L07_InventoryCost_After

L07_InventoryCost_After - Slide 1 Lecture 07 Inventory Cost...

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Unformatted text preview: Slide 1 Lecture 07 Inventory Cost Slide 2 Learning Objectives Understand the cost implication of Littles Law Understand inventory is not just financial cost Distinguish different reasons of holding inventory Understand characteristics of different process types Slide 3 Relation to Inventory Turns Slide 4 Example Cost of goods sold = $ 171,562 million / year Inventory = $ 22,749 million Flow time = $ 22,749 million $171,562 million / year = 0.13 year = 48.14 day Inventory turns = 1 48.14 day = 7.54 turns per year = 365 day / year 48.14 day Slide 5 Example Inventory turns = 6 turns per year 20 percent annual inventory cost Per unit inventory cost = 20% per year 6 turns per year = 3.33% Slide 6 Inventory turns: compute right from financial data Cost of Goods sold: 25,263 M $/year Inventory: 2,003 M $ Flow Time = Cost of Goods sold: 20,000 M $/year Inventory: 391 M $ Flow Time = Observation: Powerful Law with Cost of Goods Sold Dell: HP: Dells supply chain efficiency vs. HPs? What is Dells secret at Roundrock, TX? 0.23 months = 7 days 0.95 months = 28 days Slide 7 Observations: Inventory Turns vs. Gross Margin Inventory turns (turnover) is the reciprocal of the flow time Dell turns inventory 52 times a year (once a week) HP turns inventory about 12 times a year (once a month) Frequent inventory turns indicate that inventory is kept for a short amount of time before it is sent to the customer. While an item is in the inventory, we incur a percentage of its costs as inventory holding cost (see the next section). If Dell s inventory holding cost is 30% per year, what is the holding cost per unit? 0.3/52 = 0.58%. The 0.58% of the cost of every unit Dell sells is due to inventory holding cost. What about HP? 0.3/12 = 2.5% . Slide 8 Inventory Costs Slide 9 Importance of Inventory Cost Financial holding cost. Non-financial costs: Obsolescence (high-tech product) Perishable products (medicine, food) Shrinkage or theft Storage and overhead (insurance, security, real-estate) Waiting and quality- Slide 10 HP Finding: Pain Points Inventory Driven Cost by Callioni et al., HBR, March 2005 More inventory high availability high market share Technology advancement: new products obsolete in 6 months Multi-tiered manufacturing network: individual players only see their piece of the puzzle Excess inventory as the main drivers of the costs Inventory holding cost is < 10% of the total inventory driven costs!...
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L07_InventoryCost_After - Slide 1 Lecture 07 Inventory Cost...

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