Class Oct 26 Student - Class Oct 26 Logistics, Inventory,...

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Unformatted text preview: Class Oct 26 Logistics, Inventory, and Economic Order Quantity Cycle Stock - Definition Product received in bulk by a downstream customer gradually used up and replenished again in bulk. Cycle Inv. = Avg. Inventory for periodic orders Q Cycle Inventory = Q / 2 Illustration assumes constant demand Safety Stock Extra inventory that companies carry to protect against uncertainties in the supply chain. Q Safety Stock Total Average Inventory = CI + SS Safety Inventory prevents running out of product Q Buyers will review the demand cycle and re-order with sufficient lead time to avoid an out-of stock situation. L L Time R d = average periodic demand (per week, per month, …) L = lead time in (weeks, months, …) D = expected demand during the lead time = dL Safety Stock R = Inventory on hand at the re-order point R (re-order point) = D + SS = dL + SS Managers seek to balance the cost of ordering stock with the cost of holding inventory. Total holding and ordering costs (annual) = A Q S Q 2 H + Q = Order Quantity H = Annual Holding Cost / unit A = Annual Demand S = Ordering Cost (Procure, Transport, Receive) How much should we order? What is the economic order quantity? Seen Graphically, the EOQ is at the point of lowest total cost. Cost Order Quantity (Q) A Q S Q 2 H Total EOQ is when Total Holding Costs Equal Total Ordering Costs A Q S Q 2 H = Solving for “Q” Q 2 = 2AS H Q = 2AS H = EOQ √ Pam runs a mail-order business for gym equipment. Annual demand for “Muscle Flexers” is 16,000. The annual holding cost per unit is $2.50. The cost to place an order is $50.00. What is the economic order quantity? Inventory Carrying Cost (ICC) Expense associated with maintaining inventory in its various forms. ICC = Avg. Inventory Cost X Inventory Expense (%) Components of Inventory Expense Finance Capital 4 – 20% Taxes 0.5 – 2% Insurance 0 – 2 % Obsolescence 0.5 – 2% Operations Storage 0 – 4% Personnel 5 – 15% Equipment 3 – 10% IT 2 – 5% Misc. Secondary Inspection 0 – 5% Total 15 – 50%+ 1 2 3 Raw Materials Supply Points Distributor Manufacturing Retailer Transportation Transportation Transportation 20% Inventory Carrying Cost (ICC) Inventory Expense Order / Delivery 10,000 Tons Every 2 mo. Safety Stock 2,000 Tons Purchase Price $50 / Ton Inventory Carrying Cost = ???? 1 2 3 Raw Materials Supply Points Distributor Manufacturing Retailer Transportation Transportation Transportation 20% Inventory Carrying Cost (ICC) Inventory Expense Order / Delivery 10,000 Tons Every 2 mo. Safety Stock 2,000 Tons Purchase Price $50 / Ton Inventory Carrying Cost = 1 2 3 Raw Materials Supply Points Distributor Manufacturing Retailer Transportation Transportation Transportation 1,000 Items Every week 500 Items Every month 10,000 Tons Every 2 mo....
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This note was uploaded on 02/08/2011 for the course BUSINESS S 29:630:301 taught by Professor Briangreczyn during the Spring '10 term at Rutgers.

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Class Oct 26 Student - Class Oct 26 Logistics, Inventory,...

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