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Inventory Control

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.

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Inventory Control

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  1. Inventory Control The Logistics of Risk or When a Refrigerator isn’t!

  2. 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.

  3. 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.

  4. Good Inventory Management Inventory decisions which incorporate the: • The right _______ • The right ________ • At the right __________ • _______________

  5. 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 ___________________________________

  6. The Nature of Inventory Inventory Shortages (stock outs) cause • _________________, • Extended shut downs of _________________________ • ________________________ • ________________________

  7. The Nature of Inventory (cont.) Excess inventory causes ____________________________ • Opportunity cost of capital (interest on investment) ____________________________ ____________________________ ____________________________ ____________________________ ____________________________

  8. Average Inventory • Graphic • Algebraic; I = OQ/2 where I = average inventory and OQ is order quantity. _____________________________ ____________________________

  9. Determine Order Quantity Two major influences ____________________________ The more product we order each time the ____________________________ • The more we order each time the ____________________________ ____________________________

  10. 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.

  11. Inventory Carrying Cost - ICC = (OQ x V x R)/2 OQ=Oder Quantity, V=price & R=ICC rate Or (you try) ____________________________ ____________________________ Or ____________________________

  12. Order Cost - • Total OC = OC x S/OQ Where S = yearly sales At 10 units / order what is OC? ____________________________ Or ____________________________

  13. 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

  14. Calculate from the example • 2 orders per year • ICC = ____________________________ • OC = ____________________________ • TC = ____________________________ • 104 orders per year • ICC = ____________________________ • OC = ____________________________ • TC = ____________________________

  15. 11/14/2014

  16. Economic Order Quantity • TC = (OQ x V x R)/2 + (OC x S)/OQ • Solve by taking the ____________________________ ____________________________ ____________________________ ____________________________ ____________________________ ____________________________

  17. Cycle stocks • Are those items ____________________________ • They meet the ____________________________ assuming we can predict demand & replenishment times. • Now back to reality!

  18. 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.

  19. 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

  20. 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, … ____________________________ ____________________________

  21. Safety Stocks • Demand may exceed what we expect so ____________________________ • Product may be in transit ____________________________

  22. Dead Stocks • An SKU that ____________________________

  23. Uncertainty • Demand varies ____________________________ • Order cycle times are ____________________________ • Communication time ____________________________ Transportation times are ____________________________ • So, we have a new trade-off.

  24. 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 ____________________________ ____________________________ ____________________________ ____________________________

  25. Components of Inventory Carrying Cost ____________________________ ____________________________ ____________________________ ____________________________ ____________________________ ____________________________ ____________________________

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