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

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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? Stocks or items held to … Support production (raw materials and work-in-progress items), Support business activities (maintenance, repair and operating- MRO – supplies), and Customer service (finished goods and repair parts). Is “inventory” good or bad for companies?
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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 Cycle Inventory = Q / 2 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? 10,000 / 2 = 5,000 Tons 1,000 / 2 = 500 Items 500 / 2 = 250 Items
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Safety Stock Extra inventory that companies carry to protect against uncertainties in the supply chain. Q Safety Stock Total Average Inventory = CI + SS
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Sources of Uncertainty in the Supply Chain Customer Demand Past performance Forecasting techniques Promotions / Incentives Manufacturing Process design Product design Capacity Quality Supplier Performance Responsiveness Transportation Location Quality Information To determine how much safety stock to hold, what trade-off does management make? Product Availability vs. Cost of Inventory 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 R (re-order point) = D + SS = dL + SS
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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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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 Safety Inventory = 6,000 - (2,500 X 2) = 1,000 Safety Inventory = R - D = R - dL Q L L Time R Safety Stock
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Managers seek to balance the cost of ordering stock with the cost of holding inventory. Total holding and ordering costs (annual) =
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Class 4 F 11 - Cost Management Part 3 Logistics, Inventory,...

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