# Shrinkage calculation this formula calculates the

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Shrinkage Calculation This formula calculates the total number of inventory that will be input at each stage of the supply chain to account for the rate of loss. Order Size Required = (Actual Demand) / (Proportion of Acceptable Product Per Order) Step 1 – Retailer: Order Size Required = (300) / (100% - 2%) Order Size Required = (300) / (0.98) Order Size Required = 306.12 Always round up in order to avoid shortages – 307 units Step 2 – Distributor: Order Size Required = (307) / (100% - 1%) Order Size Required = (307) / (0.99) Order Size Required = 310.1 Always round up in order to avoid shortages – 311 units Step 3 – Manufacturer: Order Size Required = (311) / (100% - 3%) Order Size Required = (311) / (0.97) Order Size Required = 320.6 Always round up in order to avoid shortages – 321 units Answer: 321 units must be planned at the manufacturing stage in order to bring 300 units to the consumer.
Square Root Rule & Calculation – Risk Pooling Inv Future = Inv Present [ (SqRt WH Future) / (SqRt WH Present) ] Inv Future = Total combined inventory needed in future Inv Present = Total combined inventory in present system SqRt WH Future = Square Root of total number of future warehouses SqRt WH Present = Square Root of total number of present warehouses Inv Future = Unknown Inv Present = 4 * 1500 = 6000 units WH Future = 2 WH Present = 4 Inv Future = Inv Present [ (SqRt WH Future) / (SqRt WH Present) ] Inv Future = 6000 [ (SqRt of 2) / (SqRt of 4) ] Inv Future = 6000 [ (1.41) / (2.0) ] Inv Future = 6000 * 0.705 Inv Future = 4,230 units of inventory Answer: The new system would require 4,230 units of inventory in total. Thus, with two storage facilities, each facility would carry half or 2,115 units per facility. Eight Supply Chain Processes 1. Product Development and Commercialization: What does the customer want? When does the customer want it? Can we organize the right suppliers, manufacturers, distributors and retail organizations to get the job done right? 2. Supplier Relationship Management : Finding suppliers. Developing relationships. Managing present and future purchases from the suppliers. Working together to improve quality. 3. Manufacturing Flow Management: Making the right items to meet customer expectations. Doing this using the least amount of resources possible. 4. Demand Management : Utilize forecasting to understand likely demand. Once a forecast is available, manage the firm’s facilities and resources to meet expected demand. 5. Order Fulfillment : If proper demand management has taken place, then it will be time to fulfill orders. This might include picking, packing, and shipping items to the customer. 6. Customer Relationship Management : Utilizing information to better understand the needs and desires of your customers today and into the future. 7. Customer Service Management: Communication between customers and the supply chain. Providing customers with product availability details and tracking information. Providing customers with product assistance and maintenance opportunities.