Many people argue that EOQ analysis is outdated. I argue that despite its deficiencies, an EOQ analysis should be completed as a part of any inventory strategy. First, the analysis suggests appropriate reordering intervals for all items. (The forecast annual demand divided by the EOQ is the optimal time between orders.) Second, the analysis points out the importance of reducing the costs of placing purchase orders. The lower the purchase order cost, the more economical it becomes to order in small increments and the less inventory we will have in the system. Third, the analysis comparing actual order or run quantities with the optimal order/run quantities often reveals significant opportunities to reduce lot size inventory levels. In the example from a biotechnology manufacturer and distributor the order/run quantities are 2 to 8 times what they should be for over 1/3 of SKUs.
Order Quantity Profile
We frequently find it helpful to identify and rank order root and systemic causes of excess inventory. An example completed for a large HVAC client is depicted below. In this case the root causes in
The RightStock™ model also distinguishes between value added inventory (VAI) and excess, non-value added inventory (NVAI). Value added inventory is the sum of safety stock, lot size, and pipeline inventory. Those three types of inventory
Hedge inventory (HI) mitigates risks of potential sharp price increases, shortages in critical commodities, and extreme price and availability volatility for those same items. Fuel is a classic example of a commodity whose inventory may
Contingency and disaster inventory (CDI) insures against unexpected situations outside the realm of those covered by traditional safety stock inventory. Those situations include natural disasters, labor strikes, and other abnormal supply chain disruptions. For example,
The shortage factor is the % of an item's unit selling price (USP) that is lost in the event of a stockout and subsequent lost sale. It is used to compute the lost sales cost. For example, if the
Setup cost (SUC) is the cost to setup (prepare or changeover) a machine or production line to make a production run for a particular item or change between items. It is sometimes referred to as changeover cost (COC).
The purchase order cost (POC) is the cost of placing a purchase order from a vendor. The majority of those costs are related to sourcing, purchasing, and procurement salaries and benefits (italics) and include: Purchase
As a part of the National Science Foundation’s Japan Technology Evaluation Center I had the unique privilege to lead a major study for the U.S. government comparing U.S. and Japanese logistics systems. During the study
There are two conceptual models for inventory management – push and pull. The push inventory model is so called because the emphasis is on "pushing" speculative inventory, made-to-forecast (MTF) in response to forecasted demand, out
Order status communication should be proactive when there is an exception to the order contents, timing, or terms agreed upon at order entry. Order status information should be updated in real-time and should be available