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Modeling Inventory (Deterministic View)

Modeling Inventory (Deterministic View). John H. Vande Vate Spring 2006. 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).

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Modeling Inventory (Deterministic View)

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  1. Modeling Inventory(Deterministic View) John H. Vande Vate Spring 2006 1

  2. 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) 2

  3. 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. 3

  4. Overview • Products: • Computers: CPU, Monitor, Keyboard • Televisions: TV and Console • Distribution Centers • 100 across the US • Sell 10 TVs and 10 computers per day • 250 days/year 4

  5. Components We assume weight not cube determines vehicle capacity 5

  6. Initial Strategies to Consider • All direct shipments in full truckloads • Consolidate in Indianapolis. All shipments in full truckloads 6

  7. Simplification • Shipments on the order of 1,000 miles Distances 7

  8. What Costs? • Transportation • Pipeline inventory – inventory in transit • Inventory at Plants • Inventory at DCs • Handling • … 8

  9. Direct:Transportation Cost • How many shipments/year? • Green Bay • Indianapolis • Denver • Total 100 stores * Annual Store Demand /Items to fill a truck Items to fill a truck = Cap. of truck/Weight of Item • Green Bay • Indianapolis • Denver 100*2,500/6,000 = 41.67 100*5,000/3,000 =166.67 100*2,500/1,000 = 250 ~ 460 30,000/5 = 6,000 30,000/10 = 3,000 30,000/30 = 1,000 9

  10. What Costs? • Direct • Transportation ~ • $1/mile*1,000 miles/trip*460 trips/year = $460,000/year • Pipeline inventory • Inventory at Plants • Inventory at DCs • Handling • … 10

  11. 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? 11

  12. 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 12

  13. 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 DCs • Handling • … 13

  14. Inventory at the Plants • Two Extremes • Simultaneous shipments • Staggered shipments 14

  15. Simultaneous Shipments • A truckload of computers from Green Bay has 6,000 computers in it • A DC sells 2,500 per year • So we only need to replenish the DCs every 6,000/2,500 = 2.4 years 15

  16. Inventory at Green Bay • Simultaneous Shipments 600,000 2.4 years 16

  17. 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 17

  18. Why Not? • What are problems with simultaneous shipments? • When are simultaneous shipments likely? • What alternatives? 18

  19. Inventory at Green Bay • Staggered Shipments 6,000 ~6 days 19

  20. 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 20

  21. 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 DCs • Handling • … 21

  22. DC Inventory from Green Bay 6,000 ~2.4 years 22

  23. Inventory at DCs • At the DC’s? • 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 DCs: $23,250,000! 23

  24. 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 DCs • $155 million in capital • $23.25 million in carrying costs • Handling • … 24

  25. Total Cost & Capital Direct Costs • Transportation Costs: $ 460,000 • Pipeline Inventory $ 360,000 • Inventory Costs at Plants: $ 232,500 • Inventory Costs at DCs: $ 23,250,000 Total: $ 24,302,500! Capital Required: • Pipeline Inventory $ 2,400,000 • Inventory Costs at Plants: $ 1,550,000 • Inventory Costs at DCs: $ 155,000,000 Total: $ 158,950,000! 25

  26. 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 DCs 26

  27. Via Indianapolis Facts 27

  28. What Costs? • Transportation • To Indianapolis • From Indianapolis to DCs • Pipeline inventory • To Indianapolis • From Indianapolis to DCs • Inventory at Plants • Inventory at Indianapolis Cross Dock • Inventory at DCs • Handling • … 28

  29. 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 DCs • Same as total transport before, we are moving the same goods the same distance (roughly 1,000 miles to each DC) $460,000 29

  30. What Costs? • Transportation • To Indianapolis $291,800 • From Indianapolis to DCs $460,000 • Pipeline inventory • To Indianapolis • From Indianapolis to DCs • Inventory at Plants • Inventory at Indianapolis Cross Dock • Inventory at DCs • Handling • … 30

  31. 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 DCs • Same as before 2 days of sales • Capital $2,400,000 • Carrying Cost $ 360,000 31

  32. What Costs? • Transportation • To Indianapolis $291,800 • From Indianapolis to DCs $460,000 • Pipeline inventory • To Indianapolis • Capital $500,000 • Carrying Cost $ 75,000 • From Indianapolis to DCs • Capital $2,400,000 • Carrying Cost $ 360,000 • Inventory at Plants • Inventory at Indianapolis Cross Dock • Inventory at DCs • Handling • … 32

  33. 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 33

  34. What Costs? • Transportation • To Indianapolis $291,800 • From Indianapolis to DCs $460,000 • Pipeline inventory • To Indianapolis • Capital $500,000 • Carrying Cost $ 75,000 • From Indianapolis to DCs • 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 DCs • Handling • … 34

  35. Inventory at Cross Dock Receiving Shipping WIP Computers & TVs CPUs, Monitors, Consoles 35

  36. 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 DCs • ½ a truckload of Computers and TVs • WIP – like Pipeline inventory • How long does the process take? Capital $1,550,000 Carrying Cost $ 232,500 36

  37. 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 37

  38. 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 DCs • 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 $1,550,000 Carrying Cost $ 232,500 38

  39. Inventory at DCs • Inventory at a DC: • Visited by truck 4.6 times per year • Same as before • So inventory costs at DC are the same as before, right? 39

  40. Wrong! Magic? • Total Inventory Carrying Cost at DCs: $4,914,000 compared with $23,250,000 under earlier strategy. Explain! 40

  41. The Difference Explain? 41

  42. With Consolidation • Transportation Costs: $ 751,800 • Inventory Costs at DCs: $ 4,891,300 • Inventory Costs at Plants: $ 513,900 Total: $ 6,757,000 Without Consolidation • Transportation Costs: $ 460,000 • Inventory Costs at DCs: $ 23,250,000 • Inventory Costs at Plants: $ 232,500 Total: $ 23,942,500! 42

  43. Comparison Invest some of the $120 million in the cross dock Spend some of the $18 million on handling 43

  44. 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 44

  45. Deterministic Supply Chain Design • Next time: should we be shipping in full truckloads? • Later, different kinds of cross docks 45

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