Introduction into Logistics

PhD Natasha LutovinovaLogistics Lecturer

E-mail: Lutovinova.N@nhtv.nlRoom: G1.006

Handbook: Paul R. Murphy & Donald F. Wood, Contemporary logistics (New Jersey 2011), 10th edition

3

Introduction into Logistics Course Outline

12.05 Introduction

13.05 SCM Concept, Inventory

14.05 Demand Management, Warehousing Management

15.05 Transportation Management, International Logistics

16.05 Poster Session

CHAPTER 8

Inventory Management

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Learning Objectives

To understand the costs of holding inventoryTo understand reordering conceptsTo differentiate the various inventory flow patterns

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10 g€ 0.22

15 g€ 0.36

600 g€ 1.84

350 g€ 1.32

DeliveryDeliveryProcurementProcurement ManufacturingManufacturing

Customer’s order cycleCustomer’s order cycle

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Logistics lead time

Order fullfilment

Lead-time gap

Logistics lead time

Customer’s order cycle

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Inventory Management

Inventories are stocks of goods and materials that are maintained to satisfy normal demand patterns

Inventory managementDecisions drive other logistics activitiesDifferent functional areas have different inventory objectivesInventory costs are important to consider

Inventory turnover

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Inventory Management

Inventory management (continued)Inventory costs are important to consider

Inventory turnover: cost of goods sold divided by average inventory at costcost of goods sold = inventory turnoveraverage inventory

$200,000 = inventory is sold 4 times per year

$ 50,000

Compare with competitors or benchmarked companies

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Logistics objectives are mutually interdependentLow inventory turnover = high inventory carrying costs, little (or no) stockout costsHigh inventory turnover = low inventory carrying costs, high stockout costsManaging the trade-off is important to maintain service levels

Total cost approach

Reductionof the

lead time

Improvedelivery

reliability

Increaseflexibility

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Inventory Classifications

Cycle (or base) stockSafety (or buffer) stockPipeline (or in-transit) stock

Work in processSpeculative stockStrategic stockDead StockPsychic stock

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Inventory-Related Costs

Inventory carrying (holding) costsInventory carrying (holding) costs

ObsolescenceInventory shrinkage

Storage costsHandling costsInterest charges

Insurance costsTaxesOpportunity cost

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Inventory-Related Costs

StockoutsStockout costs

Trade-offs Exist between Carrying and Stockout Costs

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When to Order

Fixed order quantity systemFixed order interval system

Reorder (trigger) point (ROP)ROP = DD x RC (under certainty)ROP = (DD x RC) + SS (under uncertainty)Where DD = (average) daily demand

RC = length of replenishment cycleSS = safety stock

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When to Order

ROP = DD x RC (under certainty)ROP = (DD x RC) + SS (under uncertainty)

DD = daily demand =30 piecesRC = replenishment cycle =2 (days)

SS = safety stock =60

Reorder point = 120 pieces

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R = Variable order intervalQ = Fixed order quantityT = Fixed order intervalS = Variable order quantity

  Fixed Variabel

Order quantity R, Q R, S

Order interval T, Q T, S

Quantity

Ord

eri

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Reorder (trigger) point

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How Much to Reorder

Economic order quantity (EOQ) in unitsEOQ = √2DB/ICWhereEOQ = the most economic order size, in units D = annual demand, in units B = administrative costs per order of placing the order C = carrying costs of the inventory (%) I = dollar value of the inventory, per unit

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How Much to Reorder

Economic order quantity (EOQ) in dollarsEOQ = √2AB/CWhereEOQ = the most economic order size, in dollars A = annual usage, in dollars B = administrative costs per order of placing the order C = carrying costs of the inventory (%)

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Figure 9-2: Determining EOQ by Use of a Graph

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Calculation of eoq.lnk

How Much to Reorder

Economic order quantity (EOQ) in dollarsEOQ = √2AB/C A = annual usage = $1000B = administrative costs = $25C = carrying costs = 0.2 (20%)

EOQ = √2*1000*25/0.2 = $500 order size

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How Much to Reorder?

Economic order quantity (EOQ) in dollarsEOQ = √2AB/C A = annual usageB = administrative costsC = carrying costs

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EOQ A B C8544 3.650 € 2.000,00 20%

155 12 € 250,00 25%

How Much to Reorder

Economic order quantity (EOQ) in unitsEOQ = √2DB/IC

D = annual demand, in units = 200B = administrative costs = 25C = carrying costs = 5I = value per unit = 0.2 (20%)

EOQ = √2*200*25/.20*5 = 100

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How Much to Reorder?Economic order quantity (EOQ) in unitsEOQ = √2DB/IC

D = annual demand (in units)B = administrative costsC = carrying costsI = value per unit

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EOQ D B C I183 5.000 € 50,00 20% € 75,00

22 12 € 250,00 25% € 50,00 105 365 € 75,00 20% € 25,00 270 3.650 € 2.000,00 20% € 1.000,00 322 5.200 € 75,00 15% € 50,00

165 – 178 – 183 – 19220 – 22 – 24 – 26

90 – 95 – 100 – 105270 – 280 – 290 – 310300 – 322 – 336 – 344

Table 9-3: EOQ Cost Calculations

Number of orders per

year

Order size ($)

Ordering cost ($)

Carrying cost ($)

Total cost (sum of ordering and carrying

cost) ($)

1 1,000 25 100 125

2 500 50 50 100

3 333 75 33 108

4 250 100 25 125

5 200 125 20 145

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B C

Inventory Flows

Safety stock can prevent against two problem areas

Increased rate of demandLonger-than-normal replenishment

When fixed order quantity system like EOQ is used, time between orders may vary(When reorder point is reached, fixed order quantity is ordered)

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Figure 9-3: Inventory Flow Diagram

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Reorder point

Average inventory in units = Q/2 (+ SS)

Contemporary Approaches to Managing Inventory

ABC Analysis

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Contemporary Approaches to Managing Inventory

ABC AnalysisJust-in Time (JIT) Approach

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Figure 9-4: Trailer that opens on the side and is used for rapid discharge of parts

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Contemporary Approaches to Managing Inventory

ABC AnalysisJust-in Time (JIT) ApproachVendor-Managed Inventory (VMI)Inventory Tracking

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Inventory Management: Special Concerns

FiFoComplementary itemsDead inventoryDealsDefining stock-keeping units (SKUs)Informal arrangements outside the distribution channelRepair and replacement partsReverse logisticsSubstitute Products

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Next time:

Assignment Obligatory:

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Choose a product, draw an inventory flow diagram and describe it