Introduction into Logistics
PhD Natasha Lutovinova
Logistics Lecturer
E-mail: Lutovinova.N@nhtv.nl
Room: G1.006
Handbook: Paul R. Murphy & Donald F. Wood,
Contemporary logistics (New Jersey 2011), 10th edition
3
Introduction into Logistics Course Outline
12.05 Introduction
13.05 SCM Concept, Inventory
14.05 Demand Management, Warehousing Management
15.05 Transportation Management, International Logistics
16.05 Poster Session
CHAPTER 8
Inventory Management
5-3
Learning Objectives
To understand the costs of holding inventory
To understand reordering concepts
To differentiate the various inventory flow patterns
6-3
350 g
€ 1.32
600 g
€ 1.84
15 g
€ 0.36
10 g
€ 0.22
3-8
Procurement
Delivery
Manufacturing
5.15 Closing the lead-time gap
5.14 The lead-time gap
Logistics lead time
Customer’s order cycle
Order fullfilment
Lead-time gap
Logistics lead time
Customer’s order cycle
Inventory Management
Inventories are stocks of goods and materials that
are maintained to satisfy normal demand patterns
Inventory management
Decisions drive other logistics activities
Different functional areas have different inventory
objectives
Inventory costs are important to consider
Inventory turnover
9-3
Inventory Management
Inventory management (continued)
Inventory costs are important to consider
Inventory turnover: cost of goods sold divided
by average inventory at cost
cost of goods sold = inventory turnover
average inventory
$200,000
$ 50,000
= inventory is sold 4 times per year
Compare with competitors or benchmarked
companies
10 - 3
Visser, Logistics: Principles, fig.1.8 cost structure of physical distribution
11 - 3
Cost structure of physical distribution
Warehousing, packaging, handling
External transport
Others
Inventory costs
22%
38%
6%
34%
12 - 1
Reduction
of the
lead time
Improve
delivery
reliability
Total cost
approach
Increase
flexibility
Logistics objectives are mutually interdependent
Low inventory turnover = high inventory carrying costs, little (or no) stockout costs
High inventory turnover = low inventory carrying costs, high stockout costs
Managing the trade-off is important to maintain service levels
Inventory Classifications
Cycle (or base) stock
Safety (or buffer) stock
Pipeline (or in-transit) stock
Work in process
Speculative stock
Strategic stock
Dead Stock
Psychic stock
13 - 3
14 - 3
Inventory-Related Costs
Inventory carrying (holding) costs
Inventory carrying (holding) costs
Obsolescence
Inventory shrinkage
Storage costs
Handling costs
Interest charges
Insurance costs
Taxes
Opportunity cost
15 - 3
Inventory-Related Costs
Stockouts
Stockout costs
Trade-offs Exist between Carrying and Stockout
Costs
16 - 3
When to Order
Fixed order quantity system
Fixed order interval system
Reorder (trigger) point (ROP)
ROP = DD x RC (under certainty)
ROP = (DD x RC) + SS (under uncertainty)
Where DD = (average) daily demand
RC = length of replenishment cycle
SS = safety stock
17 - 3
When to Order
ROP = DD x RC (under certainty)
ROP = (DD x RC) + SS (under uncertainty)
DD = daily demand
RC = replenishment cycle
SS = safety stock
Reorder point = 120 pieces
18 - 3
=30 pieces
=2 (days)
=60
Reorder (trigger) point
Ordering
Quantity
Fixed
Variabel
Order quantity
R, Q
R, S
Order interval
T, Q
T, S
R = Variable order interval
Q = Fixed order quantity
T = Fixed order interval
S = Variable order quantity
19 - 3
How Much to Reorder
Economic order quantity (EOQ) in units
EOQ = √2DB/IC
Where
EOQ = the most economic order size, in units
D = annual demand, in units
B = administrative costs per order of placing
the order
C = carrying costs of the inventory (%)
I = dollar value of the inventory, per unit
20 - 3
How Much to Reorder
Economic order quantity (EOQ) in dollars
EOQ = √2AB/C
Where
EOQ = the most economic order size, in dollars
A = annual usage, in dollars
B = administrative costs per order of placing
the order
C = carrying costs of the inventory (%)
21 - 3
Figure 9-2: Determining EOQ by Use of a Graph
Calculation of eoq.lnk
22 - 3
How Much to Reorder
Economic order quantity (EOQ) in dollars
EOQ = √2AB/C
A = annual usage
B = administrative costs
C = carrying costs
= $1000
= $25
= 0.2 (20%)
EOQ = √2*1000*25/0.2 = $500 order size
23 - 3
How Much to Reorder?
Economic order quantity (EOQ) in dollars
EOQ = √2AB/C
A = annual usage
B = administrative costs
C = carrying costs
EOQ
8544
155
24 - 3
A
3.650
12
€
€
B
2.000,00
250,00
C
20%
25%
How Much to Reorder
Economic order quantity (EOQ) in units
EOQ = √2DB/IC
D = annual demand, in units
= 200
B = administrative costs
= 25
C = carrying costs
=5
I = value per unit
= 0.2 (20%)
EOQ = √2*200*25/.20*5 = 100
25 - 3
How Much to Reorder?
Economic order quantity (EOQ) in units
EOQ = √2DB/IC
D = annual demand (in units)
B = administrative costs
C = carrying costs
I = value per unit
EOQ
183
165 – 178 – 183 – 192
20 – 22 – 24 – 26 22
105
90 – 95 – 100 – 105
270
270 – 280 – 290 – 310
322
300 – 322 – 336 – 344
26 - 3
D
5.000
12
365
3.650
5.200
B
€
€
€
€
€
50,00
250,00
75,00
2.000,00
75,00
C
20%
25%
20%
20%
15%
I
€
€
€
€
€
75,00
50,00
25,00
1.000,00
50,00
Table 9-3: EOQ Cost Calculations
27 - 3
B
C
Ordering cost
($)
Carrying cost
($)
Total cost (sum of
ordering and carrying
cost) ($)
Number of
orders per
year
Order size
($)
1
1,000
25
100
125
2
500
50
50
100
3
333
75
33
108
4
250
100
25
125
5
200
125
20
145
Inventory Flows
Safety stock can prevent against two problem
areas
Increased rate of demand
Longer-than-normal replenishment
When fixed order quantity system like EOQ is
used, time between orders may vary
(When reorder point is reached, fixed order
quantity is ordered)
28 - 3
Figure 9-3: Inventory Flow Diagram
Reorder point
Average inventory in units = Q/2 (+ SS)
29 - 3
Contemporary Approaches to Managing
Inventory
ABC Analysis
30 - 3
31 - 3
Visser, Logistics: Principles, fig.5.4 ABC analysis
Contemporary Approaches to Managing
Inventory
ABC Analysis
Just-in Time (JIT) Approach
32 - 3
Figure 9-4: Trailer that
opens on the side and
is used for rapid
discharge of parts
33 - 3
Contemporary Approaches to Managing
Inventory
ABC Analysis
Just-in Time (JIT) Approach
Vendor-Managed Inventory (VMI)
Inventory Tracking
34 - 3
Inventory Management: Special
Concerns
FiFo
Complementary items
Dead inventory
Deals
Defining stock-keeping units (SKUs)
Informal arrangements outside the distribution channel
Repair and replacement parts
Reverse logistics
Substitute Products
35 - 3
Next time:
Assignment
Obligatory:

36 - 3
Choose a product, draw an inventory flow diagram and
describe it