Improving Inventory Costs with EOQ Mark Mastrangeli John

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Improving Inventory Costs with EOQ Mark Mastrangeli John Knezevic

Improving Inventory Costs with EOQ Mark Mastrangeli John Knezevic

Agenda: Problem Overview Data Description & Data Sample Assumptions(carrying, holding costs) Pareto Analysis (ABC

Agenda: Problem Overview Data Description & Data Sample Assumptions(carrying, holding costs) Pareto Analysis (ABC Classification) EOQ Models Sample Savings Other Recommendations

Overview Objectives Of Inventory Management Minimize Inventory Costs Maximize Customer Service In order to

Overview 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.

Data Description Given 2. 9 million line historical data file Focusing on a single

Data Description 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

Historical Data Sample Location Order No Item No Center Name Order Date Quantity 2

Historical Data Sample Location Order No Item No Center Name Order Date Quantity 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 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 4 th at 53 rd 10/31/2008 1 2 62983700 212015 1927 St Petersburg FL 4 th at 53 rd 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

Relevant Data Item No Location Item Description Item Price Average Cost Max Order Lead

Relevant Data Item No Location Item Description Item Price Average Cost Max Order Lead Time

Assumptions 350 Day Working Year $10. 00 Cost per Order 7% IRR Carrying Cost

Assumptions 350 Day Working Year $10. 00 Cost per Order 7% IRR Carrying Cost Max Order Quantity could be changed

Pareto Analysis (ABC Classification) n Pareto Principle n n n 80% of a nation’s

Pareto Analysis (ABC Classification) n Pareto Principle n n n 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 n Focused exclusively on A items

The Basic EOQ Model n n Can be used in planning the purchases of

The Basic EOQ Model n n Can be used in planning the purchases of inventory items for retailers General Assumptions: n n n 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

Our Analysis: Assuming, Max Order Quantity has been changed. $10. 00 Cost per Order

Our Analysis: 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

Our Analysis Available Data Center Number: Center Name: Item Number: Item Description: Item Price:

Our Analysis Available Data Center Number: Center Name: Item Number: Item Description: Item Price: Item Cost: Max Units per Order: Lead Time: Total Number of Orders: Total Units Ordered: Duration of Historical Data: 0126 Dallas TX Greenville 130016 CD-RECORDABLE ON SPINDLE (100) $36. 93 $35. 00 10 7 36. 00 87. 00 975 Assumptions Working Days per year: Cost per Order: Carrying Cost per year: 350 $10. 00 7%

Our Analysis: Calculated Data based on Assumptions and Historical Data Average Orders per Day:

Our Analysis: Calculated Data based on Assumptions and Historical Data Average Orders per Day: Average Unit Demand per Day: Average Annual Orders: Average Annual Demand: Average Units per Order: Average Units On-Hand: Annual Purchasing Cost: Annual Ordering Cost: Carrying Cost per unit per year: Annual Carrying Cost: Total Cost: Current Method Annual Inventory Cost 0. 04 0. 09 13 31 2 1 $1, 093. 08 $129. 23 $2. 45 $2. 96 $1, 225. 27 $132. 19

Our Analysis: EOQ Model D: 31 Q* : Orders Per Year : Average Units

Our Analysis: EOQ Model D: 31 Q* : Orders Per Year : Average Units On-Hand : Cycle Time : Reorder Point : Annual Ordering Cost : Annual Carrying Cost : 16 2 7. 98 179 1 $19. 56 $23. 63 EOQ Method Annual Inventory Cost : $43. 19 Savings over current method : $89. 00

Sample Savings For All 27 Class ‘A’ Items Current Total Cost of Inventory under

Sample Savings 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

Other Findings: For 3227 Orders, 516 Items in the history for Greenville, Dallas Center

Other Findings: 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 of 3227 = 645 Orders

Recommendations: n Maintaining Inventory Accuracy n Avoid stock outs at all cost n n

Recommendations: n Maintaining Inventory Accuracy n Avoid stock outs at all cost n n Recommended levels of accuracy n n A items ± 0. 2% B items ± 1% C items ± 5% Cycle Counting n n DC does not have item to send Each month 1/12 th of company items are counted Consider Changing Max Order Quantity and Using EOQ

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