Podcast
Questions and Answers
What does a contracted index help to ensure in agreements?
What does a contracted index help to ensure in agreements?
Which of the following accurately describes service level?
Which of the following accurately describes service level?
How does spending too much affect profit in a supply chain context?
How does spending too much affect profit in a supply chain context?
What is one way to assess the adherence to a production plan?
What is one way to assess the adherence to a production plan?
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What is the primary focus of the tradeoff between performance and costs?
What is the primary focus of the tradeoff between performance and costs?
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What does a high service level indicate about a company's performance?
What does a high service level indicate about a company's performance?
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Which factor negatively impacts both cost and profit in a supply chain?
Which factor negatively impacts both cost and profit in a supply chain?
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What impact does measuring the change in contract index have on sales decisions?
What impact does measuring the change in contract index have on sales decisions?
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What is the primary purpose of determining the trade unit for each customer?
What is the primary purpose of determining the trade unit for each customer?
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Which transportation mode is specifically mentioned for finished product shipments?
Which transportation mode is specifically mentioned for finished product shipments?
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What is an essential factor to consider when evaluating trade units?
What is an essential factor to consider when evaluating trade units?
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What financial metric is important for analyzing supply chain decisions?
What financial metric is important for analyzing supply chain decisions?
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What does total landed costs generally include in logistics management?
What does total landed costs generally include in logistics management?
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Why might a company increase safety stock?
Why might a company increase safety stock?
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What trade-off must a company consider when analyzing transportation options?
What trade-off must a company consider when analyzing transportation options?
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What is the significance of evaluating shelf life in supply chain management?
What is the significance of evaluating shelf life in supply chain management?
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What is the formula to calculate Return on Investment (ROI)?
What is the formula to calculate Return on Investment (ROI)?
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Which of the following is a primary activity in the value chain?
Which of the following is a primary activity in the value chain?
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What does gross margin represent in financial performance?
What does gross margin represent in financial performance?
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What is the main objective of a supply chain strategy?
What is the main objective of a supply chain strategy?
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Which component is NOT included in the calculation of operating profit?
Which component is NOT included in the calculation of operating profit?
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Which of the following does NOT describe a competitive priority?
Which of the following does NOT describe a competitive priority?
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What is measured by its return on investment (ROI)?
What is measured by its return on investment (ROI)?
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Which of the following is a component of 'cost of goods sold'?
Which of the following is a component of 'cost of goods sold'?
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Which activity is included in secondary activities of the value chain?
Which activity is included in secondary activities of the value chain?
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Which of the following metrics is used to measure financial performance?
Which of the following metrics is used to measure financial performance?
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What is the main purpose of maintaining a high service level in a company?
What is the main purpose of maintaining a high service level in a company?
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Which of the following best defines 'lead time'?
Which of the following best defines 'lead time'?
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Why is safety stock essential for a company?
Why is safety stock essential for a company?
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What can be a consequence of running out of stock when a consumer demands a product?
What can be a consequence of running out of stock when a consumer demands a product?
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What factors are used to determine the necessary amount of safety stock?
What factors are used to determine the necessary amount of safety stock?
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Which of the following is a potential effect of low service levels on a business?
Which of the following is a potential effect of low service levels on a business?
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What drives the need for safety stock?
What drives the need for safety stock?
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What is one of the trade-offs that companies face regarding safety stock?
What is one of the trade-offs that companies face regarding safety stock?
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What is the primary function of safety stock in supply chain management?
What is the primary function of safety stock in supply chain management?
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What factor is typically NOT considered when determining lot size?
What factor is typically NOT considered when determining lot size?
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Which of the following statements best describes inventory?
Which of the following statements best describes inventory?
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What defines a 'production interval'?
What defines a 'production interval'?
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Which cost is typically NOT associated with holding inventory?
Which cost is typically NOT associated with holding inventory?
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What is a 'frozen period' in the context of production?
What is a 'frozen period' in the context of production?
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How does safety stock contribute to managing obsolescence?
How does safety stock contribute to managing obsolescence?
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Which of these is NOT a critical component of safety stock determination?
Which of these is NOT a critical component of safety stock determination?
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Study Notes
Understanding the Value Chain
- The value chain is a model to visualize and analyze the sequence of activities a company undertakes to create value for its customers
- It helps organizations understand their internal processes, identify sources of competitive advantage, uncover areas for improvement, and enhance profitability
The Value Chain
-
Secondary Activities
- Firm infrastructure
- Human resource management
- Technology development
- Procurement
-
Primary Activities
- Inbound logistics
- Operations
- Outbound logistics
- Marketing and sales
- Service
- All activities contribute to margin value
Value Chain Analysis
- Examines each activity within the value chain
- Identifies areas for improvement
- Determines the impact of each activity on overall value creation
3 Steps to Value Chain Analysis
- Identify the key activities
- Analyze the costs and contribution of each activity
- Develop strategies to improve value creation
How do we measure financial performance?
- Return on Investment (ROI)
- Profitability
- Efficiency
- Market share
- Customer satisfaction
Supply Chain Performance Linkage to Financial Performance
- Improved supply chain performance can enhance financial performance
- Measures include:
- Delivery time
- Inventory levels
- Cost of goods sold
- Customer satisfaction
- Effective supply chain management impacts financial growth, profitability, and customer loyalty
Measured by its return on investment (ROI)
- ROI is the ratio of profit earned to the investment made
- Calculating ROI:
- ROI = (Gain from Investment - Cost of Investment) / Cost of Investment
How Is ROI Calculated?
- Step 1: Calculate the profit from the investment
- Step 2: Divide the profit by the cost of the investment
- Step 3: Multiply the result by 100 to express it as a percentage
Improved Customer Value
- Reduced lead times
- Higher product availability
- Enhanced order accuracy
- Increased customer satisfaction
Improved Procurement and Operational Efficiency
- Lower procurement costs
- Reduced waste and inventory
- Improved production processes
Improved Speed and Rotation
- Shorter lead times
- Faster inventory turnover
- Increased revenue generation
Improved Asset Deployment and Utilization
- Optimized inventory levels
- Improved warehouse utilization
- Increased production capacity
Main Components
-
Realized Revenue
- Revenue generated from actual sales
- Calculated by:
- Contracted sales revenue (+/-) Bonus or penalties
-
Contracted Sales Revenue
- Revenue expected from sales based on agreements
- Calculated by:
- Units sold * Contracted sale index for each customer
-
Cost of Goods Sold (COGS)
- Total direct costs incurred in producing goods
- Includes purchasing and production costs
-
Gross Margin
- Difference between realized revenue and COGS
- Represents the profit margin on production
-
Indirect Costs
- Expenses not directly related to production
- Includes overhead, stock, handling, administration, distribution, project costs, and interest
-
Operating Profit
- Profit generated from core business operations
- Calculated by: Gross margin - Indirect costs
-
Investments
- Assets used in the business
- Includes buildings, inventory, machinery, payment terms, and software
Supply Chain Strategy
- Defines how to manage the flow of goods and services to meet organizational goals
- Objective: Ensuring alignment with the overall organizational strategy
- Key factors:
- Customer needs
- Competitive landscape
- Cost considerations
- Resource availability
What is a competitive strategy?
- A plan that outlines how a company will compete in its industry
- Focuses on achieving a sustainable competitive advantage
What are the competitive priorities?
- Cost
- Quality
- Delivery
- Flexibility
Competitive Strategy Drives Supply Chain
- To meet customer needs and achieve competitive advantage, organizations must develop supply chains that align with their competitive strategy
- Competitive priorities influence supply chain design, operations, and performance
Competitive Priorities
- Cost: Minimize costs to achieve price competitiveness
- Quality: Focus on delivering high-quality products or services
- Delivery: Ensure timely and reliable delivery to meet customer deadlines
- Flexibility: Adapt to changing customer needs and market conditions
Capacity
- The maximum output that a resource can produce in a given period
- Critical for meeting demand and avoiding bottlenecks
Inventory Costs
- The expenses associated with holding inventory, including:
- Storage costs
- Insurance
- Opportunity costs (lost revenue from investment)
- Obsolescence costs
Overall Inventory Level
- The amount of inventory on hand at a given time
- Measured as:
- Stock weeks: Number of weeks of supply
Production Plan Adherence
- Measures how closely actual production output aligns with the planned schedule
- Percentage of products that meet production targets
Service Level
- Measures how timely and accurately customers’ orders are fulfilled
- Measured as:
- Percentage of orders shipped on time and in full (OTIF)
Tradeoffs - Performance vs Costs
- Tradeoffs between competitive priorities and cost
- Decisions based on cost-benefit analysis
- Higher performance usually comes with higher costs
- Finding an optimal balance based on organizational needs
Tradeoffs - cost vs profit
- Balancing spending on supply chain improvements with profitability
- Investing too much may reduce profits due to high costs
- Investing too little may impact customer satisfaction and profitability
Sales & Supply Chain Decisions
- Sales: - Trade units - Picking time - Shelf life
- Supply Chain: - Safety stock - Stock weeks
What is a contracted index?
- A numerical measure used in agreements to adjust prices based on market changes
- Tracks fluctuations in the price of materials or products, allowing for fair adjustments to the sale price
- Benefits both buyers and sellers by ensuring accurate and consistent pricing
Contract Index
- Promise/Requirement: The agreed-upon quantity and specifications of the product or service
- Contract index: The numerical value used to adjust prices based on market fluctuations
- Basic price (*): The base price of the product or service
- Purchase/Sales price: The final price paid or received, adjusted by the contract index
- Contract index values: Based on widely accepted industry benchmarks or custom indexes
Measuring the impact of the change in contract index...Sales Decisions:
- Higher Index: May result in increased selling prices, impacting revenue
- Lower Index: May result in reduced selling prices, impacting revenue
Service Level
- A measure of how well a company fulfills customer orders on time and in full
- Impact on ROI: Higher service levels lead to improved customer satisfaction, increased sales, and higher ROI
- Understanding service level is critical for planning, forecasting, and resource allocation
What is service level and how is it measured? Impact on ROI?
- Service level: Measurement of how frequently a company meets customer needs and timely delivery
- Measured by: Percentage of on-time deliveries, order accuracy, perfect order fulfillment rate
- Impact on ROI: Positive correlation, higher level of service, higher customer satisfaction, repeat business, and ultimately improved ROI
What causes low service levels?
- Inventory shortages
- Production delays
- Logistical issues
- Order inaccuracies
What is the impact of low service levels?
- Lost sales
- Negative impact on customer relations
- Reduced profits
- Increased operational costs
Understanding Order Deadline
- This determines when a customer expects to receive the order
- Critical for planning production and logistics
- Short deadlines may require expedited shipping and additional resources
What are the shortage rule options?
- Backorder: Hold the order until stock becomes available
- Lost order: Refuse the order and avoid missing the shipment deadline
- Partial shipment: Send what you can from available inventory now.
- Substitute: Send an alternate product to fulfill the order
Purchasing Delivery Reliability
- Measures how consistently a supplier delivers on time and in full
- Important for managing lead times and planning inventory
- Low delivery reliability can lead to production delays and stockouts
Purchasing...Understanding Delivery Window
- The time frame within which deliveries from suppliers are expected
- Important for planning production and inventory
- Must be carefully considered for timely order fulfillment and avoiding delays
Lead times?
- The time between ordering a product or service and its actual receipt
- Includes: Production time, delivery time, processing time
- Key for determining production schedules and ensuring timely deliveries
- Longer lead times can increase production costs and affect customer satisfaction
How to determine the net change in revenue based on the new and old contract index?
- Step 1: Calculate the difference between the new and old contract index
- Step 2: Determine the percentage change in the index
- Step 3: Calculate the change in revenue by multiplying the percentage change in the index by the contracted sales revenue
- Step 4: Add the change in revenue to the old contracted sales revenue
- Step 5: Adjust the revenue for any bonus or penalties involved
Understanding stock
- Safety stock: Extra inventory kept on hand to mitigate against unexpected demand or supply chain disruptions
- Stock weeks: Represents the number of weeks of supply available based on current inventory levels
What is safety stock? And how can you determine how much you need?
- Safety stock: Extra inventory kept on hand to mitigate against unexpected demand or supply chain disruptions
-
Determining how much you need: Consider:
- Demand variability (how unpredictable is the demand?)
- Lead time variability (how unpredictable is the delivery process?)
- Service level goal (how often do you want to meet customer demand?)
What drives the need for safety stock?
- Demand fluctuation
- Lead time variability
- Service level requirements
- Disruptions to the supply chain
- Product obsolescence
Safety stock protects you from uncertainty and stock outs
- Higher safety stock: Reduces the risk of stockouts but increases costs
- Lower safety stock: Increases the risk of stockouts but reduces costs
- Finding the right balance: Consider your risk tolerance and service level targets
Safety Stock Determination - Components
- Demand uncertainty: How much does demand fluctuate?
- Lead time uncertainty: How much does the time it takes to receive an order vary?
Safety Stock Determination - Finished Product
- Demand: How much of the finished product is expected to be sold?
- Lead time: How long does it take to get the finished product?
Safety Stock Estimation
- Consider available data, historical trends, and industry benchmarks
Operations...Capacity and Resource Availability
-
Impact of lack of capacity:
- Increased lead times
- Reduced service levels
- Higher production costs
- Missed sales opportunities
Operations - Pallet Locations
-
Determining the number of pallet locations:
- Available warehouse space
- Product size and configuration
- Inventory turnover rates
Utilization = usage/capacity
- Utilization: Measures how effectively a resource is being used
-
Factors influencing pallet location needs:
- Pallet size
- Warehouse layout
- Product flow
- Inventory management practices
- Seasonality
Remember...
- Maintaining adequate capacity is essential for fulfilling orders and minimizing production delays
- Balancing capacity with demand is critical for optimizing operational efficiency and profitability
What is lot size? And how can it be determined?
- Lot size: The quantity of a product produced or ordered in a single batch
-
Determining lot size: Consider:
- Production capacity
- Demand forecast
- Storage costs
- Set-up costs
What is inventory and its purpose?
- Inventory: A collection of all the raw materials, work-in-progress, and finished goods stored by a company
-
Purpose of inventory:
- Meeting customer demand
- Smoothing production schedules
- Taking advantage of economies of scale
- Protecting against supply chain disruptions
What are the costs associated with inventory?
- Holding costs: Expense of storing inventory (e.g., warehouse costs, insurance, obsolescence)
- Ordering costs: Expenses related to placing an order (e.g., administration, transportation)
- Shortage costs: Penalties for running out of stock (e.g., lost sales, customer dissatisfaction)
- Opportunity costs: Lost potential return from investing inventory capital
What is a production interval and frozen period?
- Production interval: The time period dedicated to a specific production run
- Frozen period: A time frame during which orders and production plans are not allowed to change
How should you evaluate the production interval which is best for each period?
-
Consider:
- Demand patterns
- Customer lead times
- Production capacity
- Inventory levels
How does the frozen period, production interval and safety stock impact obsolescence?
- Longer frozen period: Increased risk of obsolescence if demand changes
- Shorter production interval: More frequent production runs, potentially lower risk of obsolescence
- Higher safety stock: Reduced risk of stockouts, potentially lower risk of obsolescence
Determine the material required based on demand using MRP
- Material Requirements planning (MRP): A planning system that utilizes material requirements planning (MRP) to determine the components required for each product based on forecasted demand
-
Steps involved in MRP:
- Forecast demand (how much product will you need?)
- Determine the bill of materials (BOM) (what components are needed for each product?)
- Calculate the required material by multiplying the BOM with the demand
- Generate purchase orders (place orders for the necessary materials)
- Monitor inventory levels (check if the required materials are available?)
Lecture 9 - Round 1 Debrief, Round 2 Prep and Inventory Concepts
New Decisions - Sales & Purchasing
- Trade unit: The quantity of product sold or purchased in a single transaction
- Picking time: Time required to gather and prepare an order for shipment
- Shelf life: The length of time a product can be stored without becoming unusable
Sales - Trade Unit
- Customers often purchase varying amounts of each product
- Trade unit: The quantity of product sold in a single transaction
Sales - Trade Unit
-
Determining the "best" trade unit:
- Consider customer demand
- Inventory carrying costs
- Transportation costs
- Customer satisfaction
How to evaluate?
- Analyze customer order patterns
- Compare trade unit options
- Assess trade-offs between cost and customer service
Pro's and Con's
- Large trade unit: Lower order and shipping costs but higher inventory carrying costs
- Small trade unit: Higher order and shipping costs but lower inventory carrying costs
New Decision - Sales
- Trade unit calculator: Tool to help determine the optimal trade unit based on demand and other factors
-
Factors to consider:
- Product demand
- Lead times
- Average order size
- Transportation costs
- Customer preferences
Trade Unit Calculator
- Determine the optimal trade unit based on demand and other factors
What to consider by customer/product?
- Order frequency: How often do customers order?
- Average order size: How much do customers typically buy?
- Product demand: How popular is the product?
New Decision Sales
- Shelf life: The length of time a product can be stored without becoming unusable
-
Factors influencing shelf life
- Product characteristics
- Storage conditions
- Packaging
Lecture 11 - Logistics Management
Logistics
- The process of planning, implementing, and controlling the flow of goods, services, and related information
- Purpose: Ensuring the efficient and timely delivery of goods and services from point of origin to point of consumption
The Challenge:
- Meeting customer needs: Delivering on time and within budget
- Minimizing costs: Optimizing transportation, storage, and handling expenses
- Managing complexity: Coordinating multiple functions and stakeholders
Total Landed Costs
- The total cost of a product, including all expenses incurred from origin to final destination
-
Includes:
- Purchasing cost
- Transportation
- Storage
- Handling
- Insurance
Transportation Management
- Making decisions about transportation modes, carriers, routes, and schedules
- Objective: Efficiently and cost-effectively moving goods to the intended destination
Government's Role:
- Regulation: Setting standards for carrier safety, environmental protection, and trade practices
- Infrastructure: Investing in roads, ports, and airports
Government Regulations
- Safety regulations: Ensuring the safe operation of transportation vehicles
- Environmental regulations: Minimizing the environmental impact of transport operations
- Trade regulations: Controlling the flow of goods across borders
Goal of trade agreements
- Facilitating international trade
- Reducing trade barriers between countries
Modes of Transportation
- Road (Trucking): Flexible and widely available but can be susceptible to traffic congestion and weather delays
- Rail: Cost-effective for long distances but less flexible than trucking
- Water (Shipping): Cost-effective option for large quantities over long distances but subject to port congestion and weather disruptions
- Air: Fastest mode of transport but most expensive
- Pipelines: Suitable for transporting liquids and gases but lack of flexibility and potential environmental concerns
By Water - Ocean Freight
- Cost-effective option for transporting large quantities over long distances
- Suitable for: Bulk commodities, manufactured goods, and containerized cargo
By Water - Inland Waterways
- Transportation on rivers, canals, and lakes
- Suitable for: Heavier goods and bulk materials
Air
- Air freight: Used for high-value, time-sensitive, and perishable goods
Air freight
- Provides the fastest delivery times, but it is also the most expensive mode of transport
Land Transportation
- Railroad: Cost-effective, large capacity, and can be used for long distances but less flexible than trucking
Trucking Segments
- Long haul: Transports goods across long distances, often between states or provinces
- Short haul: Transports goods over shorter distances, often within a city or region
- Local trucking: Provides door-to-door delivery within a particular area
- Specialized carriers: Transport goods that require specific handling or equipment, such as refrigerated trucks, flatbeds, and tankers
Intermodal
- Combining multiple modes of transportation to maximize efficiency
- Example: Shipping goods by rail to a port and then by ship to a customer’s location
Pipelines
- Transportation of liquids and gases through underground pipes
- Suitable for: Crude oil, natural gas, water, and other fluids
Service Selection
-
Consider:
- Transportation cost
- Delivery time
- Reliability
- Carrier availability
Fresh Connections - Transportation Modes
-
Supply chain uses a combination of truck and boat transportation:
- Trucks used to transport goods from suppliers
- Boats used to ship bulk commodities
- Finished products are transported by trucks: Ensuring timely delivery to customers
The cost of transporting
-
Factors influencing transportation costs:
- Distance
- Weight
- Mode of transport
- Carrier availability
- Fuel prices
Lecture 12 - Tradeoffs and Financial Implications
What is ROI?
- Return on investment: A measure of how much profit is generated from an investment
- Calculates the effectiveness of an investment
How is ROI calculated?
- (Gain from Investment - Cost of Investment) / Cost of Investment
Trade-Offs
- Cost vs. performance: Balancing the need to minimize costs with the need to meet customer expectations
- Centralization vs. decentralization: Deciding whether to manage the supply chain centrally or to delegate responsibilities to individual departments
- Inventory vs. service: Finding the right balance between carrying inventory and meeting customer service needs
In the supply chain..Cost benefit analysis
- Analyzing the costs and benefits of different supply chain decisions
- Weighing the potential risks and rewards of each decision
- Evaluating the return on investment of supply chain improvements
Understanding the financial implications of decisions
- Assessing the impact of supply chain decisions on profitability, cash flow, and other financial metrics
- Analyzing the cost-benefit analysis of different options
Increase Safety Stock
- Increased safety stock: A supply chain strategy that is used to minimize the risk of stockouts
- Higher inventory levels: Can improve service but also carry higher costs
- Important to find a balance between stock levels and costs
Customer Service Level
- Improved customer service levels: Lead to higher satisfaction and increased retention
- Higher service levels: May result in higher costs, but can also drive revenue growth
What about component Safety stock?
- Holding safety stock for components essential to fulfill orders for finished products
Calculations Must Knows:
-
Calculating ROI:
- ROI = (Gain from Investment - Cost of Investment) / Cost of Investment
-
Calculating gross margin:
- Gross margin = Realized revenue - Cost of goods sold
-
Calculating operating profit:
- Operating profit = Gross margin - Indirect costs
-
Calculating safety stock:
- Safety stock = (Demand variability * Lead time variability) + Service level factor
-
Calculating inventory turnover:
- Inventory turnover = Cost of goods sold / Average inventory
-
Calculating lead time:
- Lead time = Time from order placement to order receipt
-
Calculating service level:
- Service level = (Number of orders fulfilled on time) / (Total number of orders)
-
Calculating utilization:
- Utilization = (Usage / Capacity)
Warehouse Capacity
- Understanding the maximum storage capacity of the warehouse
-
Factors influencing warehouse capacity:
- Warehouse size
- Pallet configuration
- Storage height
Bottling Line Capacity
- Understanding the maximum output capacity of the bottling line
-
Factors influencing bottling line capacity:
- Bottling line speed
- Number of bottling lines
- Production scheduling
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