Class 4 F 11 Student

Class 4 F 11 Student - Cost Management Part 3 Logistics,...

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Cost Management – Part 3 Logistics, Inventory, and Economic Order Quantity
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What is Inventory? When should we order inventory? How much inventory should we order? How much does inventory cost? Strategic Questions we will address …
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What is INVENTORY?
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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 Illustration assumes constant demand
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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. Cycle Inv. 2 = Cycle Inv. 3 = Cycle Inv. 1 = What is the Cycle Inventory?
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Safety Stock Extra inventory that companies carry to protect against uncertainties in the supply chain. Q Safety Stock
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Sources of Uncertainty in the Supply Chain To determine how much safety stock to hold, what trade-off does management make? Our company Customer Supplier
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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
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Q L L Time R Safety Stock Safety Inventory - example Average Lot Size Q = 10,000 units Average demand per week d = 2,500 units Average lead time L = 2 weeks Re-order point R = 6,000 How much safety inventory is being held?
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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?
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Class 4 F 11 Student - Cost Management Part 3 Logistics,...

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