Mark MastrangeliJohn Knezevic

Problem OverviewData Description & Data SampleAssumptions(carrying, holding costs)Pareto Analysis (ABC Classification)EOQ ModelsSample SavingsOther Recommendations

Objectives Of Inventory Management Minimize Inventory Costs Maximize Customer Service

In order to Minimize Inventory Cost

▪ Find Economic Order Quantity that minimizes:▪ Annual Ordering Cost + Annual Carrying Cost

▪ Annual Purchasing Cost is not included because there is nothing you can do about it.

Given 2.9 million line historical data file Focusing on a single store’s A class

inventory Items we calculated:▪ Current Method Annual Inventory Cost▪ EOQ Annual Inventory Cost

~3000 Item Master Inventory spreadsheet Eliminated Many Items to narrow

inventory

Location Order No Item No Center No Center Name Order Date Quantity

2 62984100 220071 1103 Atlanta GA South CPC 10/31/2008 4

2 62984100 220071 1103 Atlanta GA South CPC 10/31/2008 4

2 62984100 310222 1103 Atlanta GA South CPC 10/31/2008 3

2 62984100 310223 1103 Atlanta GA South CPC 10/31/2008 3

2 62984000 220077 513 Memphis TN Poplar Ave 10/31/2008 2

2 62984000 212015 513 Memphis TN Poplar Ave 10/31/2008 1

1 62983900 120008 472 Denver CO Tech Center 10/31/2008 1

1 62983900 212015 472 Denver CO Tech Center 10/31/2008 1

1 62983900 212015 472 Denver CO Tech Center 10/31/2008 1

2 62983800 130082 4456 New York NY 90 Park Ave 10/31/2008 1

2 62983800 120008 4456 New York NY 90 Park Ave 10/31/2008 1

2 62983700 408062 1927 St Petersburg FL 4th at 53rd 10/31/2008 1

2 62983700 212015 1927 St Petersburg FL 4th at 53rd 10/31/2008 1

1 62983600 110165 1703 Riverside CA 10/31/2008 2

1 62983600 408040 1703 Riverside CA 10/31/2008 5

2 62983500 408139 1085 Chicago IL Illinois Center 10/31/2008 10

2 62983500 408062 1085 Chicago IL Illinois Center 10/31/2008 5

Item NoLocation Item Description Item PriceAverage CostMax OrderLead Time

350 Day Working Year

$10.00 Cost per Order

7% IRR Carrying Cost

Max Order Quantity could be changed

Pareto Principle 80% of a nation’s wealth, owned by 20% of

population Apply concept to inventory

A - account for 10-20% of items, 60-80% value

B - account for 20-40% of items, 15-30% value

C - account for 50-60% of items, 5-10% value Focused exclusively on A items

Can be used in planning the purchases of inventory items for retailers

General Assumptions: Uses Constant Annual Demand vs. Fluctuating Periodic Item’s purchase cost is independent of the quantity

ordered and irrelevant in calculating annual inventory cost

Lead time is a certainty

Assuming, Max Order Quantity has been changed. $10.00 Cost per Order 7% IRR 350 Working Days per year

Calculated Cost of Actual known orders Averaging Total Units Ordered over

Duration and known number of orders Calculated EOQ Model for all 27 Class

‘A’ Items

Available DataCenter Number: 0126

Center Name: Dallas TX GreenvilleItem Number: 130016

Item Description:CD-RECORDABLE ON SPINDLE

(100)Item Price: $36.93Item Cost: $35.00

Max Units per Order: 10Lead Time: 7

Total Number of Orders: 36.00Total Units Ordered: 87.00

Duration of Historical Data: 975Assumptions

Working Days per year: 350Cost per Order: $10.00

Carrying Cost per year: 7%

Calculated Data based on Assumptions and Historical DataAverage Orders per Day: 0.04

Average Unit Demand per Day: 0.09Average Annual Orders: 13

Average Annual Demand: 31Average Units per Order: 2Average Units On-Hand: 1Annual Purchasing Cost: $1,093.08

Annual Ordering Cost: $129.23Carrying Cost per unit per year: $2.45

Annual Carrying Cost: $2.96Total Cost: $1,225.27

Current Method Annual Inventory Cost $132.19

EOQ ModelD : 31

Q* : 16Orders Per Year : 2

Average Units On-Hand : 7.98Cycle Time : 179

Reorder Point : 1Annual Ordering Cost : $19.56Annual Carrying Cost : $23.63

EOQ Method Annual Inventory Cost : $43.19

Savings over current method : $89.00

For All 27 Class ‘A’ Items Current Total Cost of Inventory under given assumptions: $3,315.91 EOQ Total Cost of Inventory: $1348.05 Savings over current method: $1967.86 Average Savings per Item: $72.88

~Annual Savings for All 1124 stores: 1124 x $1967.86 = $2,211,874.64 If Pareto Principle Holds $2,211,874.64 = 60% Value Then 100% = $ 3,686,461.69

For 3227 Orders, 516 Items in the history for Greenville, Dallas Center Avg Units per order = 2.7

Under EOQ for 27 A Items 67 Orders per year

Under Current Method 307 Orders per year

80% Reduction

80% Reduction of 3227 = 645 Orders

Maintaining Inventory Accuracy Avoid stock outs at all cost

DC does not have item to send Recommended levels of accuracy

A items ± 0.2% B items ± 1% C items ± 5%

Cycle Counting Each month 1/12th of company items are

counted Consider Changing Max Order Quantity

and Using EOQ