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Logistics: Elements of Inventory

Logistics: Elements of Inventory. June 5, 2006. Required Discussion in Project (1). How are the channels of distribution, from supplier to consumer household, designed to meet the physical characteristics of the product? Weight Bulk Perishability. Required Discussion in Project (2).

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Logistics: Elements of Inventory

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  1. Logistics: Elements of Inventory June 5, 2006

  2. Required Discussion in Project (1) • How are the channels of distribution, from supplier to consumer household, designed to meet the physical characteristics of the product? • Weight • Bulk • Perishability

  3. Required Discussion in Project (2) • How are the channels of distribution, from supplier to consumer household, designed to meet the consumer’s need for differentiation (or standardization) of product? • Unique product features • Positioning, brand characteristics • Seasonality

  4. Service Output Levels • Spatial convenience • Waiting time/postponement speculation • Lot size/combined shipments • Assortment depth and inventory

  5. SOS/SOD “Gaps” • Retail formats are a standardized combination of “service output levels, format design is an optimal combination of SOLs based on assumptions of the household: • Offering higher spatial convenience sacrifices efficiency in inventory management

  6. Demand Gaps: SOS<SOD or SOS>SOD • Service level demanded by consumers is less than that supplied. • Retail supply chain is not delivering the product with respect to convenience, waiting time, etc. demanded • Tupperware, a convenience good is restrictively distributed • Adult running shoes stores, minimizing waiting time and additional convenience that’s not demanded.

  7. Supply-Side Gaps • Total costs of performing a function is too high, a lower cost alternative is available. • Travel agents costing airlines too much for services provided to the airline and customer. • Multi-level marketing systems, “network DSOs” place costs too high on convenience goods.

  8. Bucklin’s Postponement/Speculation • Postponement: Differing taking title to inventory, preferring to pay additional transportation expenses. • Speculation: Holding title to inventory, bearing risk of inventory obsolescence and capital costs.

  9. Buying from supplier A Unit delivery costs Delivery time/waiting time

  10. Buying from supplier B Unit delivery costs Delivery time/waiting time

  11. Comparing suppliers A and B Unit delivery costs Delivery time/waiting time

  12. Total costs Unit delivery costs Delivery time/waiting time

  13. Resealable Refrigerator Containers Tupperware (direct) Unit delivery costs Glad (Supercenter) Delivery time/waiting time for household

  14. Number of Intermediate Stocking Points Approach • Distribution centers are the typical example for a retailer. • With each additional distribution center, transportation costs (per unit) decrease. • Additional inventory appears at each distribution center.

  15. Transportation costs Economies of combined shipments, bulky, heavy products 1 Number of distribution centers

  16. Inventory costs Products that highly perishable Highly differentiated products 1 Number of distribution centers

  17. Total distribution costs Optimal number 1 Number of distribution centers

  18. Total distribution costs High economies in transportation costs Low or near non-existent inventory costs Durable, low-cost goods, commodities Optimal number 1 Number of distribution centers

  19. Total distribution costs Optimal number Expensive products Highly perishable 1 Number of distribution centers

  20. High inventory costs Number of distribution centers to supply retail outlets

  21. Economic Order Quantity Total cost Total Dollars Ordering Most Economical Cost Number of Orders Maintenance Cost Number of Orders per Year

  22. Inventory Cycle Basics • Shorter order cycles, more orders, smaller average inventories • Longer order cycles, fewer orders, larger average inventories • The order cycle decision is a "trade-off" between: • Costs of placing an order • Inventory maintenance costs

  23. Economic Order Quantity • Co = cost per order • Cm = cost of maintenance per year • S = annual sales volume, units • U = cost per unit

  24. Example

  25. Example, ½ Units

  26. 200 100 40 60 20 Illustration of Sales Uncertainty Inventory 0

  27. Daily Sales Distribution: One Brand Number of Days 5 4 3 2 0 0 1 1 2 2 3 3 5 6 4 4 3 9 7 8 10 13 11 12 Daily Sales (Units) Total Sales, 40 Days = 243 Mean = 6.1 Std. Dev. = 2.9

  28. 3 3 4 4 Daily Sales Distribution: One of Two Brands Number of Days 8 7 6 5 4 3 2 0 0 2 2 5 1 1 6 7 8 9 3 10 13 11 12 Daily Sales (Units) Total Sales, 40 Days = 122 Mean = 3.1 Std. Dev. = 2.3

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