Inventory costs inventory costs interest or

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Inventory Costs Inventory Costs Interest or opportunity Cost Interest or opportunity Cost Storage and Handling Costs Storage and Handling Costs Taxes, Insurance, and Shrinkage Taxes, Insurance, and Shrinkage Customer Service Cost Customer Service Cost Ordering Cost/Setup Cost Ordering Cost/Setup Cost Labor and Equipment Cost Labor and Equipment Cost Transportation Costs Transportation Costs Payments to Suppliers Payments to Suppliers
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Customer Service in Inventory Management Customer Service: measured by the availability of items when needed a performance measure of inventory management Customer may be: purchaser of FG/distribution/another plant or shop where next operation is performed Customer Service Level: a target level for keeping initial delivery schedules and backorders
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Service Level and Safety Stock Service level: an inventory management performance criterion measured by ---the percentage of stock-out occurrence defined as service level=1-P(percentage of stock-out) Safety stock: a quantity of inventory which have been set aside to reduce the probability of stock-out or to improve the service level.
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Service Level and Safety Stock Safety Stock is: A Quantity of Inventory which have been set aside to reduce the Probability of Stock- Out, or to improve the Service Level. The General Relationship Between Safety Stock and Services Level is:
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The ABC Classification Method A small percentage of the items that would account for a large percent of the total values of annual usage- these are called “A” items A large percentage of the item that would account for a small percentage of the total value of annual usage- these are called “C” items Items in between “A” and “C” items- these are called “B” items A typical relationship among A, B and C items is:
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ABC Analysis ABC Analysis 10 10 20 20 30 30 40 40 50 50 60 60 70 70 80 80 90 90 100 100 Percentage of items Percentage of items Percentage of dollar value Percentage of dollar value 100 100 — 90 90 — 80 80 — 70 70 — 60 60 — 50 50 — 40 40 — 30 30 — 20 20 — 10 10 — 0 0 — Figure 15.2 Figure 15.2 Class C Class A Class B
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See ABC Classification Example on your Supplement (p.15-8) Reading Article about 80/20 Rule on p. 15-11.
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ABC Classification Examples A wholesaler has ten items in a product line. The item number, selling price, and estimated annual volume in units are: item Selling price Annual usage in units Annual Usage in Values 1001 $3.00 10,000 30,000 3080 15.00 350 5,250 0053 4.60 4,000 18,400 4197 2.56 5,000 12,800 3683 21.00 200 4,200 4421 0.65 10,500 6,825 2222 4.49 12,500 56,125 5376 6.38 4,400 28,072 2121 4.21 750 3,157.5 0070 5.44 2,000 10,880 Total= 175,709.50
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The first step in categorizing the item is to estimate the dollar value of annual usage for each item (multiply the selling price by the estimated annual usage). Then, they should be arranged in descending order. The result of these two steps are: Item Value of annual usage Cumulative value of annual usage Cumulative percent of value of annual usage 2222 $56,125.00 $ 56,125.00 31.9 % 1001 30,000.00 86,125.00 49.0 A 5376 28,072.00 114,197.00 65.0 0053 18,400.00 132,597.00 75.5 4197 12,800.00 145,397.00 82.7 0070 10,880.00 156,277.00 88.9 B 4421 6,825.00 163,352.00 92.8 3080 5,250.00 168,352.00 95.8 C 3683 4,200.00 172,552.00 98.2 2121 3,157.50 175,709.50 100.0
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