Inventory Control
The 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.
_____________________________
____________________________
Determine Order Quantity
Two major influences
____________________________
The more product we order each time the
____________________________
The more we order each time the
____________________________
____________________________
Example
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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 Cost
What is TC = ?
____________________________
TC = ____________________________
TC = ____________________________
TC = ____________________________
TC = total cost
OQ=quantity ordered/order
V= average unit value of product
R=annual inventory carry charge as a %
OC=ordering cost or $cost per order
S = Annual sales
Calculate from the example
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2 orders per year
ICC = ____________________________
OC = ____________________________
TC = ____________________________
104 orders per year
ICC = ____________________________
OC = ____________________________
TC = ____________________________
Annual D
208.00
208.00
208.00
208.00
208.00
208.00
Inventory Carrying and Ordering Costs
# of Orders units/order Ave Inv Ave Inv Value Annual ICC Annual
Annual
OC Total Cost
2
104
52
$31,200.00 $7,800.00
$200.00 $8,000.00
8
26
13
$7,800.00 $1,950.00
$800.00 $2,750.00
10
20.8
10.4
$6,240.00 $1,560.00 $1,000.00 $2,560.00
12 17.33333 8.666667
$5,200.00 $1,300.00 $1,200.00 $2,500.00
16
13
6.5
$3,900.00
$975.00 $1,600.00 $2,575.00
104
2
1
$600.00
$150.00 $10,400.00 $10,550.00
3/16/2016
Inv Carrying & Ordering Cost
Inv Carry Costs
Costs
$20,000.00
Order Costs
$15,000.00
Total Costs
$10,000.00
$5,000.00
$0.00
2
27
52
77 102 127
# Orders/Year
Economic Order Quantity
• TC = (OQ x V x R)/2 + (OC x S)/OQ
• Solve by taking the
____________________________
____________________________
____________________________
____________________________
____________________________
____________________________
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
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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
____________________________
____________________________
____________________________
____________________________
____________________________
____________________________
____________________________