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