Inventory Control

The Logistics of Risk

or

When a Refrigerator isnt!

 What is Porters value chain?

A representation of a firms 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
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
2 orders per year
ICC = ____________________________
OC = ____________________________
TC = ____________________________
104 orders per year
ICC = ____________________________
OC = ____________________________
TC = ____________________________
03/18/17
 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
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 OCs 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
____________________________
____________________________
____________________________
____________________________
____________________________
____________________________
____________________________