Chapter 7:
Inventory Decision Making
Fundamental Approaches to
Managing Inventory

Basic issues are simple…






how much to order and
when to order
where to store inventory and
what items to order.
Traditionally, conflicts were usually present…as customer service
levels increased, investment in inventory also increased.
Recent emphasis is on increasing customer service and reducing
inventory investment.
Chapter 7
Management of Business Logistics, 7th Ed.
2
Fundamental Approaches to
Managing Inventory

Four factors might permit this apparent
paradox, that is, the firm can achieve higher
levels of customer service without actually
increasing inventory:
1.
More responsive order processing
2.
Ability to strategically manage logistics
data
3.
More capable and reliable transportation
4.
Improvements in the location of inventory
Chapter 7
Management of Business Logistics, 7th Ed.
3
Relationship between
Inventory and Customer Service Level
Figure 7-1
Chapter 7
Management of Business Logistics, 7th Ed.
4
Key Differences among Approaches
to Managing Inventory
Three differences of approach:
1.
2.
3.
Dependent versus Independent Demand
Pull versus Push
Systemwide versus single-facility solutions
Each approach has models developed for
approach solution to the inventory problem.
Chapter 7
Management of Business Logistics, 7th Ed.
5
Key Differences among Approaches
to Managing Inventory

1. Dependent versus Independent Demand
 Dependent demand is directly related to the
demand for another product.
 Independent demand is unrelated to the
demand for another product.
 For many manufacturing processes, demand
is dependent.
 For many end-use items, demand is
independent.
Chapter 7
Management of Business Logistics, 7th Ed.
6
Key Differences among Approaches
to Managing Inventory


Chapter 7
Of the inventory management processes in
this chapter, JIT, MRP and MRPII are
generally associated with items having
dependent demand.
Alternatively, DRP and the EOQ models are
generally associated with items exhibiting
independent demand.
Management of Business Logistics, 7th Ed.
7
Key Differences among Approaches
to Managing Inventory

2. Pull versus Push
 Pull approach is a “reactive” system, relying
on customer demand to “pull” product
through a logistics system. MacDonald’s is
an example.
 Push approach is a “proactive” system, and
uses inventory replenishment to anticipate
future demand. Catering businesses are
examples of push systems.
Chapter 7
Management of Business Logistics, 7th Ed.
8
Key Differences among Approaches
to Managing Inventory

Pull versus Push
 Pull systems respond quickly to sudden or
abrupt changes in demand, involve one-way
communications, and apply more to
independent demand situations.
 Push systems use an orderly and disciplined
master plan for inventory management, and
apply more to dependent demand
situations.
Chapter 7
Management of Business Logistics, 7th Ed.
9
Key Differences among Approaches
to Managing Inventory

3. systemwide versus single-facility approach
 Is to estimate whether the selected
approach would apply to the whole system,
or is appropriate to a single facility
Chapter 7
Management of Business Logistics, 7th Ed.
10
On the Line:
American Cancer Society





ACS constructed a world class automated order
fulfillment center in Atlanta.
Order cycle time was reduced to five business
days.
Centralized storage reduced waste and
obsolescence of educational materials.
Centralized shipment reduced freight rates.
The new center saved $8 million in the first year
alone.
Chapter 7
Management of Business Logistics, 7th Ed.
11
We now look at models of

1.
2.
Chapter 7
Fixed order cost with condition of
Certainty
Fixed order cost with condition of
Uncertainty
Management of Business Logistics, 7th Ed.
12
1. Fixed Order Quantity Approach
(Condition of Certainty): Inventory Cycles

In this example, each cycle starts
with 4,000 units:
 Demand is constant at the rate
of 800 units per day.
 When inventory falls below 1,500 units, an
order is placed for an additional 4,000 units.
 After 5 days the inventory is completely used.
 Just as the 4,000th unit is sold, the next order
of 4,000 units arrives and a new cycle begins.
Chapter 7
Management of Business Logistics, 7th Ed.
13
Fixed Order Quantity
Model under the Condition of Certainty
Figure 7-2
Chapter 7
Management of Business Logistics, 7th Ed.
14
Fixed Order Quantity Approach (Condition
of Certainty): Simple EOQ Model

Simple EOQ Model Assumptions






Chapter 7
Continuous, constant, known and infinite rate
of demand on one item of inventory.
A constant and known replenishment time.
Satisfaction of all demand.
Constant cost, independent of order quantity
or time.
No inventory in transit costs.
No limits on capital availability.
Management of Business Logistics, 7th Ed.
15
Fixed Order Quantity Approach (Condition
of Certainty): Simple EOQ Model

Simple EOQ Model Variables








Chapter 7
R = annual rate of demand
Q = quantity ordered (lot size in units)
A = order or setup cost
V = value or cost of one unit in dollars
W = carrying cost per dollar value in percent
S = VW = annual storage cost in $/unit per year
t = time in days
TAC = total annual costs in dollars per year
Management of Business Logistics, 7th Ed.
16
Figure 7-3
Inventory Carrying Cost
Chapter 7
Management of Business Logistics, 7th Ed.
17
Figure 7-4
Order or Setup Cost
Chapter 7
Management of Business Logistics, 7th Ed.
18
Figure 7-5
Inventory Costs
Chapter 7
Management of Business Logistics, 7th Ed.
19
Fixed Order Quantity Approach (Condition
of Certainty): Simple EOQ Model
TAC = QVW + AR
2
Q
or
TAC = QS + AR
2
Q
First term is the average carrying cost
Second term is order or setup costs per year
Chapter 7
Management of Business Logistics, 7th Ed.
20
Figure 7-6
Sawtooth Model
Chapter 7
Management of Business Logistics, 7th Ed.
21
Fixed Order Quantity Approach (Condition
of Certainty): Simple EOQ Model
TAC = QVW + AR
2
Q
or
TAC = QS + AR
2
Q
Solving for Q gives the following expressions:
Q=
√ 2 RA
Chapter 7
or Q =
VW or S
√ 2RA
or Q =
VW
Management of Business Logistics, 7th Ed.
√ 2RA
S
22
Fixed Order Quantity Approach (Condition
of Certainty): Simple EOQ Model
Where R = 3600 units V = $100; W = 25%;
S (or VW)= $25; A = $200 per order
Q=
√ 2 RA
VW or S
or
Q=
√ 2RA
or
Q=
√ 2RA
VW
S
√ 2*3600*$200 √ 2*3600*$200
$100*25%
Q = 240 units
Chapter 7
$25
Q = 240 units
Management of Business Logistics, 7th Ed.
23
Figure 7-7
Sawtooth Models
Chapter 7
Management of Business Logistics, 7th Ed.
24
Table 7-1
Total Costs for Various EOQ Amounts
Chapter 7
Management of Business Logistics, 7th Ed.
25
Figure 7-8 Graphical Representation of
the EOQ Example
Chapter 7
Management of Business Logistics, 7th Ed.
26
1. Fixed Order Quantity Approach
(Condition of Certainty)

Summary and Evaluation of the
Fixed Order Quantity Approach:





EOQ is a popular inventory model.
EOQ doesn’t handle multiple locations as well as a
single location.
EOQ doesn’t do well when demand is not constant.
Minor adjustments can be made to the basic model.
Newer techniques will ultimately take the place of EOQ.
Chapter 7
Management of Business Logistics, 7th Ed.
27
2. Fixed Order Quantity Approach
(Condition of Uncertainty)


Uncertainty is a more normal condition.
 Demand is often affected by exogenous
factors---weather, forgetfulness, etc.
 Lead times often vary regardless of carrier
intentions.
Examine out Figure 7-9.
 Note the variability in lead times and
demand.
Chapter 7
Management of Business Logistics, 7th Ed.
28
Figure 7-9 2. Fixed Order Quantity
Model under Conditions of Uncertainty
Chapter 7
Management of Business Logistics, 7th Ed.
29
2. Fixed Order Quantity Approach
(Condition of Uncertainty)

Reorder Point – A Special Note
 With uncertainty of demand, the reorder
point becomes the average daily demand
during lead time plus the safety stock.


Chapter 7
Based on rate of probability
Examine Figure 7-9 again.
Management of Business Logistics, 7th Ed.
30
Fixed Order Quantity Approach
(Condition of Uncertainty)

Uncertainty of Demand Affects Simple EOQ
Model Assumptions:






Chapter 7
a constant and known replenishment time.
constant cost/price, independent of order
quantity or time.
no inventory in transit costs.
one item and no interaction among
the inventory items.
infinite planning horizon.
no limit on capital availability.
Management of Business Logistics, 7th Ed.
31
Notes for the following tables


Assume k =10, each unit,v =$100,
carrying cost,w =25%, A=200,R=3600





Table 7-1
shortage
Table 7-2
Table 7-3
Table 7-4
Chapter 7
illustrates the rate of probability of
shows the units of shortage
combines Tables 7-1 and 7-2
computes all relevant values
Management of Business Logistics, 7th Ed.
32
Table 7-2 Probability Distribution
of Demand during Lead Time
Demand
Chapter 7
Probability
100 units
0.01
110
0.06
120
0.24
130
0.38
140
0.24
150
0.06
160
0.01
Management of Business Logistics, 7th Ed.
33
Table 7-3 Possible Units of Inventory
Short or in Excess during Lead Time with
Various Reorder Points
Actual
Demand 100
100
0
110
-10
110
10
0
Reorder Points
120
130
140
20
30
40
10
20
30
150
50
40
160
60
50
120
130
140
-20
-30
-40
-10
-20
-30
0
-10
-20
10
0
-10
20
10
0
30
20
10
40
30
20
150
160
-50
-60
-40
-50
-30
-40
-20
-30
-10
-20
0
-10
10
0
Chapter 7
Management of Business Logistics, 7th Ed.
34
Table 7-3 Possible Units of Inventory
Short or in Excess during Lead Time with
Various Reorder Points
Reorder Points
Actual
Demand
Probability
100
110
120
130
140
150
160
100
0.01
0.0
0.1
0.2
0.3
0.4
0.5
0.6
110
0.06
-0.6
0
0.6
1.2
1.8
2.4
3.0
120
0.24
-4.8
-2.4
0
2.4
4.8
7.2
9.6
130
0.38
-11.4
-7.6
-3.8
0
3.8
7.6
11.4
140
0.24
-9.6
-7.2
-4.8
-2.4
0
2.4
4.8
150
0.06
-3.0
-2.4
-1.8
-1.2
-0.6
0
0.6
-0.1
0
160
0.01
Chapter 7
-0.6Management
-0.5 of Business
-0.4 Logistics,
-0.3 7 -0.2
Ed.
th
35
Table 7-4 Calculation of Lowest-Cost Reorder Point
Dmnd
100
110
120
130
140
150
160
(e)
0.0
0.1
0.8
3.9
10.8
20.1
30.0
(VW)*
e=2
0
$2.50
$20
$97.50
(g)=3
30
20.1
10.8
3.9
0.8
0.1
0.0
G=gw
=4=
3*100
$300
$201
$108
$39
$8
$1
$0
GR/Q
$4500 $3015 $1620
$585
$120
$15
$0
=5
=1
$270 $502.50 $750
TAC
$4500 $3018 Management
$1640 of$682.50
$390 $517.50 $750
Chapter 7
Business Logistics, 7 Ed.
36
= 2+5
th
Note for Table 7-4

e = expected excess per cycle
=of values above diagonal line of Table 7.4
g = expected shorts per cycle
=of values below diagonal line of Table 7.4
K = stockout cost in dollars
G =gk =expected stockout cost per cycle
G (R/Q) = 5 = expected stockout per year

Refer to page 241 of text for calculation.




Chapter 7
Management of Business Logistics, 7th Ed.
37
Fixed Order Quantity Approach (Condition
of Certainty): Expanded EOQ Model
Where R = 3600 units V = $100; W = 25%;
A = $200 per order; G = 8
Q=
√ 2 R(A + G)
VW
√ 2 * 3600 * ($200 + 8)
$100 * 25%
Q = approximately 242 units
Chapter 7
Management of Business Logistics, 7th Ed.
38
Fixed Order Quantity Approach (Condition
of Certainty): Expanded EOQ Model
Where R = 3600 units V = $100; W = 25%;
A = $200 per order; G = 8; Q = 242; e = 10.8
TAC = QVW + AR + eVW + GR
2
Q
Q
TAC = (242*$100*25%) + (200*3600) + (10.8*$100*25%) + (8*3600)
2
242
242
TAC =
$3025
TAC =
$6389 (New value for TAC when uncertainty introduced)
Chapter 7
+
$2975
+
$270
Management of Business Logistics, 7th Ed.
+
$119
39
Fixed Order Quantity Approach (Condition
of Uncertainty): Conclusions


Following costs will rise to cover the uncertainty:
 Stockout costs.
 Inventory carrying costs of safety stock
Results may or may not be significant.
 In text example, TAC rose $389 or
approximately 6.5%.
 The greater the dispersion of the probability
distribution, the greater the cost disparity.
Chapter 7
Management of Business Logistics, 7th Ed.
40
Figure 7-10
Area under the Normal Curve
Chapter 7
Management of Business Logistics, 7th Ed.
41
Table 7-5 Reorder Point Alternatives and
Stockout Possibilities
Chapter 7
Management of Business Logistics, 7th Ed.
42
Fixed Order Interval Approach





A second basic approach
Involves ordering at fixed intervals and
varying Q depending upon the remaining
stock at the time the order is placed.
Less monitoring than the basic model
Examine Figure 7-11.
Amount ordered over each five weeks in the
example varies each week.
Chapter 7
Management of Business Logistics, 7th Ed.
43
Figure 7-11 Fixed Order Interval Model
(with Safety Stock)
Chapter 7
Management of Business Logistics, 7th Ed.
44
Summary and Evaluation of EOQ
Approaches to Inventory Management

Four basic inventory models:
1.
2.
3.
4.


Fixed quantity/fixed interval
Fixed quantity/irregular interval
Irregular quantity/fixed interval
Irregular quantity/irregular interval
Where demand and lead time are known,
basic EOQ or fixed order interval model best.
If demand or lead time varies, then safety
stock model should be used
Chapter 7
Management of Business Logistics, 7th Ed.
45
Summary and Evaluation of EOQ
Approaches to Inventory Management


Relationship to ABC analysis
 “A” items suited to a fixed quantity/irregular
interval approach.
 “C” items best suited to a irregular
quantity/fixed interval approach.
Importance of trade-offs
 Familiarity with EOQ approaches assists the
manager in trade-offs inherent in inventory
management.
Chapter 7
Management of Business Logistics, 7th Ed.
46
Summary and Evaluation of EOQ
Approaches to Inventory Management


New concepts
 JIT, MRP, MRPII, DRP, QR, and ECR also take
into account a knowledge and understanding
of applicable logistics trade-offs.
Number of DCs (distribution centers)
 The issue of inventory at multiple locations in a
logistics network raises some interesting
questions concerning the number of DCs, the
SKUs at each, and their strategic positioning.
Chapter 7
Management of Business Logistics, 7th Ed.
47
Additional Approaches to
Inventory Management

Five approaches to inventory management
that have special relevance to supply chain
management:
1.
JIT (Just in Time)
2.
MRP (Materials Requirements into
Planning)
3.
DRP (Distribution Resource Planning)
4.
QR (Quick Response)
5.
ECR (Efficient Consumer Response)
Chapter 7
Management of Business Logistics, 7th Ed.
48
1. JIT: Time-Based Approaches
to Replenishment Logistics

Definition and Components of JIT Systems - designed
to manage lead times and eliminate waste.
 Kanban - refers to the informative signboards on
carts in a Toyota system of delivering parts to the
production line. Each signboard details the exact
quantities and necessary time of replenishment.
 JIT operations - Kanban cards and light warning
system communicate possible production
interruptions.
 Fundamental concepts - JIT can substantially reduce
inventory and related costs.
Chapter 7
Management of Business Logistics, 7th Ed.
49
1. JIT (cont.)

Definition and Components of JIT Systems designed to manage lead times and eliminate
waste.
 Goal is zero inventory, and zero defects.
 Similarity to the two-bin system - one bin
fills demand for part, the other is used when
the first is empty.
 Reduces lead times through requiring small
and frequent replenishment.
Chapter 7
Management of Business Logistics, 7th Ed.
50
1. JIT (cont.)



JIT is a widely used and effective strategy for
managing the movement of parts, materials,
semi-finished products from points of supply
to production facilities.
Product should arrive exactly when a firm
needs it, with no tolerance for early or late
deliveries.
JIT systems place a high priority on short,
consistent lead times.
Chapter 7
Management of Business Logistics, 7th Ed.
51
1. JIT versus EOQ Approaches to
Inventory Management

Six major differences:
 1. JIT attempts to eliminate excess
inventories for both buyer and seller.
 2. JIT systems involve short production
runs with frequent changeovers.
 3. JIT minimizes waiting lines by delivering
goods when and where needed.
Chapter 7
Management of Business Logistics, 7th Ed.
52
1. JIT versus EOQ Approaches to
Inventory Management



Chapter 7
4. JIT uses short, consistent lead times to
satisfy inventory needs in a timely manner.
5. JIT relies on high-quality incoming
products and on exceptionally high-quality
inbound logistics operations.
6. JIT requires a strong, mutual
commitment between buyer and seller,
emphasizing quality and win-win outcomes
for both partners.
Management of Business Logistics, 7th Ed.
53
Table 7-6 EOQ versus JIT Attitudes and
Behaviors
Chapter 7
Management of Business Logistics, 7th Ed.
54
1. JIT (cont.)

JIT versus Traditional Inventory Management
 Reduces excess inventories
 Shorter, more frequent production runs
 Minimize waiting lines by delivering materials when
and where needed
 Short, consistent lead times through proximate
location
 Quality stressed throughout supply chain
 Win-win relationships necessary to a healthy supply
chain
Chapter 7
Management of Business Logistics, 7th Ed.
55
2. JIT (cont.)

Examples of JIT Successes:




Chapter 7
Apple Computer’s increase in IT from 10 weeks
to 2 weeks resulted in 18-month $20 million
payback on plant.
GM increased production by 100%, but
inventories increased by only 6%.
Norfolk Southern mini-train hauls direct from
one GM plant to another without switching
delays.
Ryder handles all inbound logistics for Saturn.
Management of Business Logistics, 7th Ed.
56
Note for Figure 7-12 (next)

It shows JIT-based manufacturing use timesequenced motor carrier pickup from
suppliers in conjunction with rail-motor to
meet JIT requirements.
Chapter 7
Management of Business Logistics, 7th Ed.
57
Figure 7-12
The Orderly Pickup Concept
Chapter 7
Management of Business Logistics, 7th Ed.
58
2: MRP: Time-Based Approaches
to Replenishment Logistics


A Materials Requirements Planning (MRP)
system consists of a set of logically related
procedures, decision rules, and records
designed to translate a master production
schedule into time-phased net inventory
requirements for each component item
needed to implement this schedule.
MRPs re-plan net requirements based on
changes in schedule, demand, etc.
Chapter 7
Management of Business Logistics, 7th Ed.
59
2. MRP (cont.)

Goals of an MRP:
 Ensure the availability of materials,
components, and products for
planned production.
 Maintain lowest possible inventory
level.
 Plan manufacturing activities, delivery
schedules, and purchasing activities.
Chapter 7
Management of Business Logistics, 7th Ed.
60
2. MRP (cont.)

Key elements of an MRP:
 Master production schedule
 Bill of materials file
 Inventory status file
 MRP program
 Outputs and reports
Chapter 7
Management of Business Logistics, 7th Ed.
61
Figure 7-13
An MRP System
Demand Forecasts
Customer Orders
Master Production Schedule
Bill of Material File
MRP Program
Inventory Status File
Output and Reports
Chapter 7
Management of Business Logistics, 7th Ed.
62
Figure 7-14 Relationship of Parts to Finished
Product: MRP Egg Timer Example
1 Egg Timer
2 Ends
1 Bulb
3 Supports
1 Gram of Sand
Chapter 7
Management of Business Logistics, 7th Ed.
63
Table 7-7 Inventory Status File:
MRP Egg Timer Example
Product
Gross Req. Inventory
Net Req.
Lead Time
Egg Timers
1
0
1
1
Ends
2
0
2
5
Supports
3
2
1
1
Bulbs
1
0
1
1
Sand
1
0
1
4
Chapter 7
Management of Business Logistics, 7th Ed.
64
Master Schedule: MRP
Egg Timer Example
Figure 7-15
Chapter 7
Management of Business Logistics, 7th Ed.
65
Time-Based Approaches to
Replenishment Logistics: MRP

Principal advantages of MRP:
1.
Maintain reasonable safety stock.
2.
Minimize or eliminate inventories.
3.
Identification of process problems.
4.
Production schedules based on actual
demand.
5.
Coordination of materials ordering.
6.
Most suitable for batch or intermittent
production schedules.
Chapter 7
Management of Business Logistics, 7th Ed.
66
2. MRP (cont.)

Principal shortcomings of MRP:
1.
Computer intensive.
2.
Difficult to make changes once operating.
3.
Ordering and transportation costs may
rise.
4.
Not usually as sensitive to short-term
fluctuations in demand.
5.
Frequently become quite complex.
6.
May not work exactly as intended.
Chapter 7
Management of Business Logistics, 7th Ed.
67
3: Distribution Resource Planning



MRP sets a master production schedule and
“explodes” into gross and net requirements.
DRP starts with customer demand and works
backwards toward establishing a realistic
system-wide plan for ordering the necessary
finished products.
Then DRP works to develop a time-phased
plan for distributing product from plants and
warehouses to the consumer.
Chapter 7
Management of Business Logistics, 7th Ed.
68
3. Distribution Resource Planning
(cont.)

DRP develops a projection for each SKU (stock
17
keep unit) and requires :
 Forecast of demand for each SKU.
 Current inventory level for each SKU.
 Target safety stock.
 Recommended replenishment quantity.
 Lead time for replenishment.
Chapter 7
Management of Business Logistics, 7th Ed.
69
Table 7-8 DRP Table for
Chicken Noodle Soup
Columbus Distribution Center–Distribution Resource Planning
Month
Week
CN Soup
Forecast
January
1
2
3
February
4
5
6
Chapter 7
8
9
Current BOH=4314; Q=3800; SS=1956; LT=1
974
974
974
974
989
1002
Schedule
0
0
3800
0
0
0
Receipt
BOH-End 3340 2366 5192 4218 3229 2227
Planned
Order
7
March
0
3800
0
0
0
1002
1002
1061
3800
0
0
5025
4023
2962
0
0
3800
3800
Management of Business Logistics, 7th Ed.
70
Figure 7-16
Combining DRP Tables
Chapter 7
Management of Business Logistics, 7th Ed.
71
Inventory at Multiple Locations –
The Square Root Law (SQL)



Used to reduce inventory at multiple locations.
As locations increase, inventory also increases,
but not in the same ratio as the growth in
facilities.
The square root law (SRL) states that total
safety stock can be approximated by
multiplying the total inventory by the square
root of the number of future facilities divided
by the current number of facilities.
Chapter 7
Management of Business Logistics, 7th Ed.
72
Inventory at Multiple Locations –
The Square Root Law


X2= (X1) *
√(n /n )
2
1
Where:
 n1 = number of existing facilities
 n2 = number of future facilities
 X1 = total inventory in existing facilities
 X2 = total inventory in future facilities
Chapter 7
Management of Business Logistics, 7th Ed.
73
Square Root Law Example



Current distribution 40,000 units
Eight facilities shrinking to two
Using the square root law:
√(2/8)

X2 = (40,000) *

X2 = 20,000 units
Chapter 7
Management of Business Logistics, 7th Ed.
74
Table 7-9 Example Impacts of Square Root Law
on Logistics Inventories
Warehouses
1
√n
1.0000
Total Av Inv
3,885
% Change
---
2
3
4
1.4142
1.7321
2.0000
5,494
6,729
7,770
141%
173%
200%
5
10
15
2.2361
3.1623
3.8730
8,687
12,285
15,047
224%
316%
387%
20
23
25
4.4721
4.7958
5.0000
17,374
18,632
19,425
447%
480%
500%
Chapter 7
Management of Business Logistics, 7th Ed.
75
Four Directions for
Replenishment Logistics
Figure 7-17
Chapter 7
Management of Business Logistics, 7th Ed.
76
4. Quick Response (QR)

Structure of QR
 Shorter, compressed time horizons.
 Real-time information available by SKU.
 Seamless, integrated logistics networks
with rapid transportation, cross-docking
and effective store receipt and distribution
systems.
Chapter 7
Management of Business Logistics, 7th Ed.
77
4: Quick Response (QR) (cont.)

Structure of QR
 Partnership relationships present among
supply chain members.
 Redesign of manufacturing processes to
reduce lot sizes, changeover times and
enhanced flexibility.
 Commitment to TQM.
Chapter 7
Management of Business Logistics, 7th Ed.
78
Figure 7-18
Basic Elements of Quick Response (QR)
Chapter 7
Management of Business Logistics, 7th Ed.
79
5. Efficient Consumer Response (ECR)

Structure of ECR


Grocery industry estimates U.S. savings at
approximately $30 billion.
“Ultimate goal is a responsive, consumer-driven
system in which distributors and suppliers work
together as business allies to maximize consumer
satisfaction and minimize cost. Accurate
information and high-quality products flow
through a paperless system between
manufacturing and check-out counter with
minimum degradation or interruption…”
Chapter 7
Management of Business Logistics, 7th Ed.
80
Figure 7-19 Efficient Consumer
Response: Broad Operating Capabilities
Tailored to Each Unique Partner
Chapter 7
Management of Business Logistics, 7th Ed.
81
Chapter 7:
Summary and Review Questions
Students should review their knowledge of the
chapter by checking out the Summary and Study
Questions for Chapter 7.
This is the last slide for Chapter 7
Figure A7-1 Sawtooth Model Modified for
Inventory in Transit
Chapter 7
Management of Business Logistics, 7th Ed.
83
Figure A7-2 EOQ Costs Considering
Volume Transportation Rate
Chapter 7
Management of Business Logistics, 7th Ed.
84
Table 7A-1 Annual Savings, Annual Cost,
and Net Savings by Various Quantities
Using Incentive Rates
Chapter 7
Management of Business Logistics, 7th Ed.
85
Figure A7-3 Net Savings Function for
Incentive Rate
Chapter 7
Management of Business Logistics, 7th Ed.
86
End of Chapter 7 and 7A Slides
Inventory Decision Making