Inventory ControlThe 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 ft3 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.

_____________________________

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Determine Order Quantity

Two major influences

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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 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

Calculate from the example

• 2 orders per year• ICC = ____________________________• OC = ____________________________• TC = ____________________________• 104 orders per year• ICC = ____________________________• OC = ____________________________• TC = ____________________________

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

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

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!

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 St/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

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