GLogistics – IBC 2023
ROUND 2 – CASE STUDY
A. SHOWCASE
I.
Company’s Background
Company ABC is a reputable company specializing in the production and supply of high-quality labels and labeling solutions. With
several years of industry experience, ABC Group has established itself as a leader in the labeling industry, serving a wide range of
customers across various sectors.
ABC operates with a strong focus on innovation, utilizing cutting-edge printing technology and advanced labeling techniques to
produce labels that meet the ever-evolving needs of their customers. They offer a diverse range of labeling solutions, including
product labels, barcode labels, thermal labels, and especially RFID tags and labels, accommodating different industries and
applications.
5W1H/SCQA?
Functional/Innovative product? -> Sc strategy: Responsive SC
The company prides itself on its customer-centric approach, aiming to deliver
personalized labeling solutions tailored to meet the specific requirements of
each client. They collaborate closely with their customers, understanding their
branding goals, regulatory compliance needs, and logistical requirements to
provide the most effective labeling solutions.
Initially, ABC Group was a small-scale label printing business catering to local
clients, with its headquarter based in London, United Kingdom. Through their
commitment to excellence and customer satisfaction, the company
experienced significant growth, today it has over 5000 employees, and
expands its operation to 21 global locations, from North America to Asia,
including Vietnam.
II.
The Company’s Challenges
Currently, RFID is becoming an essential requirement for achieving retail optimization that no business can afford to ignore (Laura
O'Brien n.d.). RFID technology is widely utilized across various industries and fields to automate the process of data collection and
minimize human errors associated with data tracing. RFID labels are one of the most popular product lines in ABC, with the RFID
chip serving as the primary component used in the manufacturing of these labels.
ABC relies on two main suppliers for RFID chips, located in Sri Lanka and China. However, the global pandemic and the governance
crisis in Sri Lanka in 2022 have significantly impacted the supply chain. The disruptions, combined with fluctuating customer demand,
have resulted in variations between supply and demand ever since, frequently leading to stockouts and inventory backlog. This has
made it challenging for ABC to control the inventory levels and improve their service level. Additionally, ABC Group follows a Maketo-Stock (MTS) approach by maintaining an inventory of pre-made labels to fulfill customer orders promptly. While this strategy allows
for quick order fulfillment, it also incurs costs associated with holding inventory and ordering.
III.
Finding the Economic Order Quantity (EOQ) and the Reorder Point
1. Economic Order Quantity
Economic order quantity (EOQ) is defined in the APICS Dictionary as “a
type of fixed order quantity model that determines the amount of an item
to be purchased or manufactured at one time”. As shown in Figure 1, EOQ
is the point where annualized ordering costs and carrying costs are equal,
which is ideally the quantity minimizing the total cost.
The formula for calculating EOQ is:
𝐸𝑂𝑄 = √
Notation:
2𝑥 𝐷 𝑥 𝑂𝐶
𝐻𝐶
EOQ= Optimal order quantity
D = annual demand
OC = Ordering cost
HC = annual holding cost per unit
2. The total cost of EOQ
The total cost of the Economic Order Quantity (EOQ) is the combined cost of ordering and holding inventory for a specific item over
a given time period. It represents the overall expenses incurred by a business in managing its inventory.
The total cost of EOQ includes two main components:
•
Ordering Cost: This refers to the cost incurred each time an order is placed for the item.
•
Holding Cost: Also known as carrying cost, this represents the cost of holding inventory in stock over a specific period
The total cost can be calculated using the following formula:
𝑇𝐶𝐸𝑂𝑄 = (
Notation:
𝐷
𝑄
𝑥 𝑂𝐶) + ( 𝑥 𝐻𝐶)
𝑄
2
𝑇𝐶𝐸𝑂𝑄 = Total annual cost
D = annual demand
OC = Ordering cost
HC = annual holding cost per unit
Q = EOQ = Economic order quantity
3. Reorder Point or Time between orders
The time between orders, also known as the reorder point, refers to the duration between placing an order for inventory and the
receipt of that order. It represents the time required for the supplier to process the order, ship the items, and for the inventory to reach
the business.
The time between orders is a critical factor to consider in inventory management to ensure that stock levels are replenished on time
and meet customer demand. It helps businesses determine when to place an order to align with the lead time and avoid stockouts or
excessive inventory levels. (Figure 2)
The formula to calculate the time between order or reorder point (only applicable for fixed order quantity model with
predictable demand):
𝑇=
𝐸𝑂𝑄
𝑥 365
𝐷
Notation:
T = Times between orders
D = annual demand
EOQ = Quantity to be ordered
For Example: T = 30,72 = 30 days and 17 hours → The business needs to reorder to fulfill their inventory every 30 days and 17
hours, which means the reorder point is roughly every 1 month
IV.
The ABC Analysis of Inventory
When we apply the 80-20 rule of Vilfredo Pareto to inventory management,
the result is ABC analysis of Inventory (also known as ABC Classification).
It is defined as the classification of a group of items in decreasing order of
annual dollar volume (price multiplied by projected volume), this array is
then split into three groups, namely A,B and C (Figure 3)
• Group A represents 20% by number of items that contribute to 80% of
total value
• Group B represents 30% by number of items that contribute to 15% of
total value
• Group C represents the remaining 50% by number of items,
contributing to only 5% of total value
To be successful in inventory management, business must weight the
importance of their inventory investments. ABC inventory analysis helps
inventory managers where to prioritize their allocation of resources.
The formula for ABC analysis is as follows:
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 (%) 𝑜𝑓 𝑇𝐴𝐶 = (
Notation:
V.
𝐴𝐶 𝑜𝑓 𝑖𝑡𝑒𝑚
) 𝑥 100
𝑇𝐴𝐶
TAC = Total annual cost
AC of item = Annual cost of a particular item
Annual cost = Annual demand x Unit cost
Calculating Safety Stock
Statistical methods for determining safety stock levels approach the issue mathematically, using variations in demand or forecast
error and the desired level of customer service to determine a range of safety stock.
The process:
1. Firstly, you need to calculate the degree to which demand can be expected to fluctuate, which can be done by calculating the
following:
a. Mean absolute deviation (MAD) of actual demand from forecast demand
Mean absolute deviation or MAD is the measure of the average absolute difference between actual demand and forecasted demand,
values for a particular product or item. MAD is used to assess the accuracy of a forecasting method by quantifying the magnitude of
errors.
The formula to calculate MAD:
𝑀𝐴𝐷 (𝑢𝑛𝑖𝑡) =
∑(|𝑫 − 𝑭|)
𝑵
Notation:
∑ = The sum of
D = Actual demand value
F = Forecasted demand value
N = Total number of data points
b. Standard Deviation (SD) of actual demand from average demand
In inventory management, standard deviation is a statistical measure that quantifies the variability or dispersion of data points around
the mean or average demand value. Standard deviation is used to assess the level of volatility or fluctuation in demand, which is
crucial for determining safety stock levels and managing inventory effectively.
The formula to calculate SD:
∑((𝐷 − 𝑀)2 )
𝑆𝐷 (𝑢𝑛𝑖𝑡) = √
(𝑁 − 1)
Notation:
∑ = The sum of
D = Actual demand value
M = The mean or average demand value
N = Total number of data points
Note that this calculation only requires the actual demand data
2. Determining Customer Service Level
The customer service level can be determined by using a safety factor table, as shown in Table 1 below:
Percentile
Customer Service
Level
MAD
(Units x Factor below)
SD
(Units x Factor below)
50.00
75.00
80.00
85.00
90.00
94.00
95.00
96.00
97.00
98.00
99.00
99.90
99.99
0.00
0.84
1.05
1.30
1.60
1.95
2.06
2.19
2.35
2.56
2.91
3.85
5.00
0.00
0.67
0.84
1.04
1.28
1.56
1.65
1.75
1.88
2.05
2.33
3.09
4.00
Table 1: Safety Factor Table
For example: If a company want to raise their customer service level of 85%, the safety factor will be 1.30 for MAD, and 1.04 for
SD
3. Calculating the Safety Stock
Finally, the safety stock can be calculated by multiplying the MAD (unit) or SD (unit) with the appropriate safety factor required for
the desired customer service level
𝑆𝑎𝑓𝑒𝑡𝑦 𝑆𝑡𝑜𝑐𝑘 = MAD/SD x Service Factor
VI.
The Company’s Data
1. ABC have been trying to improve their demand forecast by measuring the demand of RFID chips over the year 2022. According
to ABC’s data base, the monthly demand for RFID chips are as follows:
ABC’S DEMAND OF RFID CHIPS IN 2022 (by
unit)
January
February
March
April
May
June
July
August
September
October
November
December
Total
20,241
12,136
31,279
19,183
28,169
24,293
26,773
40,904
26,183
32,335
12,240
24,231
297,967
Table 2: ABC’s Monthly Demand of RFID chip in 2022
2. ABC Group does not classify their inventory, hence, contributing to their challenging inventory control. From the database,
we also know the annual demand for each of their raw materials and unit cost per item, which are shown below:
No.
1
2
4
5
6
7
8
9
Total
Item
Paper
Cardstock
Thread
Adhesive
Ink
Woven fabric
Plastic film
RFID chips
Annual Demand (by unit)
Unit cost (per unit - in dollar)
1,125,217
974,231
602,224
462,917
324,386
525,336
455,031
297,967
4,767,309
1
1.2
2
3
3.5
5
7
15
37.7
Table 3: Annual Demand and Unit cost of raw materials
3. Poor inventory control practices have resulted in frequent occurrences of stockouts and overstock, leading to a decline in the
level of customer service. Table 4 presents a comparison between the forecasted demand and the actual demand of RFID
chips over an 8-week period in 2023 to assess the accuracy of the forecasts.
Week
Actual Demand
(by piece)
Forecasted Demand
(by piece)
1
2
3
4
5
6
7
8
3,354
2,865
3,624
2,952
2,724
3,443
3,135
2,913
2,900
3,100
3,000
3,400
2,900
2,800
3,000
3,100
Table 4: The actual demand and forecasted demand of RFID chip in a 8-week period
B. MOVE TO CANDIDATES
I.
Question 1
1. Assume that the monthly demand for RFID chip in 2022 is predictable, and ABC only needs to order a fixed quantity of the
item. Knowing that the ordering cost per order is 27,500$ and holding cost is 10$ per piece. Using data from Table 2, help
ABC Group to identify:
• The economic order quantity (EOQ)
• The total cost of economic order quantity
• Reorder point for economic order quantity
2. To your knowledge, explain why EOQ is ideal for predictable demand but not suitable for a company having variable demand?
II.
Question 2
ABC is also trying to classify their inventory so that they know which item they should prioritize, hence provide better allocation of
resources. Apply the ABC analysis of inventory using the data provided in Table 3, please identify, and separate their raw materials
into groups based on their impact on the total annual cost, from lowest to highest.
III.
Question 3
Due to inadequate inventory control practices, ABC has been experiencing frequent stockouts or excess inventory, leading to a
decline in their customer service level over the past year, currently standing at approximately 85%. In 2023, ABC aims to significantly
improve their customer service level to reach 95% and recognizes the need to enhance their safety stock levels. Utilize the data given
in
Table 1 & Table 4 to address the following questions:
•
•
Applying both “Mean absolute deviation” (MAD) and “Standard Deviation” (SD) methods to assist ABC in determining the
appropriate safety stock levels required to achieve their customer service level goal.
Compare the results obtained from both methods and provide reasoned insights on which method is more optimal in the
specific case of ABC Group.
C. GUIDELINES
1. Please note that each question represents a distinct scenario requiring a different resolution of a specific problem
2. Pay close attention while reading, as every piece of information provided is crucial for successfully solving the case
3. Most of the results from calculations are expressed in units and pieces; therefore, it is necessary to round up the final number to
the appropriate whole value when presenting the solution.
4. We highly encourage further research to augment the candidate's answers by gathering additional information to complement the
data and suggestions presented in this document. Your effort to seek additional supporting evidence is greatly appreciated.
5. Attaining a high score does not solely come from your calculations, but it also depends on both industry-specific logical thinking
and thorough research and analysis of relevant information and facts. However, fundamental calculations and analysis must not be
allowed to be mistaken