2. 1 1 Modeling Inventory (Deterministic View) John H. Vande Vate Spring 2007

3. 2 2 Types of Inventory Deterministic Inventory –Pipeline Inventory: Inventory in transit –Cycle Inventory: Goods accumulating for transit Goods delivered and waiting for processing Stochastic Inventory (later)

4. 3 3 Illustrative Example Develop a distribution strategy to minimize inventory and transportation costs Purpose: –Outline issues covered in outbound logistics –The importance of transportation in the supply chain –Illustrate costs and investments –Always do a quick analysis first, then refine it.

5. 4 4 Overview Products: –Computers: CPU, Monitor, Keyboard –Televisions: TV and Console Stores –100 across the US –Sell 10 TVs and 10 computers per day –250 days/year

6. 5 5 Components ComputersTV/MonitorConsole Cost$300$400$100 Weight5 lbs10 lbs30 lbs FromGreen BayIndianapolisDenver We assume weight not cube determines vehicle capacity Truck holds 30,000 lbs

7. 6 6 Initial Strategies to Consider All direct shipments in full truckloads Consolidate in Indianapolis. All shipments in full truckloads

8. 7 7 Simplification Shipments on the order of 1,000 miles Distances

9. 8 8 What Costs? Transportation Pipeline inventory – inventory in transit Inventory at Plants Inventory at Stores Handling …

10. 9 9 Direct:Transportation Cost How many shipments/year? –Green Bay –Indianapolis –Denver –Total 100 stores * Annual Store Demand /Items to fill a truck Items to fill a truck = Cap. of truck/Weight of Item –Green Bay –Indianapolis –Denver 30,000/5 = 6,000 30,000/10 = 3,000 30,000/30 = 1,000 100*2,500/6,000 = 41.67 100*5,000/3,000 =166.67 100*2,500/1,000 = 250 ~ 460

11. 10 What Costs? Direct –Transportation ~ $1/mile*1,000 miles/trip*460 trips/year = $460,000/year –Pipeline inventory –Inventory at Plants –Inventory at Stores –Handling –…

12. 11 Pipeline Inventory How long are goods in transit? –1,000 miles at 50+ miles per hour –2 days + How much inventory is in transit on average? Imagine we send the items one-at-a-time How many items in the pipe?

13. 12 Pipeline Inventory One Day worth of sales at a Store –10 TVs at $400+$100 each = $5,000 –10 Computers at $300+$400 = $7,000 –Total $12,000 per day per Store Two days of system-wide sales: –2 days * $12,000/Store/day * 100 stores = $2,400,000 –Carrying cost 15% of $2,400,000 = $360,000

14. 13 What Costs? Direct –Transportation ~ $1/mile*1,000 miles/trip*460 trips/year = $460,000/year –Pipeline inventory $2,400,000 in capital $360,000 in annual carrying costs –Inventory at Plants –Inventory at Stores –Handling –…

15. 14 Inventory at the Plants Two Extremes –Simultaneous shipments –Staggered shipments

16. 15 Simultaneous Shipments A truckload of computers from Green Bay has 6,000 computers in it A Store sells 2,500 per year So we only need to replenish the Stores every 6,000/2,500 = 2.4 years

17. 16 Inventory at Green Bay Simultaneous Shipments 600,000 2.4 years

18. 17 Simultaneous shipments –Green Bay ships once every 2.4 years Inventory is 1.2 years demand or 300,000 CPUs Inventory value is $90,000,000 Inventory carrying cost is $13,500,000 –Denver ships 2.5 times per year Inventory is 20% of annual demand or 50,000 Consoles Inventory value is $5,000,000 Inventory carrying cost is $750,000 –Indianapolis ships 1.6 times per year Inventory is 500,000/3.2 or about 150,000 items Inventory value is $60,000,000 Inventory carrying cost is $9,000,000

19. 18 Why Not? What are problems with simultaneous shipments? When are simultaneous shipments likely? What alternatives?

20. 19 Inventory at Green Bay Staggered Shipments 6,000 ~6 days

21. 20 What Costs? Inventory at Plants –Simultaneous Shipments Capital Carrying Cost Green Bay $90 million$13.5 million Denver$ 5 million$.75 million Indianapolis$60 million$ 9.0 million Total $155 million$23.25 million –Staggered Shipments (divide by 100!) Capital Carrying Cost Green Bay $900 K $135 K Denver$ 50 K$ 7.5 K Indianapolis$600 K$ 90 K Total $1.55 million $232.5 K

22. 21 What Costs? Direct –Transportation ~ $1/mile*1,000 miles/trip*460 trips/year = $460,000/year –Pipeline inventory $2,400,000 in capital $360,000 in annual carrying costs –Inventory at Plants – Staggered Shipments $1.55 million in capital $232.5 K in annual carrying costs –Inventory at Stores –Handling –…

23. 22 DC Inventory from Green Bay 6,000 ~2.4 years

24. 23 Inventory at Stores At the Stores? –½ truckload or 3,000 CPUs at $300 each: $900,000 –½ truckload or 1,500 Monitors at $400 each: $600,000 –½ truckload or 500 Consoles at $100 each: $ 50,000 $1,550,000 Carrying cost: 15% of $1,550,000 or $232,500 Total Carrying cost at the Stores: $23,250,000!

25. 24 What Costs? Direct –Transportation ~ $1/mile*1,000 miles/trip*460 trips/year = $460,000/year –Pipeline inventory $2,400,000 in capital $360,000 in annual carrying costs –Inventory at Plants – Staggered Shipments $1.55 million in capital $232.5 K in annual carrying costs –Inventory at Stores $155 million in capital $23.25 million in carrying costs –Handling –…

26. 25 Costs Transportation Costs: $ 460,000 Pipeline Inventory $ 360,000 Inventory Costs at Plants: $ 232,500 Inventory Costs at Stores: $ 23,250,000 Total: $ 24,302,500! Capital Required: Pipeline Inventory $ 2,400,000 Inventory Costs at Plants: $ 1,550,000 Inventory Costs at Stores: $ 155,000,000 Total: $ 158,950,000! Total Cost & Capital Direct

27. 26 Consolidation Strategy 2: Assemble Products in Indianapolis and distribute by truckload from there What will happen to costs? –Transportation –Pipeline –At plants –At Indianapolis Warehouse/Cross Dock –At Stores\s

28. 27 Via Indianapolis Facts

29. 28 What Costs? Transportation –To Indianapolis –From Indianapolis to Stores Pipeline inventory –To Indianapolis –From Indianapolis to Stores Inventory at Plants Inventory at Indianapolis Cross Dock Inventory at Stores Handling …

30. 29 Indirect: Transportation To Indianapolis –Green Bay 400 miles* 42 trips = 16,800 –Indianapolis 0 miles*167 trips = ~ 0 –Denver 1,100 miles*250 trips = 275,000 –Total $291,800 From Indianapolis to Stores –Same as total transport before, we are moving the same goods the same distance (roughly 1,000 miles to each Store) $460,000

31. 30 What Costs? Transportation –To Indianapolis $291,800 –From Indianapolis to Stores $460,000 Pipeline inventory –To Indianapolis –From Indianapolis to Stores Inventory at Plants Inventory at Indianapolis Cross Dock Inventory at Stores Handling …

32. 31 Pipeline Inventory To Indianapolis –From Green Bay 400 miles ~ 1 day 1,000 per day at $300 each ~ $300,000 capital 15% of $300,000 is $45,000 carrying cost –From Denver 1,100 miles ~ 2 days 2 days at 1,000 per day at $100 each ~ $200,000 capital 15% of $200,000 is $30,000 carrying cost –Total Capital$500,0000 Carrying Cost$ 75,0000 From Indianapolis to Stores –Same as before 2 days of sales –Capital $2,400,000 –Carrying Cost $ 360,000

33. 32 What Costs? Transportation –To Indianapolis $291,800 –From Indianapolis to Stores $460,000 Pipeline inventory –To Indianapolis Capital $500,000 Carrying Cost$ 75,000 –From Indianapolis to Stores Capital$2,400,000 Carrying Cost$ 360,000 Inventory at Plants Inventory at Indianapolis Cross Dock Inventory at Stores Handling …

34. 33 Inventory at Plants Same as before –Green Bay holds ½ of a truckload –Denver holds ½ of a truckload –Assume Indianapolis holds ½ of a truckload for delivery to the cross dock –Capital$1,550,000 –Carrying Cost $ 232,500

35. 34 What Costs? Transportation –To Indianapolis $291,800 –From Indianapolis to Stores $460,000 Pipeline inventory –To Indianapolis Capital $500,000 Carrying Cost$ 75,000 –From Indianapolis to Stores Capital$2,400,000 Carrying Cost$ 360,000 Inventory at Plants –Capital $1,550,000 –Carrying Costs$ 232,500 Inventory at Indianapolis Cross Dock Inventory at Stores Handling …

36. 35 Inventory at Cross Dock ReceivingShipping CPUs, Monitors, Consoles Computers & TVs WIP

37. 36 Inventory at Indianapolis Cross Dock Receiving from the Plants –½ a truckload of CPUs –½ a truckload of Monitors –½ a truckload of Consols Shipping to the Stores –½ a truckload of Computers and TVs WIP – like Pipeline inventory –How long does the process take? Capital $1,550,000 Carrying Cost $ 232,500

38. 37 What’s in a Truck Of Computers and TVs? In the same mix as demand –1:1 computers to TVs –X computers in a truck –Weight of the computers 15X lbs –Weight of the TVs 40X lbs –15X + 40X = 30,000 lbs –X = 30,000/55 = 545 A full truck of finished goods has –545 computers and 545 TVs –545 CPUs, 545 Consoles and 1090 Monitors

39. 38 Inventory at Indianapolis Cross Dock Receiving from the Plants –½ a truckload of CPUs –½ a truckload of Monitors –½ a truckload of Consols Shipping to the Stores –½ a truckload of Computers and TVs 273 CPUs at $300 each or $ 81,900 273 Consoles at $100 each or $ 27,300 545 Monitors at $400 each or $218,000 Total $327,200 Carrying cost$ 49,080 WIP – like Pipeline inventory –How long does the process take? Capital $1,550,000 Carrying Cost $ 232,500

40. 39 Inventory at Stores Inventory at a Store: –Visited by truck 4.6 times per year –Same as before –So inventory costs at Stores are the same as before, right?

41. 40 Wrong! Magic? Total Inventory Carrying Cost at Stores: $4,914,000 compared with $23,250,000 under earlier strategy. Explain!

42. 41 The Difference Explain?

43. 42 With Consolidation –Transportation Costs: $ 751,800 –Inventory Costs at Stores: $ 4,891,300 –Inventory Costs at Plants: $ 513,900 Total: $ 6,757,000 Without Consolidation –Transportation Costs: $ 460,000 –Inventory Costs at Stores: $ 23,250,000 –Inventory Costs at Plants: $ 232,500 Total: $ 23,942,500!

44. 43 Comparison Invest some of the $120 million in the cross dock Spend some of the $18 million on handling

45. 44 Summary Deterministic Inventory –Pipeline –Cycle –WIP Pipeline from Days in transit * Value/Day Cycle from half of shipment WIP like pipeline Value of consolidation Quick & Dirty analysis first

46. 45 Deterministic Supply Chain Design Next time: should we be shipping in full truckloads? Later, different kinds of cross docks