log Flashcards
E/E Balance
Available balance vs Current balance
Balancing supply of inventory with demand
E/E Balance - Too Little
Stockouts
Lost sales
Poor customer service
E/E Balance - Too Much
High carrying costs
Inefficient performance
Inventory Trends - GDP
Inventory in the economy as decreased as a gross percentage of the GDP
Inventory Trends - Logistics Costs
Inventory as a percentage of logistics costs has decreased over the long run
Return on Assets 📋
Profit / Asset Investment
As inventory decreases, ROA increases
Inventory Turns 📋
COGS / Avg Inventory
The number of times per year a business is able to use up / sell off their complete inventory of raw materials / finished goods
What is a good turnover ratio?
Good turnover ratios depend on the industry and economic conditions
When do companies decide to hold less/more inventory?
Less inventory on high demand parts as they are efficient to stock and high in volume
More inventory on low demand parts as they are needed for customer service and low in volume (Why? Companies may hold more inventory for low-demand parts not because they sell often but because when someone needs it, it’s urgent and critical)
Rationales for Holding Inventory
Batching (economies of scale)
Uncertainty
Time
Seasonality
Cycle stock
Inventory that will be used up or sold over some period of time
Causes of batching
Procurement - volume price discounts
Transportation - mileage discounts
Production - long production runs
Batching tradeoff
Must store the extra inventory you don’t use immediately
Safety stock
Inventory a company holds beyond normal needs as a buffer against uncertainty due to delays in materials availability and customer order patterns
Causes of uncertainty
Uncertainty around how much customers will buy and when
Uncertainty around suppliers having materials you need
Mitigating need for safety stock
Need for safety stock may be mitigated by greater information sharing across the supply chain
In Transit stock
May be any class of inventory (RM, components, WIP, FG) inbound or outbound
Transit speed tradeoff
Faster transportation modes cost more but may save a larger amount in inventory carrying costs
(You need to carry more inventory if it is stuck on a boat for weeks traveling across continents!)
Work in process stock
Raw materials, parts, and sub-assemblies in the process of being converted to FGs
Lean operations impact
Reduces inventory by streamlines processes and reducing lead times
Seasonal supply (perishability)
Some products (e.g. agricultural, can of corn) may only be harvested once per year, but must be stocked year round
Seasonal demand (compressed selling period)
Demand spike prior to holiday seasons (e.g. Hallmark cards have no 2nd chance to meet demand if out of stock)
Risks of holding excess inventory
Inefficient use of cash
Obsolescence
Pilferage
Storage costs
Damage
When might you need to hold more inventory?
When customers expect it
“Do we really need to stock 14 kinds of hammers at Walmart?” To their surprise, they found out they did
Inventory carrying costs
Capital
Storage space
Inventory service
Inventory risk
Inventory Carrying Costs: Capital 📋
Opportunity cost associated with investing in inventory, or any asset, over other investment choices
Generally the largest component of ICC
Hurdle rate
Minimum rate of return for any investment
Weighted average cost of capital
WACC
Inventory Carrying Costs: Storage 📋
Cost of moving products in and out of storage
Handling
Rent
Staff
Equipment
Storage Logistics Cost
Public space mostly variable (e.g. cost per pallet)
Private space may be primarily a fixed cost
Inventory Carrying Costs: Service 📋
Insurance and Taxes on stored goods
Varies according to the value of the goods
Inventory Carrying Costs: Risk 📋
Factors beyond the control of the firm
Obsolescence
Damage
Employee pilferage
Theft
Calculating the cost of Carrying Inventory 📋
- Identify the value of the item stored in inventory (Say the average cost of printer $100)
- Measure each individual ICC component as a percentage of product value
- Multiply overall ICC as a percentage of product value by the value of the product (30.2% * $100 = $30.20) (If avg inventory 2500 units… $30.20 * 2500 = $75500)
Inventory Models
Make simplifying assumptions about reality
More the model assumes, easier it is to understand but less accurate
Simple EOQ Model: Assumptions
Continuous, constant, known, and infinite rate of demand on one item of inventory
A constant and known replenishment lead time
Satisfaction of all demand - no need for safety stock
Constant price/cost, independent of order quantity or time
No inventory in transit
No limits on capital availability
Simple EOQ Models: What it Considers
Inventory carrying cost
Order / setup cost
Goal: Determine replenishment order size that optimizes total cost
Simple EOQ Model: Carrying Costs & Order Setup Relationship
Inventory carrying cost increases for larger orders
Order (or setup) costs decreases for larger orders
Goal: Find compromise between ICC and OC that minimizes total cost
Fixed Order Quantity with Certainty 📋
https://drive.google.com/drive/folders/1N_ZoP52iDqcQwAlXJYjc7KZuuWypcNhs?usp=sharing
Replenishment quantity, lead time, demand during lead time, reorder point
Reorder point in this model is 180
Safety stock in this model is 0
Lead time is time in triangle (e.g. 1 week)
Fixed Order Quantity w/ Uncertainty: Purpose
Uncertainty is a more normal condition
Uncertainty in demand, lead times, product availability, damage in transit, wrong items, etc.
Introduces safety stock into the equation
Fixed Order Quantity w/ Uncertainty: Assumptions
A constant and known replenishment lead time
Must account for stockouts
Constant price/cost, independent of order quantity or time
One item of inventory
No inventory in transit
No limits on capital availability
Fixed Order Quantity w/ Uncertainty: Differences
Safety stock: Necessary to cover variations in demand (or supply)
Reorder point: Average daily demand during lead time plus the safety stock
Goal: Balance ICC & stockout risk
Probability-based model
Fixed Order Quantity w/ Uncertainty 📋
https://drive.google.com/drive/folders/1fc2_Xd5QgfNC6nQsJ8j663Ph9jMXVas7?usp=drive_link
Fixed Order Interval Approach
Involves ordering at fixed intervals and varying Q depending upon the remaining stock at the time the order is placed
Fixed Order Interval Model (with Safety Stock)
Calculating Safety Stock 📋
https://drive.google.com/drive/u/1/folders/13A4FPgQo_A1yxGZa6IrsmHECIX1k7g6d
ABC Analysis Classifications
Cat A: Always in stock (Most profitable/most important)
Cat B: Mostly in stock or via express delivery (Infrequently purchased)
Cat C: Allow backorders (The rest in the middle)
Pareto’s Rule
80% of sales come from 20% of items
ABC Inventory Analysis
ABC Inventory Reevaluation
Baltimore Bridge Collapse
19th largest port in US
Top port for auto shipments
2nd largest port for coal exports
Many ships “stuck” in port
Transportation Spending Trends
Costs have increased as a total percentage of logistics costs
Transportation Spending By Mode
1st: Truck 78.7%
2nd: Rail 7.4%
3rd: Air 5.5%
4th: Pipeline 5.2%
5th: Water 3.2%
Truck works for many things and is economical in cost
Water is extremely cheap but very slow
Air is incredibly fast but incredibly expensive
Ton-Mile
One ton of cargo carried one mile
Statistical standard measurement used in transportation industry
TEU
Twenty foot equivalent unit, a measure of container size
A standard 40 foot container equals 2 TEU
Modes of Transportation
Rail, Motor, Water, Pipeline, Air
Railroad Strengths
High capacity
Low cost per ton mile
Railroad Weaknesses
Low accessibility
Long transit times
Rough ride (damage)
Lack of investment
Less flexibile
Railroad Overview
7 railroads carry 90% of freight
Carry a wide variety of products
Low distance large mover of low value and/or high density items
More often found inbound to RMs
Motor Carriers Overview
Large number of small firms (400000+)
75%-80% of US Freight expenditures
Motor Carriers Strengths
High accessibility
Transit times faster than rail or water
Motor Carrier Weaknesses
Can be affected greatly by weather
Relatively high cost compared to rail and water
Water Carriers Overview
Long distance mover of low value, bulk materials, agricultural, and forest products
Most major cities are along a water route
70% of US international freight moves by water
Water Carriers Strengths
Extremely low cost
Water Carrier Weaknesses
Extremely slow
Tankers
Specifically designed for liquid cargoes
Carry the most tonnage
Container ships
High speed for ships
Intermodel link
Can handle 10000+ containers
Container shipping companies in top 10 are non-US owned
Water Carrier Rates with Pandemic
RO-RO
Roll On Roll Off
Large ferry that facilities the loading and unloading process by using drive on/off ramps
Air Overview
Limited number of carriers earn ~90% of revenue
Any carrier (e.g. Southwest) can carry freight but some only carry freight
Cost structure is highly variable and companies do not own rights of wayA
Air Strengths
Fastest transit times
Air Weaknesses
Highest cost
Limitations on what can be shipped
Weather can impact
Low accessibility
Best for value to weight ratio
Pipelines Overview
Performance Rating of Modes Example
Intermodal Transportation
Use of two or more modes of transportation cooperating on the movement of a shipment by publishing a through rate
Containerization
Malcom McLean credited
US Govt used small standard sized containers during WW2
Container ships now carry 60% of goods via ocean container
Distribution Purpose
Manufacturing is centralized - few locations
Demand is spread out - many locations
Role of Distribution Facilities
Balance supply with demand (Seasonal products like christmas ornaments need to be stored)
Protect supply chain against uncertainty (labor strikes, best seller, ships getting stuck sideways in a canal)
Quantity purchase discounts
Production (Long production runs require additional storage)
Transportation economies of scale (Full container / TL more cost effective than many small shipments)
Historic Role of Warehousing
Place to store product for a LONG time
Low inventory turns
Increased inventory risks: Opportunity for damage / obsolescence
Present Role of Warehousing
Services a SHORT TERM flow through point… not a stopping point
More of a strategic asset
Shorten cycle times
Better customer service
Cross Docking
Facility without long term storage
Inbound Shipments received > Broken down and sorted > Position to fill outbound shipments
Clean receiving dock / sort each shift or end of day
Truckloads inbound and truckloads or less than truckloads outbound
Function of Distribution Facilities
Accumulation, sortation, allocation, assortment, value add
Accumulation
Receipt of goods from multiple sources
Facilities order consolidation
Facilitates transportation efficiencies
Sortation
Assembling like products together for efficient storage
Allows tracking of lot #s, expiration dates, etc.
Allocation
Match available inventory to customer orders
Breaking bulk
Assortment
Assemble customer orders for multiple SKUs
Value added activities
Assembly / product configuration (Adding software to an HP printer)
Labeling (Retailer specific price tags)
Kitting (Lancome Beauty Pack)
Repackaging
Product repair
Returns processing
Transportation cost & warehousing costs
Transportation costs decrease as number as warehouse costs increase
Inventory costs & warehousing costs
Inventory costs go up as warehouse costs increase
Cost of lost sales & warehousing costs
Cost of lost sales decreases as warehouse costs increase
The Square Root Rule 📋
Used to estimate the increase/decrease in aggregate inventory as the firm increases/decreases the number of stocking locations
Factors Affecting Number of Warehouses
Facility Ownership Public vs. Private Ownership Decision
As throughput volume increases, private warehousing becomes more cost efficient
Warehouse Designing Process
- Determine operating requirements (Profiling customer segments, demand patterns, growth plans)
- Determine overall space requirements
- Determine process flows (Physical, logical)
- Cost assessment
- Iterate and optimize
Space Requirements Planning
Plan by functional area: Inbound, storage, processing, outbound
Key criteria: Low/average/peak volumes, length and timeframe of each, future growth or shrinkage potential (new customers)
U-Shape Physical Flows
Facilitates cross docking and focuses security in one area
Straight Thru Physical Flows
Different inbound and outbound transportation modes, conversion facilities
Multi-Level Physical Flows
Avoid if at all possible
Difficult to share personnel and move bulk product between levels
Process Flow Planning Logical Flows
- Identify basic steps (efficiency)
- What controls are needed (quality)
- Documents used / documents created
- System capabilities
- Link processes - how does one process support the next?
Pallet Storage Types
Floor stack
Single deep pallet rack
Double deep pallet rack
Drive in / Drive thru
Push back
Case Storage Types
Carton flow rack
Floor Stacking
LIFO requirement, best when large blocks of product are received / ordered for each SKU
Lowest capital cost, flexible configuration, very dense storage
Single Deep Pallet Racks
Best when many SKUs w/ 2-5 pallet positions each
Uses standard material handling equipment and supports order picking
Density lost because of increasing number of aisles required
Double Deep Pallet Racks
Most common, best when many SKUs w/ 2-5 pallet positions each
Greater density, saves on aisle space
More honeycombing required, requires truck reach
Drive in/Drive Through
LIFO requirement, slow to medium SKU movement, large stocking quantities per SKU
Very dense storage option
Uses common material handling equipment
Limited access to pallets, and slow in/out
Push Back Rack
LIFO requirement, medium to fast SKU movement
Very dense storage option and supports order selection
Less honeycombing
Fairly high cost
Flow Rack
FIFO requirement, many SKUs
High volume, easy access to SKUs stocking and picking
Supports lighted picking operations, highly configurable
Lose cube (height)
Standard Material Handling Equipment
Pallet jacks, forklifts, walkie stacker, order pickers, reach trucks
“Not So Standard” Material Handling Equipment
Automated guided vehicles, narrow aisle reach truck
Material Handling Equipment Costs
Picking Costs
Omnichannel Order Fulfillment
Material handling fulfillment strategy that treats inventory as a single unit and uses it to fill all channels (e-commerce, store, replenishment, wholesale) from one location
“The whole process ranging from the customer placing the order to the time when the order gets delivered to him or her comes under omnichannel fulfillment
Historic Retail Product Flow
Order Source > Supplier > Region DC > Store > Customer Delivery
Evolution of Omni Channel Success
2010: Separate DC for e-commerce fulfillment
2012: Combined DC for store replenishment & e-com fulfillment
2014: In store fulfillment of e-com orders (Click and collect, pick from back room, pick from shelf, local delivery)
2016: Combination approach
Present Retail Product Flow
Order Source (Phone/Website/Mobile) > Inventory Location (Store, Region DC< Dark Store, Ecom DC, Supplier) > Order Delivery (In Store Pickup, Del From Store, Kiosk Pickup, Del From DC)
Omni Channel Key Decisions
Where to locate inventory?
Where to route the order?
Single vs. Multiple deliveries?
Who should process the order?
