INTERNATIONAL BUSINESS PLAN FOR 7 ELEVEN IN GERMANY AND CHILE

Fast food and convenience stores are two aspects of American life that have become nearly iconic around the world as representative of America's fast-paced lifestyle. Families no longer gather in the kitchen as meals are prepared, women no longer shop each day for the evening's meal, and convenience is sought as Americans rush from home to school to work to extracurricular activities and put in long days at the office. Convenience stores do not compete directly with supermarkets in the United States; their prices are higher and they do not carry nearly the selection of goods that are found in supermarkets. But they offer convenience in having short lines, essential items, and often include prepared meals among their products. In addition, many convenience stores are located within petrol stations, making it even more convenient for rushed Americans to pick up staples such as milk while fuelling their vehicles. Just as American fast food has spread around the world, the convenience store has also moved abroad. One of the most successful brands in the United States, 7 Eleven, has also successfully entered the Japanese market along with some European nations. This research considers the marketing strategy of 7 Eleven, and examines the possibilities for its expansion to Germany and Chile.

Improving Store Replenishment

Case Study

Coop Danmark A/S

Fast Facts

Industry

Grocery Retailer

Headquarters

Copenhagen, Denmark

Description

Coop Danmark is Denmark’s leading

consumer goods retailer operating five

separate retail chains. The company is a

subsidiary of Coop Norden AB, which is the

largest player in the Nordic consumer goods

market.

Revenues

DKK $33 billion (USD $6 billion)

Number of Employees

64,000 (Total for Coop Norden Group A/S)

Business Challenge

Coop Danmark faced the prospect of losing market share to the established,

country-wide discount chains. To counter this increase in competition, the

company realized it needed to leverage software that could help it continue

to offer a broad range of quality products and service at attractive prices

while simultaneously improving efficiency.

Business Solution

• JDA® Advanced Store Replenishment

Business Benefits

• Improved replenishment processes, enabling store personnel to work

more efficiently

• Minimized purchasing frequency

• Reduced number of weekly deliveries within certain product areas

• Optimized inventory levels

• Enhanced ordering system

• Improved service to stores

• Reduced stock, leading to a reduction in the amount of unnecessary orders

• Reduced shrink, resulting in minimized wastage for stores

“We can recommend JDA Software’s ASR

solution to other retailers. Our experience

has persuaded us that both JDA and

its products are very professional and

reliable. We will continue to look to JDA for

additional solutions that may benefit our

business.”

- Michael Djarnis,

manager of supply chain development,

Coop Danmark

Coop Danmark, Denmark’s Largest Consumer Goods Retailer, Increases Service Levels,

Decreases Stock and Reduces Shrink with JDA SoftwareCoop Danmark, Denmark’s largest

consumer goods retailer, owns and operates

five chains that include approximately

1,140 mini markets, low-priced outlets,

supermarkets and hypermarket stores.

When competition toughened for the

biggest buyer of fast-moving consumer

goods in the Nordic region, Copenhagenbased Coop faced the prospect of losing

market share to the established, countrywide discount chains. To counter this

increased competition, the company wanted

to continue offering a broad range of quality

products and services at attractive prices

while improving efficiency.

In order to optimize processes in the

supply chain, Coop turned to JDA®

Advanced Store Replenishment (ASR).

This powerful solution has enabled Coop

to optimize the flow of goods to stores by

simplifying replenishment, forecasting and

analysis processes. ASR also enables Coop’s

personnel to more efficiently replenish

items according to variables that include

demand, seasonality, order frequency, lead

times, order quantities and service levels.

“One of the advantages of ASR is

simplifying the replenishment process,

which has enabled store personnel to work

more efficiently,” stated Michael Djarnis,

manager of supply chain development at

Coop Danmark. “We are now working

on using the system to minimize our

purchasing frequency, reduce the number

of weekly deliveries within certain product

areas and achieve optimal inventories in

our warehouse. We’re also looking to

improve the effectiveness of other parts

of the supply chain.”

Coop Places Store Orders More

Precisely Using ASR

Coop initially rolled out ASR in 87 Kvickly

stores that offer an assortment of up to

14,000 fresh and frozen food, ambient and

non-food items.

The following are benefits that Coop

received by deploying JDA’s ASR solution:

• More Precise Ordering System – Ensures

an accurate count of goods and improved

efficiency of deliveries at the stores

• Improved Service to Stores – Confirms that

shelves are properly filled by suggesting

appropriate amounts of product to be

delivered on the orders

• Reduced Stock – Gives store associates

an enhanced awareness of on-shelf and

on-stock needs, reducing the amount of

unnecessary orders

• Less Shrink – Minimizes wastage for

stores, particularly in perishable foods

UK & Northern Europe

+44 (0) 1344 354500

France & Southern Europe

+33 (0)1 56 79 27 00

US

+1 800 479 7382

Canada & Latin America

+1 480 308 3555

WEB

www.jda.com

EMAIL

info@jda.com

ASIA PACIFIC

Singapore

+65 6305 4350

Australia

+61 2 8912 7900

Japan

+81 3 6418 1100

India

+91 22 6770 2795

China

+86 21 6289 7979

AMERICAS EUROPE

Copyright © 2009, JDA Software Group, Inc. All rights reserved. JDA is a Registered Trademark of JDA Software Group, Inc. All other company and product names may be Trademarks,

Registered Trademarks or Service Marks of the companies with which they are associated. JDA reserves the right at any time and without notice to change these materials or any of the

functions, features or specifications of any of the software described herein. JDA shall have no warranty obligation with respect to these materials or the software described herein, except as

approved in JDA’s Software License Agreement with an authorized licensee.

07.23.09

Commenting on the reduced shrink,

Djarnis stated, “When we tested the system

in our chilled foods categories in three

stores, the replenishment accuracy of ASR

helped us perceptibly reduce the amount of

product that we must discard.”

Djarnis added that Coop has achieved

benefits of ASR beyond its chilled

assortment. ASR is also helping Coop

more precisely replenish orders for the

entire assortment.

“We can recommend JDA Software’s ASR

solution to other retailers. Our experience

has persuaded us that both JDA and its

products are very professional and reliable,”

Djarnis said. “We will continue to look

to JDA for additional solutions that may

benefit our business.”

About JDA Software Group, Inc.

JDA® Software Group, Inc. (NASDAQ:

JDAS) is the world’s leading supply

chain solutions provider, helping

companies optimize operations and

improve profitability. JDA drives business

efficiency for its global customer base of

more than 5,800 retailers, manufacturers,

wholesaler-distributors and services

industries companies through deep domain

expertise and innovative solutions. JDA’s

combination of unmatched services,

together with its integrated yet modular

solutions for merchandising, supply chain

planning and execution and revenue

management, leverage the strong heritage

and knowledge capital of market leaders

including Manugistics, E3, Intactix and

Arthur. When supply chain results matter,

companies turn to JDA.

Manual Replenishment Systems

ThisisthelevelwhereallreplenishmentsystemswerebeforeretailersintroducedIT

systems. A manual replenishment system relies solely on the information and

intelligenceoftheemployees.Thiskindofsystemisstillinusenowadays;ingrocery

retailers (e.g. VOLG), bakeries (Kamps), discounters (Denner) and opticians

(McOptic).Butonlythreeoutof12majorEuropeangroceryretailersstillrelysolely

onsuchmanualorderingsystems(Småros,Angereretal.2004a).

ASR1: Electronic Inventory-Based Replenishment Systems

AssoonasretailershavetheirinventorylevelsadministeredbyanITsystem,one

cansaythatastateofsemi8automationhasbeenattained.

56

Inthedescriptivemodel,

thisstepmeansthatthefirstmodule"InventoryVisibility"isrepresentedelectronically

in the IT system. With this electronic information, it is for the first time possible to

move replenishment decisions away from the store. A centralized system is now

thinkable, where a central organizational unit monitors inventories at all the outlets

and makes decisions concerning deliveries. In order to do so, a certain degree of

inventoryrecordsaccuracyhastobereached.

Itisworthnotingthatdecisionsaboutthetimeandquantityoftheorderarestillmade

manually; therefore, the module "Replenishment Logic" is still not IT8based. Order

restrictionscanbedisplayedonanITsystems,buttheplannerstillhastotakethem

intoaccount"manually"whenplacingtheorder.Freshproducts,suchasfruitsand

vegetables,areoftenorderedthisway.Examplesofcompaniesusingpredominantly

ASR1systemsareconsumerelectronicsretailers(e.g.MediaMarktCH)andbook

stores(OrellFüssli).

Groceryretailingisahighlycompetitivemarket(e.g.KehandPark1997).European

retailers are continuously aiming to improve customer loyalty by offering good

service. At the same time, they are struggling to reduce costs in order to stay

competitive.Theefforttoachievecustomerserviceexcellencehasonlybeenpartly

successful, as the low average product shelf availability rates of 92–95% (Gruen,

Corstenetal.2002;RolandBerger2003b)andasunkstoreloyaltyunderline.The

majorpartofretailercostsarepersonnelcosts,andinparticularitistheoperationsin

thestorethatrequireintensivestaffdedication(Broekmeulen,vanDonselaaretal.

2004a).TheGermanretailerGlobushascalculatedthatthelogisticscostsofthelast

50 meters in the store, i.e. from the backroom to the shelf, are three times as

expensive as the first 250 kilometres from the producer to the store gate (Shalla

2005). A technique that promises to reduce the out8of8stock (OOS) rate by

simultaneously reducing the store handling costs are so8called automatic store

replenishment(ASR)systems,themainresearchsubjectofthisthesis.

Thischapterprovidesanintroductiontothebusinesschallengesfacedbyretailers

and the valuable role of logistics in retail, followed by a short introduction to ASR

systems. Later, research deficits in the literature are identified and the research

questions of this thesis are derived. Finally, an overview of the structure of this

researchstudyisgiven.

. New Technologies Enable Automatic Store Replenishment

Systems

As half of all OOSs arise from incorrect ordering and forecasting processes, it is

sensible to have a closer look at stores' replenishment processes and systems.

Somedecadesago,therewasnoalternativetomanualstorereplenishmentsystems.

Aplanner,forexamplethestoremanager,wasresponsiblefordecidingthetwomain

parameters of replenishment systems, namely the amount to be ordered and the

whentoplacetheorder.Inordertodothis,theplannerhadtocheckmanuallythe

quantityinstock.Inthelastdecade,therehasbeenanimpressivediffusionoflarge8

scale information packages such as ERP (Enterprise Resource Planning) in

organizations (Kallinikos 2004). In addition, identification technology (such as

barcodesandscanners)andcommunicationtools(suchasEDI

9

)havebecomevery

cheap,theirimplementationanduseisnearlyroutine(Kuk2004).Today,theseand

othernewtechnologiesmakeitincreasinglypossibletoautomatethereplenishment

decision8making. The interviews conducted with practitioners as well as other

surveys(BearingPoint2003;Småros,Angereretal.2004a)clearlyrevealatrendin

retailingtowardsautomatingstorereplenishmentprocesses:

"The normal replenishment process has been until now consisted of store

personnel deciding what quantity to order by looking on the shelf. Now,

retailers want to let the systems take this decision."

10

Semi8automaticsystemsmerelysupporttheplannerinhisdecision,forexample,byshowinghimelectronicallytheinventoryandorderrestrictions.Advancedautomatic

store replenishment systems are IT8based software systems that automatically

decidewhentoorderwhichquantity.Nevertheless,thereareseveraldifferencesin

the complexity and performance of such ASR systems. The simplest systems just

placeanorderassoonasanarticleissoldorwhenacertainminimumstocklevelis

reached.Noforecastsaremade;thequantitytobeorderediscalculatedwithavery

simplealgorithm(e.g.filluptoacertainlevel).Thiskindofautomaticsystemis,for

example, used by the Swiss retailers Mobile Zone, Marionnaud and Fust. One

exampleofacomplex,state8of8theartASRsystemcomesfromthecompanySAF

AG(Switzerland).ThemainadvantageoftheirASRsoftware"SuperStore"isthatit

makesaseparateforecastforeveryitemineverystore.Thisisincontrasttoother

softwareprograms,whichmaketheircalculationsatSKUs/storesclustersduetoIT

performancerestrictions(Beringe2002).Furthermore,suchforecastsdonotrelyonly

onhistoricsales.Theirsophisticatedcausalmodelsalsoconsiderprice,promotion,

seasons,holidayandothereventswhenpredictingdemand.Theintroductionofthis

productintheGermanover8the8counterchemistretailerdm8drogeriemarktresultedin

a 70–80% reduction in OOS incidents and simultaneously reduced the inventory

stocklevelby10–20%(Beringe2002).Adetailedclassificationofthevariousexisting

ASRsystemsisprovidedinsection4.1

Importance of Inventory Management SystemsBy Osmond Vitez, eHow Contributor

 

 

 

Print this article Inventory management is an important part of a business because inventories are usually the largest expense incurred from business operations. Most companies will use an inventory management system that will track and maintain the inventory required to meet customer demand. Most systems used by companies are linked to the management or accounting information system, increasing the effectiveness of their operations.

Related Searches:

Stock Systems Stock Tracking

1. Inventory Orderso Inventory management systems help businesses order inventory by accurately recording consumer

sales. Electronic inventory systems can track sales in a real-time format, ordering inventory automatically when current stock hits a predetermined minimum level. Electronic ordering, known as Electronic Data Interchange (EDI), allows companies to maintain the proper amount of stock by not increasing costs through over-ordering of inventory. EDI also ensures that orders are placed immediately, ensuring short amounts of lead time to receive new inventory.

Stock Maintenanceo Computerized inventory management systems allow companies to properly order and maintain

several different types of goods. Different styles, colors or sizes can easily be managed to ensure that consumer demand is met through offering a variety of goods. Most companies use inventory management to keep stock items separate from similar goods; this allows management to determine which items are selling well and which items need to be reduced from inventory based on poor sales.

Price Levelso Properly managing goods is largely based on the cost of the goods incurred by the business. Using

inventory management systems will help companies find the lowest price on inventory items and ensure that the best deals are reached when purchasing these items. Purchasing goods by volume also helps companies to lower their cost on inventory, ensuring that low prices are assured to consumers. Inventory management systems track costs from purchased goods and can prepare a report indicating which vendors have the lowest cost on goods.

Count Methodso All inventories need to be counted and reconciled to the information provided by inventory

management systems. Computerized systems will generate current inventory reports for management to use when conducting physical counts of on-hand inventory items. These systems will also prepare reports showing the current sales or transfers of inventory to allow management to track sold or moved goods. After conducting a physical count, inventories can be adjusted in the inventory system to ensure accurate reporting.

Trend Analysiso A great function of inventory management systems is the trending analyses that are generated for

management review. These trends are used to see which months have high inventory levels or the effectiveness of inventory purchases. Trends also ensure that companies can order inventory if the inventory management system does not accurately reflect upcoming busy seasons, such as holidays or back-to-school shopping.

Read more: Importance of Inventory Management Systems | eHow.com http://www.ehow.com/about_5518506_importance-inventory-management-systems.html#ixzz1iyRhWynI

Reasons for Inventory Controlby Chris Joseph, Demand Media

Share RSS Print Email

Inventory control is a necessary component of successful small business operation.

According to the Service Corps of Retired Executives (SCORE), inventory costs result in 45 to 90 percent of all business expenses. Therefore, properly controlling your company's inventory is an essential component to the success of your small business. Carrying excess inventory results in an additional expense for your business, which reduces your bottom line. Not carrying enough of the right products causes lost sales and gives customers the impression that your business is poorly managed.

Maximizing SpaceAs a small business owner, you probably have limited storage space in your business location. According to SCORE, inventory control allows you to maximize your space by identifying the faster and slower sellers in your product mix. As a result, you can provide for space for better sellers while weeding out slow-moving items.

Room for New MerchandiseIn a competitive business environment, being the first to carry the newest products on the market gives you an edge over your competitors. By effectively managing and controlling your inventory, you're continuously eliminating the outdated and obsolete products in your mix, which means you'll always have room for the newest, latest thing. Customers will look to your business first when searching for new items.

Turning Over StockSCORE also indicates that proper inventory control ensures increased speed in turning over your stock. This reduces the costs associated with carrying excess inventory and keeps merchandise moving through your operation instead of collecting dust in your stockroom. As a result, you'll run a leaner, more efficient operation, which can lead to higher profits.

Discontinuing MerchandiseAccording to SmallBusinessTown.com, by controlling your inventory, you'll know when it's time to remove an item from your product mix. Perhaps an item only sells well on a seasonal basis, or no longer meets the needs of your customers. By removing the item from your shelf or stockroom and displaying it at a reduced price, you'll generate some revenue while getting rid of a slow seller.

Avoiding Lost SalesJust as carrying too much inventory can lead to higher expenses for your business, not carrying enough of the right products can also pose a problem. If you don't control your inventory, you run the risk of missing out on sales due to running out of a key item. If customers can't find what they're looking for at your business, they'll probably go someplace else. They may even decide not to patronize your business in the future.

Reasons for Inventory Controlby Chris Joseph, Demand Media

Share RSS Print Email

Inventory control is a necessary component of successful small business operation.

According to the Service Corps of Retired Executives (SCORE), inventory costs result in 45 to 90 percent of all business expenses. Therefore, properly controlling your company's inventory is an essential component to the success of your small business. Carrying excess inventory results in an additional expense for your business, which reduces your bottom line. Not carrying enough of the right products causes lost sales and gives customers the impression that your business is poorly managed.

Maximizing SpaceAs a small business owner, you probably have limited storage space in your business location. According to SCORE, inventory control allows you to maximize your space by identifying the faster and slower sellers in your product mix. As a result, you can provide for space for better sellers while weeding out slow-moving items.

Room for New MerchandiseIn a competitive business environment, being the first to carry the newest products on the market gives you an edge over your competitors. By effectively managing and controlling your inventory, you're continuously eliminating the outdated and obsolete products in your mix, which means you'll always have room for the newest, latest thing. Customers will look to your business first when searching for new items.

Turning Over StockSCORE also indicates that proper inventory control ensures increased speed in turning over your stock. This reduces the costs associated with carrying excess inventory and keeps merchandise moving through your operation instead

of collecting dust in your stockroom. As a result, you'll run a leaner, more efficient operation, which can lead to higher profits.

Discontinuing MerchandiseAccording to SmallBusinessTown.com, by controlling your inventory, you'll know when it's time to remove an item from your product mix. Perhaps an item only sells well on a seasonal basis, or no longer meets the needs of your customers. By removing the item from your shelf or stockroom and displaying it at a reduced price, you'll generate some revenue while getting rid of a slow seller.

Avoiding Lost SalesJust as carrying too much inventory can lead to higher expenses for your business, not carrying enough of the right products can also pose a problem. If you don't control your inventory, you run the risk of missing out on sales due to running out of a key item. If customers can't find what they're looking for at your business, they'll probably go someplace else. They may even decide not to patronize your business in the future.

advantages: 1) can meet the customer demand2) can avoid loss of sale3) can meet unexpected increase in demand

disadvantages:1) money locked up in inventory2) holding costs3) spoilage costs

4) obsolescence costsby D. Victor

Created on: March 02, 2010

Whether a business is in retailing or manufacturing, there are several cogent reasons for holding inventory. Businesses may hold stocks of raw materials, spare parts for machinery, work in progress or finished goods. Given that there are costs involved with purchases, orders and carriage inwards, a firm might want to minimize its order costs and utilize storage space efficiently. While a business would incur holding costs when storing inventory, these costs can be offset if there are good business reasons for so doing.

== To meet expected demand ==

A business must ensure that it has adequate supplies to meet expected demand for its goods, regardless of whether it is a retailing or production environment. Particularly where a business has a high demand and rapid turnover, having stock in storage ensures that the firm can comfortably meet anticipated demand.

== To guard against shortages ==

Holding inventory can act as insurance against future shortages. Unexpected shortages in the supply of raw materials or finished goods can affect the production run of a business or its ability to meet demand. Holding inventories allows a degree of continuity for the activities of an enterprise.

== To benefit from discounts ==

Suppliers often offer trade discounts for bulk purchases, once those purchases are above a certain amount. A business can reduce the unit cost of materials and its ordering costs (delivery, import duties) by purchasing a large amount of goods/ raw materials to hold in stock.

== To deal with variations in usage or demand ==

"Usage" refers to production consumption in a manufacturing process. Increased usage can increase the demand for materials. This is the result of either increased inefficiency or increased production levels. Sometimes a business might cater for special orders or have high seasonal demand that it must address, requiring additional stock to facilitate such occurrences.

== To facilitate the production process ==

Stock can allow the manufacturing process to flow smoothly and help the business to respond quickly and effectively to contingencies.

== In times of high inflation/ supply shortages ==

Holding vast supplies of inventories can be a deliberate strategy in response to unusual or difficult economic circumstances. In times of high inflation, a business might not wish to purchase stock at increasingly higher prices. Once the business determines that it is feasible to hold additional inventory beyond the usual levels, this is a very sensible strategy.

== Some processes require holding work in progress ==

Inventory can also include work in progress. Some products might have longer production cycles than others (like wine or cheese for instance). It is necessary to hold a high volume of inventory to cater for the inherent nature of production in some business contexts.

Naturally, there are restrictions on how much inventory a business could or should hold. The nature of the product, regulations and maximum storage capacity are some

elements that limit or deter a business from holding too much inventory.  Once a business decides to hold inventory, then a proper inventory management and control system is necessary to optimize both the stock levels and inventory costs.

What Is The Importance Of Inventory Management To A Business?Inventory management is important to an entrepreneur's business.discussAds by Google

QlikView DashboardIn-Memory Business Intelligence. Direct Path from Data to Decision!QlikView.com/Free-Download

Inventory management is vital for a business because an inventory very often incurs the biggest expense, and so it needs to be carefully controlled in order for the business to run effectively. Having the wrong inventory, or too much inventory can deplete resources to dangerous levels, so by managing it efficiently, the business will be aware of what stock they need to replenish and what needs to be shifted.

If inventory management is taken seriously and done properly, a business will probably find that it can reduce its costs and increase sales. An effective way of achieving this is by having an inventory management system in place, which will track and maintain inventory so that customer demand can be met. They can also be linked to the accounting or management departments, so that all operations can become more effective, reducing costs and maximising profit.

An inventory management system works by recording customer sales in a real time format, and automatically re-ordering stock when it reaches a pre-determined level. This electronic ordering is called EDI (Electronic Data Interchange) and means that companies will always carry necessary stock, and so will not waste money on ordering what is not needed.

These systems can also differentiate between different styles of the same stock, such as size or colour variations, so a company will not have an excess of one and not enough of the entire range. This process enables management to see what is selling and what is not, so future decisions can be made using facts, rather than hunches, again making inventory more cost effective.

It is also possible to be able to look at trends and see when particular items are selling best, so they can be exploited to realise the most profit.

Blurtit Answer

Was this answer helpful? Yes | No

Ads by Google

Inventory ManagementMaster inventory management techniques with this free article.NextLevelPurchasing.com/inventory

Bachelor of AccountingYour Accountant Career Begins Here. International Students Enquire Now!www.studygroup.edu.au/CSU

Inventory Management is the planning, control, organizing and leading the goods and materials required by the business.

Inventory Management is very important for the business. It enables the business to meet or exceed expectations of the customer by making the product readily available. 

If managed properly, it can help the organization reduce its costs, achieve economies of scale and prepares the organization for uncertainty.Anonymous

Report

Was this answer helpful? Yes | No

7.2 Managing Inventories

All manufacturing and trading firms must hold some inventories. Inventory is one of the most expensive and most important assets for many firms and includes raw material stores, work in progress and finished goods.This discussion deals only with finished goods inventory intended for resale.

Reasons For Holding Inventories

There are four reasons for holding inventory:

1. To avoid inventory shortages: Frequent shortages of inventory may cause customers to look for alternative suppliers. This will reduce sales and profit.

2. To take advantage of quantity discounts: Suppliers often offer quantity discounts. However, any cost savings must be balanced against higher storage costs, increased risk of damage and the greater cost of financing higher inventory levels.

3. To protect against price increases: Carrying (holding) inventory is one way of hedging against possible price increases. Firms that supply goods against contracted or quoted prices may buy

the required inventories and hold them for future use rather than risk a price increase in the future.

4. To avoid uncertainty associated with market fluctuations: When supply and/or demand are irregular and/or seasonal, the buying and storing of inventories above a normal level effectively reduces the uncertainty associated with such market fluctuations.

Inventory Turnover

Inventory turnover, as you know, relates to the time a unit of inventory remains in stock before it is sold. Products that are sold very quickly are considered high inventory turnover items and those sold slowly as low inventory turnover items. As a reminder, the rate of inventory turnover measures the number of times that the average inventory level is turned over or sold in a year. It is expressed as:Cost of goods sold = inventory turnover

Average Inventory

The lower the average inventory held, the higher the rate of turnover. Other benefits of lower inventory levels are cost savings from lower storage costs, and lower insurance and financing costs.The fundamental decision managers must make is between larger and less frequent inventory orders, or smaller and more frequent orders.

The Inventory Decision

The two basic decisions to be made on inventory policy, therefore, are how much to order, and when to order.These two decisions are influenced by the need to keep down the total costs associated with inventory policy. The total cost of inventory policy is the sum of the costs of ordering inventory, and the costs of holding inventory.The costs of ordering inventory. These are the costs of acquiring an item of inventory each time an order is placed and are expressed as the 'dollar cost per order'.Ordering costs include all costs of issuing the purchase order; placing the order; following up the order; taking physical delivery; and inspecting the items delivered. They also include costs of the necessary paperwork and record keeping of accounts payable.The costs of holding inventory . Holding costs, also called carrying costs, are expressed as the cost of holding one item of inventory in stock for one year. They may be expressed as a percentage, for example, the holding cost is 20% of the average unit cost per year; or as a dollar amount, for example, $2.50 per unit per year. Holding costs include:

The cost of forgoing interest when money is invested in inventory Costs incurred when inventory items go 'out of style' (obsolescence) Storage or space costs, including heating, lighting, refrigeration and occupancy costs Costs associated with storeroom operations, including costs for record keeping and physical

stocktaking of inventory Insurance costs against fire and reportable theft Costs associated with the risks of deterioration and undetected pilferage.

  Previous Page  - Next Page  

7.2.2 The Economic Order Quantity (EOQ)

We can use decision models to help manage inventory. The economic order quantity model (EOQ) is concerned with answering the question, 'how much inventory should be ordered'? It seeks to identify the size of the order that will minimise the total of ordering costs (that decrease with the size of orders) plus holding costs (that increase as a greater quantity of inventory is held).

As the textbook shows, the economic order quantity is calculated by using the equation:EOQ = 2DCHWhere: D = the annual demand for the item of inventory C = the cost of placing an order H = the cost of holding one unit of inventory for one yearThe limiting assumptions for the basic EOQ model are that:

The demand for an item can be predicted accurately and is constant over time. This means that sales are distributed evenly (and don't fluctuate) over the relevant time period

Inventory is received immediately . This means that the quantity ordered is received as one batch at one point in time and without delay.

Relevant costs are the variable costs of ordering (ordering costs) and of holding inventory (holding costs). The EOQ model is essentially a trade-off between the relationship of total ordering costs and total holding costs as they change with changes in order quantities

The lead-time between placing and receiving an order is known with certainty. This means orders can be placed at the 'right' time to avoid any possible shortages and 'stock-out' conditions

Quantity discounts are not possibleInventory levels over time (implied by the basic assumptions). The following reading shows how inventory levels will vary over time under the basic assumptions of the EOQ model.Reading 3Meredith, GG. 1994. Extract from topic 11 'Management of capital'. InAccounting and Financial Management for Business Decisions . McGraw-Hill Book Company of Australia Pty Ltd, Roseville . Pages 382-384.Graphical representation of EOQ: The next reading extends the calculation of EOQ to a graphical analysis.Text readingAtrill, Mclaney, Harvey & Jenner, pages 411-415See figures 12.2, 12.3 and 12.4. Note the MRP and JIT systemsNote, in figure 12.4 that total relevant costs fall at first because the total ordering costs fall more than total holding costs increase.However, total costs don't continue to fall as reductions in total ordering costs become smaller because the order size increases. The total holding cost increases will more than offset any savings in total ordering costs and the total cost curve changes direction and starts to rise. The optimum order quantity is, therefore, the point when total costs are at a minimum.Also note that the total holding cost and total ordering cost curves intersect at the EOQ level. That is to say, at the EOQ level, the total holding costs and the total ordering costs are equal.For exampleA company is trying to determine an appropriate inventory policy and has gathered the following information about one of the products it sells.Actual demand = 3 600 units per yearOrdering cost = $15 per orderHolding cost = $1.20 per orderThe current policy is to order in lots of 400 unitsUse the EOQ model to evaluate the current policy and suggest any improvements.AnswerEconomic order quantityEOQ = 2 x D x C = 2 x 3600 x 15 = 90 000 = 300 units per orderH 1.20Total relevant cost of EOQ (Q = 300 units)TRC EOQ = H x EOQ = 1.2 x 300 = $360Total relevant costs at present order quantity (Q = 400 units)TRC = (D/Q)C + (Q/2)H = (3600/400)15 + (400/2)1.20 = $375

Thus if the order quantity is reduced to 300 units per order, the total relevant costs of the inventory policy will be reduced from $375 to $360 per order

  Previous Page  - Next Page  

Re-Order Point (ROP)

As sales are made the inventory levels held by the business fall until, if not replaced, they become zero. Most businesses place orders for replacement inventory before stock is exhausted; and, as inventory approaches zero fresh supplies will be received, thus avoiding out-of-stock situations.The period between the time that we start the reordering process and when we receive the goods and have them available for sale is referred to as lead-time.The demand or sales during this lead-time determines the appropriate re-order point or the inventory level at which the re-order process begins. (This assumes no safety stocks are being held). The following example illustrates how the re-order point is calculated.ExampleSuppose a company sells 5000 units of a certain product at a constant rate over 250 working days in a year. The company has estimated that it takes 15 working days from the start of the ordering process to receipt of the goods in its warehouse. If we assume that no safety stocks are to be held, at what inventory level does the company start the re-ordering process?Answer:Average demand per day = 5000/250 = 20 units per day Given that the lead-time is 15 days, Then the demand during lead-time is 20 x15 = 300units Therefore, the ROP is 300 units

  Previous Page  - Next Page  

Safety Stock (SS)

To safeguard against unforseen events that could cause the firm to run out of inventory and lose sales, some minimum level of inventory (inventory is also called 'stock') must be kept. Without perfect knowledge about demand patterns or re-order lead-times, it is difficult to decide on a re-order point. The answer is to hold a certain level of safety stock, which reduces the risk of running out of inventory. The larger the safety stock held the lower the risk of running out of stock.Safety stock levels are usually established by management policy. Such a policy decision considers the degree to which back ordering is acceptable to its customers and the loss of goodwill (in sales forgone) that could arise through an out-of-stock condition. In this case safety stock levels are set by the rate of demand for a product.Note re-order point calculations are affected by the amount of safety stock held. Under such conditions, the re-order point will be the safety stock plus the demand during lead-time.ExampleYou are asked to advise management on its current inventory management policy. Management provides the following information about one of its top-selling items.

The annual demand is 9000 units and the current policy places an order for 750 units on the first day of each month

The cost per unit is $12.00 Company sales records show that demand is uniform over time The ordering costs are $80 per order and the annual holding costs are estimated to be 25% of

the average cost of inventory held (carried) The company has good relationships with its suppliers and can reasonably expect any of its

orders to be filled within 6 working days The company holds a minimum safety stock level to cover demand for a 5 work ing-day period.

Assume 250 working days per year.

1. What is the total relevant cost of the current inventory policy? (Remember to include safety stocks)

2. What is the economic order quantity?

3. What will be the total relevant cost (including safety stocks) if the company uses the economic order quantity?

4. What is the re-order point?

Answers

1. Total relevant cost Safety stock = (demand per day) x safety period = (9000/250)5 days = 36 x 5 =180 units 

average inventory = safety stock + (order quantity/2) = 180 + (750/2) = 180+ 375 = 555 units 

annual holding costs = average inventory x H = 555 x (25% x $12) = 555 x 3 =$1665 

annual order costs = orders per year x OC = 12 x $80 = $960 

total relevant cost (including safety stock) = annual holding costs + annual order costs = 1665 + 960 = $2625 per annum 

2. Economic order quantity EOQ = 2DC = 2 x 9000 x 80 = 480 000 = 693 units per order H 3 

3. Total relevant costs for EOQ (including safety stocks) TRC = (O x EOQ) + (CHx SS) = (3 x 693) + (3 x 180) = $2619 

4. Re-order point (ROP) ROP = SS + (demand during lead-time) = 180 x (36 x 6) = 396 units

  Previous Page  - Next Page  

Presented By Deepak ABC analysis

o It is the Methods of Inventory/Material control

ABC ANALYSIS STOCK LEVELS EOQ(Economic Order Quantity) Perpetual Inventory System

What is Inventory?o The term INVENTORY is defined as “the systematic control and

regulation of purchase, storage and usage of materials in such a way so as to maintain an even flow of production and at the same time avoiding excessive investment in inventories.”

What is ABC Analysis?o ABC analysis divides the total inventory into 3 classes A,B & C using

the rupee volume, as follows:o class “A” items constitute the most important class of inventories so far

as the proportion in the total value of inventory .The “A” items consists of approximately 15% of the total items , accounts for 80% of the total material usage. This items merit a tightly controlled inventory system

with constant attention to the purchase & stores management. A larger effort per item on only a few items will cost only moderately, but the effort can result in larger savings.

o class “B” items constitute an intermediate position, which constitute approximately 35% of the total items, accounts for approximately 15% of the total material consumption. These items merit a formalized inventory system & periodic attention but the purchase & the stores management.

o class “C” items are quite negligible. It consists remaining 50% items, accounting only 5% of the monetary value of total material usage . Quite relaxed inventory procedures are used.

ABC ANALYSIS OF INVENTORY Class “A” Class “B” Class “C” Ex - In shoes leather forms A grade materials , sole forms B grade materials

and shoe lace forms C grade materials this is ABC analysis in inventory management

ABC Analysis in Medical Stores Inventory Controlo Background: The basic principle of inventory control is ABC based on

cost criteria .o Methods: Based on ABC matrix, economic analysis of drug expenditure

of priced vocabulary of medical stores (PVMS)o section 01 for the year 2003 of a 190 bedded service hospital was under

taken.o Result: Out of 493 drugs in PVMS section 01, only 325 drugs were

being used in the reference hospital. The total cost of drugs usedo was Rupees 55,23,503 . Of these 325 drugs, 47(14.4%) drugs were

Category A , consuming 70% of total expenditure, 73 (22.46 %)o drugs Category B consuming 20% and rest 205 drugs (63.7%) Category

C drugs cost only 10% of expenditure. ITEM ITEMS(%) MONEY VALUE(%) A 10 70 B 20 20 C 70 10 “ A “ Class items (High Consumption Value) “ B” Class items (Moderate

Consumption Value) “ C” Class items (Low Consumption Value) 1.Very strict control. 1.Moderate control

o Loose control

2. No safety stocks or very low safety stocks. 2.Low safety stocks 2.High safety stocks. 3.Maximium follow-up & expediting. 3.Periodic follow-up. 3.Follow –up & expediting in exceptional cases. 4.Rigorous value analysis. 4.Moderate value analysis. 4.Minimum Value Analysis. 5.Must be handled by senior officers. 5. Can be handled by middle management. 5. Can be fully delegated.

6. 6. 6. 7. 7. 7. 8. 8. 8.

CONCLUSIONo At last I conclude that ABC analysis is a vitalo method for control the Inventory.

 

Backorder Reporting

Balanced Scorecard

Benchmarking

CycleTime  

DPMO

Fill Rate

Inventory Accuracy

Inventory ABC Classification

Inventory Finance

Inventory Turns

OnTime Shipping/Delivery

Perfect Order Measure

Performance to Promise

Transportation

Other Metrics

Setting Goals

Inventory Record AccuracyA common calculation is:

Stratify SKU's: (annual usage X standard cost)A items= items representing the top 80% of total dollarsB items= items representing the next 15% of dollarsC items= items representing the bottom 5% of dollars

Cycle count items (usually daily) using a random sample, within the following groupings:A items = 4 times per yearB items = 2 times per yearC items = 1 time per year

Items considered accurate if the actual on-hand quantity matches the perpetual inventory quantity, within the following tolerances:A items = plus or minus 1% quantity variance from perpetual balanceB items = plus or minus 3% quantity variance from perpetual balanceC items = plus or minus 5% quantity variance from perpetual balance

Target should be absolute minimum of 95% for MRP/DRP to function effectively; 99% for best-in-class

 Note: Do NOT do a simplified Cycle Count, adding the positives and negatives, then comparing the sum to the total stated inventory.Example: Item ABC: Stated Inventory = 100, Cycle Count = 95Item BCD: Stated Inventory = 100, Cycle Count =105In this example, if you add the Stated Inventory it equals 200. The Cycle Count sum equals 200 also. This does NOT mean that you have 100% accuracy.This may sound obvious, but I've encountered many companies that use this method. If the items above are A or B items, the the actual Cycle Count Accuracy is 0% (Neither item is correct. Both are 5% off)

Supply Chain Acronyms

Q&A Discussion Thread. 

Reference Link to this website

 

NEWS LETTER

Contact us

 

 

 

 

 

Other Websites