inventory control the logistics of risk or when a refrigerator isn’t!
TRANSCRIPT
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Inventory ControlThe Logistics of Risk
or
When a Refrigerator isn’t!
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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.
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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.
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Good Inventory Management
Inventory decisions which incorporate the:• The right _______• The right ________• At the right __________• _______________
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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 ft3 rather than the desired size. _________________• When it is manufactured in December but
demanded in July___________________________________
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The Nature of Inventory
Inventory Shortages (stock outs) cause • _________________,• Extended shut downs of
_________________________• ________________________ • ________________________
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The Nature of Inventory (cont.)
Excess inventory causes ____________________________• Opportunity cost of capital (interest on
investment)____________________________________________________________________________________________________________________________________________
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Average Inventory
• Graphic
• Algebraic; I = OQ/2 where I = average inventory and OQ is order quantity.
_____________________________
____________________________
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Determine Order Quantity
Two major influences
____________________________
The more product we order each time the
____________________________- The more we order each time the
____________________________
____________________________
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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.
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Inventory Carrying Cost -
ICC = (OQ x V x R)/2
OQ=Oder Quantity, V=price & R=ICC rate
Or (you try)
____________________________
____________________________
Or
____________________________
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Order Cost -
• Total OC = OC x S/OQ
Where S = yearly sales
At 10 units / order what is OC?
____________________________
Or
____________________________
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Calculate the Total CostWhat is TC = ?____________________________
TC = ____________________________
TC = ____________________________
TC = ____________________________TC = total costOQ=quantity ordered/orderV= average unit value of productR=annual inventory carry charge as a %OC=ordering cost or $cost per orderS = Annual sales
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Calculate from the example
• 2 orders per year• ICC = ____________________________• OC = ____________________________• TC = ____________________________• 104 orders per year• ICC = ____________________________• OC = ____________________________• TC = ____________________________
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04/19/2304/19/23
Annual D # of Orders units/order Ave Inv Ave Inv Value Annual ICC Annual OCAnnual Total Cost
208.00 2 104 52 $31,200.00 $7,800.00 $200.00 $8,000.00208.00 8 26 13 $7,800.00 $1,950.00 $800.00 $2,750.00208.00 10 20.8 10.4 $6,240.00 $1,560.00 $1,000.00 $2,560.00208.00 12 17.33333 8.666667 $5,200.00 $1,300.00 $1,200.00 $2,500.00208.00 16 13 6.5 $3,900.00 $975.00 $1,600.00 $2,575.00208.00 104 2 1 $600.00 $150.00 $10,400.00 $10,550.00
Inventory Carrying and Ordering Costs
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Inv Carrying & Ordering Cost
$0.00
$5,000.00
$10,000.00
$15,000.00
$20,000.00
2 27 52 77 102 127
# Orders/Year
Costs
Inv Carry Costs
Order Costs
Total Costs
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Economic Order Quantity• TC = (OQ x V x R)/2 + (OC x S)/OQ• Solve by taking the
____________________________
____________________________
____________________________
____________________________
____________________________
____________________________
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Cycle stocks
• Are those items
____________________________
• They meet the
____________________________
assuming we can predict demand & replenishment times.
• Now back to reality!
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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.
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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 St/OC
• 30/5= # shipments in transit• 100 units per shipment = 600 units of transit inventory at
$3,000 per item = $1,800,000
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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, …________________________________________________________
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Safety Stocks
• Demand may exceed what we expect so
____________________________
• Product may be in transit
____________________________
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Dead Stocks
• An SKU that
____________________________
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Uncertainty
• Demand varies
____________________________• Order cycle times are
____________________________• Communication time
____________________________
Transportation times are
____________________________• So, we have a new trade-off.
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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________________________________________________________________________________________________________________
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Components of Inventory Carrying Cost
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