 2.9 Daily Sales Distribution: One Brand

29. 2 0 1 2 0 1 25 6 3 4 3 4 783109 1112 13 3 4 5 Daily Sales (Units) Number of Days Total Sales, 40 Days = 122 Mean = 3.1 Std. Dev. = 2.3 6 7 8 Daily Sales Distribution: One of Two Brands