Chapter 8 Logistics
Marginal analysis
How to find the trade-off between carrying and stockout costs
High inventory carrying costs, little or on stockout costs =
Low inventory turnover =
ROP = (DDxRC) + SS DD= daily demand RC = Length of the replenishment cycle SS = Safety stock
Reorder point under uncertainty
Inventory Carrying costs
Costs of holding an inventory, such as interest on investment, insurance, deterioration, and so on. Typically 25%
Carrying costs = Average inventory x carrying cost per unit
Formula for carrying costs:
Ordering costs = number of orders per year x ordering cost per order
Formula for ordering costs:
The higher the average cost of a stockout, the better it is for the company to hold some amount of inventory to protect against stockouts
General rules regarding stockout costs
Low inventory carrying costs, high stockout costs
High inventory turnover =
Fixed Order Quantity system
Inventory is replenished with a set quantity every time it is ordered; the time interval between orders may vary.
Complementary items Dead inventory deals defining SKUs Repair Reverse logistics Substitute items Inventory Turnovers
Inventory management special concerns:
Inventory tracking
RFID is the main technology in this field
Inventory Ordering costs
Refer to those costs associated with ordering inventory, such as order costs and setup costs
ROP = DD x RC DD= daily demand RC = Length of the replenishment cycle SS = Safety stock
Reorder point under certainty
Inventory
Stocks of goods and materials that are maintained to satisfy normal demand patterns
Stockout costs
The costs to a seller when it is unable to supply an item to a customer ready to buy Ranges from waiting for it to come in stock or completely losing a customer
Safety Sock is there to protect against greater demand and because a larger inventory management cycle
What are the two things safety stock can protect against
vendor-managed inventory (VMI)
a system in which a supplier maintains material for the buyer
ABC analysis of inventory
concept that recognizes that because inventories are not of equal value to a firm, they should not be managed in the same way
Fixed order interval system
inventory is replenished on a constant, set schedule and is always ordered at a specific time; the quantity ordered varies depending on forecasted sales before the next order date
Pipeline or in-transit stock
inventory that is en route between various fixed facilities in a logistics system such as a plant, warehouse, or store
Safety or buffer stock
inventory that is held in addition to cycle stock to guard against uncertainty in demand or lead time
Cycle or base stock
inventory that is needed to satisfy normal demand during the course of an order cycle
Psychic stock
inventory that stimulates demand in the sense that customer purchases are stimulated by inventory that they can see
Inventory turnover
number of times that inventory is sold in a one year period Costs of goods sold / average inventory = inventory turnover
Speculative stock
refers to inventory that is held for several reasons, including seasonal demand, projected price increases, and potential shortages of a product.
JIT approach
seeks to minimize inventory by reducing (if not eliminating) safety stock, as well as by having the required amount of materials arrive at the production location at the exact time that they are needed
Reorder (trigger) point (ROP)
the level of inventory at which a replenishment order is placed