modeling inventory (deterministic view)
DESCRIPTION
Modeling Inventory (Deterministic View). John H. Vande Vate Spring 2007. Types of Inventory. Deterministic Inventory Pipeline Inventory: Inventory in transit Cycle Inventory: Goods accumulating for transit Goods delivered and waiting for processing Stochastic Inventory (later). - PowerPoint PPT PresentationTRANSCRIPT
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Modeling Inventory(Deterministic View)
John H. Vande Vate
Spring 2007
22
Types of Inventory
• Deterministic Inventory– Pipeline Inventory: Inventory in transit– Cycle Inventory:
• Goods accumulating for transit
• Goods delivered and waiting for processing
• Stochastic Inventory (later)
33
Illustrative Example
• Develop a distribution strategy to minimize inventory and transportation costs
• Purpose: – Outline issues covered in outbound logistics– The importance of transportation in the supply
chain– Illustrate costs and investments– Always do a quick analysis first, then refine
it.
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Overview
• Products:– Computers: CPU, Monitor, Keyboard– Televisions: TV and Console
• Stores– 100 across the US– Sell 10 TVs and 10 computers per day– 250 days/year
55
Components
Computers TV/Monitor ConsoleCost $300 $400 $100
Weight 5 lbs 10 lbs 30 lbs
From Green Bay Indianapolis Denver
We assume weight not cube determines vehicle
capacityTruck holds 30,000 lbs
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Initial Strategies to Consider
• All direct shipments in full truckloads
• Consolidate in Indianapolis. All shipments in full truckloads
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Simplification
• Shipments on the order of 1,000 miles
F
F
F
Green Bay
Indianapolis Denver
Distances
88
What Costs?
• Transportation
• Pipeline inventory – inventory in transit
• Inventory at Plants
• Inventory at Stores
• Handling
• …
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Direct:Transportation Cost
• How many shipments/year?– Green Bay
– Indianapolis
– Denver
– Total100 stores * Annual Store Demand /Items to fill a truck
Items to fill a truck = Cap. of truck/Weight of Item
– Green Bay
– Indianapolis
– Denver
30,000/5 = 6,000
30,000/10 = 3,000
30,000/30 = 1,000
100*2,500/6,000 = 41.67
100*5,000/3,000 =166.67
100*2,500/1,000 = 250
~ 460
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What Costs?
• Direct– Transportation ~
• $1/mile*1,000 miles/trip*460 trips/year = $460,000/year
– Pipeline inventory – Inventory at Plants– Inventory at Stores– Handling– …
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Pipeline Inventory
• How long are goods in transit?– 1,000 miles at 50+ miles per hour– 2 days +
• How much inventory is in transit on average?
• Imagine we send the items one-at-a-time
• How many items in the pipe?
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Pipeline Inventory
• One Day worth of sales at a Store– 10 TVs at $400+$100 each = $5,000– 10 Computers at $300+$400 = $7,000– Total $12,000 per day per Store
• Two days of system-wide sales: – 2 days * $12,000/Store/day * 100 stores = $2,400,000
– Carrying cost 15% of $2,400,000 = $360,000
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What Costs?
• Direct– Transportation ~
• $1/mile*1,000 miles/trip*460 trips/year = $460,000/year
– Pipeline inventory• $2,400,000 in capital• $360,000 in annual carrying costs
– Inventory at Plants– Inventory at Stores– Handling– …
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Inventory at the Plants
• Two Extremes– Simultaneous shipments– Staggered shipments
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Simultaneous Shipments
• A truckload of computers from Green Bay has 6,000 computers in it
• A Store sells 2,500 per year
• So we only need to replenish the Stores every 6,000/2,500 = 2.4 years
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Inventory at Green Bay
• Simultaneous Shipments
600,000
2.4 years
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Simultaneous shipments– Green Bay ships once every 2.4 years
• Inventory is 1.2 years demand or 300,000 CPUs• Inventory value is $90,000,000• Inventory carrying cost is $13,500,000
– Denver ships 2.5 times per year• Inventory is 20% of annual demand or 50,000 Consoles• Inventory value is $5,000,000• Inventory carrying cost is $750,000
– Indianapolis ships 1.6 times per year• Inventory is 500,000/3.2 or about 150,000 items• Inventory value is $60,000,000• Inventory carrying cost is $9,000,000
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Why Not?
• What are problems with simultaneous shipments?
• When are simultaneous shipments likely?
• What alternatives?
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Inventory at Green Bay
• Staggered Shipments
6,000
~6 days
2020
What Costs?
• Inventory at Plants– Simultaneous Shipments
Capital Carrying Cost
• Green Bay $90 million $13.5 million• Denver $ 5 million $ .75 million• Indianapolis $60 million $ 9.0 million• Total $155 million $23.25 million
– Staggered Shipments (divide by 100!) Capital Carrying Cost
• Green Bay $900 K $135 K• Denver $ 50 K $ 7.5 K• Indianapolis $600 K $ 90 K• Total $1.55 million $232.5 K
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What Costs?
• Direct– Transportation ~
• $1/mile*1,000 miles/trip*460 trips/year = $460,000/year
– Pipeline inventory• $2,400,000 in capital• $360,000 in annual carrying costs
– Inventory at Plants – Staggered Shipments• $1.55 million in capital• $232.5 K in annual carrying costs
– Inventory at Stores– Handling– …
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DC Inventory from Green Bay
6,000
~2.4 years
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Inventory at Stores
• At the Stores?– ½ truckload or 3,000 CPUs at $300 each: $900,000
– ½ truckload or 1,500 Monitors at $400 each: $600,000
– ½ truckload or 500 Consoles at $100 each: $ 50,000
$1,550,000
Carrying cost: 15% of $1,550,000 or $232,500
Total Carrying cost at the Stores: $23,250,000!
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What Costs?
• Direct– Transportation ~
• $1/mile*1,000 miles/trip*460 trips/year = $460,000/year
– Pipeline inventory• $2,400,000 in capital• $360,000 in annual carrying costs
– Inventory at Plants – Staggered Shipments• $1.55 million in capital• $232.5 K in annual carrying costs
– Inventory at Stores• $155 million in capital• $23.25 million in carrying costs
– Handling– …
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Costs• Transportation Costs: $ 460,000• Pipeline Inventory $ 360,000• Inventory Costs at Plants: $ 232,500• Inventory Costs at Stores: $ 23,250,000
Total: $ 24,302,500!Capital Required: • Pipeline Inventory $ 2,400,000• Inventory Costs at Plants: $ 1,550,000• Inventory Costs at Stores: $ 155,000,000
Total: $ 158,950,000!
Total Cost & Capital Direct
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Consolidation
• Strategy 2: Assemble Products in Indianapolis and distribute by truckload from there
• What will happen to costs?– Transportation– Pipeline– At plants– At Indianapolis Warehouse/Cross Dock– At Stores\s
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Via Indianapolis
F
F
F
Green Bay
Indianapolis Denver
Facts
2828
What Costs?
• Transportation– To Indianapolis– From Indianapolis to Stores
• Pipeline inventory – To Indianapolis– From Indianapolis to Stores
• Inventory at Plants• Inventory at Indianapolis Cross Dock• Inventory at Stores• Handling• …
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Indirect: Transportation
• To Indianapolis– Green Bay 400 miles* 42 trips = 16,800– Indianapolis 0 miles*167 trips = ~ 0– Denver 1,100 miles*250 trips = 275,000– Total $291,800
• From Indianapolis to Stores– Same as total transport before, we are moving the
same goods the same distance (roughly 1,000 miles to each Store) $460,000
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What Costs?
• Transportation– To Indianapolis $291,800– From Indianapolis to Stores $460,000
• Pipeline inventory – To Indianapolis– From Indianapolis to Stores
• Inventory at Plants• Inventory at Indianapolis Cross Dock• Inventory at Stores• Handling• …
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Pipeline Inventory• To Indianapolis
– From Green Bay 400 miles ~ 1 day • 1,000 per day at $300 each ~ $300,000 capital• 15% of $300,000 is $45,000 carrying cost
– From Denver 1,100 miles ~ 2 days• 2 days at 1,000 per day at $100 each ~ $200,000 capital• 15% of $200,000 is $30,000 carrying cost
– Total • Capital $500,0000• Carrying Cost $ 75,0000
• From Indianapolis to Stores– Same as before 2 days of sales – Capital $2,400,000– Carrying Cost $ 360,000
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What Costs?• Transportation
– To Indianapolis $291,800– From Indianapolis to Stores $460,000
• Pipeline inventory – To Indianapolis
• Capital $500,000• Carrying Cost $ 75,000
– From Indianapolis to Stores• Capital $2,400,000• Carrying Cost $ 360,000
• Inventory at Plants• Inventory at Indianapolis Cross Dock• Inventory at Stores• Handling• …
3333
Inventory at Plants
• Same as before– Green Bay holds ½ of a truckload– Denver holds ½ of a truckload– Assume Indianapolis holds ½ of a truckload
for delivery to the cross dock– Capital $1,550,000– Carrying Cost $ 232,500
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What Costs?• Transportation
– To Indianapolis $291,800– From Indianapolis to Stores $460,000
• Pipeline inventory – To Indianapolis
• Capital $500,000• Carrying Cost $ 75,000
– From Indianapolis to Stores• Capital $2,400,000• Carrying Cost $ 360,000
• Inventory at Plants– Capital $1,550,000– Carrying Costs $ 232,500
• Inventory at Indianapolis Cross Dock• Inventory at Stores • Handling• …
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Inventory at Cross Dock
Receiving Shipping
CPUs, Monitors, Consoles
Computers & TVsWIP
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Inventory at Indianapolis Cross Dock
• Receiving from the Plants– ½ a truckload of CPUs – ½ a truckload of Monitors– ½ a truckload of Consols
• Shipping to the Stores– ½ a truckload of Computers and TVs
• WIP – like Pipeline inventory– How long does the process take?
Capital $1,550,000Carrying Cost $ 232,500
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What’s in a Truck
• Of Computers and TVs?• In the same mix as demand
– 1:1 computers to TVs– X computers in a truck– Weight of the computers 15X lbs– Weight of the TVs 40X lbs– 15X + 40X = 30,000 lbs– X = 30,000/55 = 545
• A full truck of finished goods has– 545 computers and 545 TVs– 545 CPUs, 545 Consoles and 1090 Monitors
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Inventory at Indianapolis Cross Dock
• Receiving from the Plants– ½ a truckload of CPUs – ½ a truckload of Monitors– ½ a truckload of Consols
• Shipping to the Stores– ½ a truckload of Computers and TVs
• 273 CPUs at $300 each or $ 81,900• 273 Consoles at $100 each or $ 27,300• 545 Monitors at $400 each or $218,000• Total $327,200• Carrying cost $ 49,080
• WIP – like Pipeline inventory– How long does the process take?
Capital $1,550,000Carrying Cost $ 232,500
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Inventory at Stores
• Inventory at a Store:– Visited by truck 4.6 times per year – Same as before– So inventory costs at Stores are the same
as before, right?
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Wrong! Magic?
Product Value Number per year
Number per shipment
Average Inventory
Average Value of Inventory
Inventory Carrying
CostTV 500.00$ 2,500 545 273 136,500$ 20,475$ Computer 700.00$ 2,500 545 273 191,100$ 28,665$
Total: 49,140$
• Total Inventory Carrying Cost at Stores:
$4,914,000
compared with
$23,250,000
under earlier strategy. Explain!
4141
The Difference
Product Value Number per year
Number per shipment
Average Inventory
Average Value of Inventory
Inventory Carrying
CostTV 500.00$ 2,500 543 272 135,869.57$ 20,380.43$ Computer 700.00$ 2,500 543 272 190,217.39$ 28,532.61$
Total: 48,913.04$
Part Value Number per year
Number per shipment
Average Inventory
Average Value of Inventory
Inventory Carrying Cost
CPU $300 2500 6,000 3,000 900,000.00$ 135,000.00$ Monitor/Keyboard $400 5000 3,000 1,500 600,000.00$ 90,000.00$ Console $100 2500 1,000 500 50,000.00$ 7,500.00$
Total: 232,500.00$
Explain?
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With Consolidation– Transportation Costs: $ 751,800
– Inventory Costs at Stores: $ 4,891,300
– Inventory Costs at Plants: $ 513,900
Total: $ 6,757,000
Without Consolidation– Transportation Costs: $ 460,000
– Inventory Costs at Stores: $ 23,250,000
– Inventory Costs at Plants: $ 232,500
Total: $ 23,942,500!
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Comparison
Capital Cost Capital CostTransportation
To Indianapolis -$ 291,800$ From Indianapolis to stores 460,000$ 460,000$
Pipeline InventoryTo Indianapolis 500,000$ 75,000$ From Indianapolis to stores 2,400,000$ 360,000$ 2,400,000$ 360,000$
Inventory at Plants 1,550,000$ 232,500$ 1,550,000$ 232,500$ Inventory at Cross Dock
Receiving 1,550,000$ 232,500$ Shipping 327,600$ 49,140$
Inventory at stores 155,000,000$ 23,250,000$ 32,760,000$ 4,914,000$
Total 158,950,000$ 24,302,500$ 39,087,600$ 6,614,940$
Direct Consolidation
Invest some of the $120 million in the cross dock
Spend some of the $18 million on handling
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Summary
• Deterministic Inventory– Pipeline
– Cycle
– WIP
• Pipeline from Days in transit * Value/Day• Cycle from half of shipment• WIP like pipeline• Value of consolidation• Quick & Dirty analysis first
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Deterministic Supply Chain Design
• Next time: should we be shipping in full truckloads?
• Later, different kinds of cross docks