Chapter 2 Lesson 2 01 30 2014 Learning Objectives Explain the percentage of items in stock Explain the percentage of time an item is in stock Explain the item fill rate Key Terms Perpetual Inventory PI o Amount of inventory on hand plus the amount of inventory received minus the amount of inventory sold o How much you have on hand right now o A single bottle of water is a different SKU than the same water o How many different SKU s you have in a category o Post General Mills Cherrios 12 oz box 15 oz box etc Stock Keeping Unit SKU in a 6 pack Assortment Kellogg s Backorder o Distribution sale level Lost Sale it o Stock out and lost sale because someone would have bought o In store sale level Margin 1 unit 10 bags per facing Destination o Item for which you will make a special trip to the store for o Cost of being out of a destination item then you could lose an entire shopping cart of product Impulse o Item that you didn t plan on getting but you bought example candy or soft drink at checkout Percentage of Items In Stock PIIS 1 PI005 Percentage of items out of stock problem it s a snapshot You don t know which one is out of stock or which is about to be out of stock when do you calculate this Wrong because of lost inventory reads higher than it really is Percentage of Time an Item is in Stock PTIS This can be misleading Item fill rate Percentage of demand fulfilled from on hand inventory SKU A has a demand of 10 per day Out of Stock every 4th day PTIS 75 3 days 4 days SKU B has a demand of 1 every day but every 4th day has a IFR is 75 30 units 40 units o More common things tend to stock out when the demand is demand of 7 high Out of stock every 4th day PTIS 75 3 days 4 days IFR 30 3 units 10 units Lesson 3 Supply chain management has an effect on customer service Shopper behaviors when faced with an out of stock Switch to another size flavor or type within the same brand Switch to another brand Switch to another category but same product type Go to another store for the product that is out but buys other products at the current store Leave the entire basket and go to another store Delay purchase of the product until the next shopping trip Just doesn t purchase on that trip consumable Purchase the product on line In addition to these the shopper may also stop shopping at this particular retail store or stop buying the specific product that was out of stock Cost of Stock Out Per Unit of Lost Sale 1 x 0 5 0 x 0 5 0 50 margin 1 unit 50 of the people when faced with a 1 margin will switch to snickers also with a margin of 1 and the other 50 won t buy what is the cost of a stock out per unit of lost sale o 1 x 0 5 0 x 0 5 0 50 expected value of lost sale is 0 50 Number of Units out of Stock Per Replenishment Cycle Building is open from 7 7 and open 300 days per year 2 facings of bags of ruffles potatoes chips each facing can hold 10 bags what is the max capacity of ruffles o 20 Empirical Distribution o Based on frequency in the past Opportunity cost o If I have an extra slot of ruffles I am losing a spot for a different product 11 10 x 0 2 12 10 x 1 0 4 units o if you only have 1 facing of ruffles instead of 2 o 0 4 units per day x 300 days per year 120 units per year can I put another product in there that will sell more than 120 units per year Lesson 4 Normally distributed demand Newspaper with mean print circulation on Wednesdays of 200 000 papers and a standard deviation of 10 000 papers Standard deviation deviation from the mean spread out high close together low With a normal distribution 68 1 standard deviation from the mean of the sales around 200 000 10 000 papers or from 190 000 to 210 000 paper 95 2 standard deviations from the mean from 180 000 to 99 from 170 000 to 230 000 papers 3 standard deviations from 220 000 papers the mean Estimates of service levels using the normal distribution Mean print circulation on Wednesday of 200 000 papers with a standard deviation of 10 000 papers In the future they produce 205 500 papers NORMDIST 205 500 200 000 10 000 1 70 70 in stock o 1 cumulative distribution Amount of production needed to achieve a service level target using the normal distribution Mean print circulation on Wednesday of 200 000 papers with a standard deviation of 10 000 papers PTIS 99 5 NORMINV 0 995 200 000 10 000 225 758 Optimal PTIS Pay 2 for every newspaper he buys PTIS cost of not producing enough cost of not producing enough cost of producing too much Cost of not producing enough 2 Cost of not enough 1 NORMINV PTIS mean standard deviation NORMINV 0 66 200 000 10 000 Chapter 3 01 30 2014 How do you create financial value in an organization Return on Asset Improvement Operational cost reductions result in lower outputs quality quality of product service etc will the quality be something we are willing to tradeoff Supply Chain Impact on ROI How effectively you use your money Definition Return you get on the money you have invested on something how smart you are on investing your money into something that you want a return on ROA Quantify how efficient a company is how efficient a company is and how efficient they run a company Reducing capital employment will increase your ROI o Reduce safety stock then we will reduce the amount of money in inventory and then it will reduce increases ROI Quicker we manage our supply chains the quicker we can get them to our customer and the quicker we get our money The Perfect Order if you ain t perfect you ve failed of orders perfect on all elements total orders Usual Distribution of Customer or Product Profitability ABC customer service A customer is most important and then go down the line 80 20 rule o 20 of customers make up 80 of your sales some customers contribute a negative contribution o cost to service them is higher than what they are buying o consider ALL of the costs Assessing DCP Distribution of Customer Profitability Considering all costs transportation per customer packaging per customer order processing returns etc Functional vs Activity Based Costs Looking at costs based on activities rather than on a total category of costs Trying to quantify your costs based on the activities you engage in Traditional costs view o Salaries 120 000 supplies 30 000 depreciation 20 000 …