INVENTORY MANAGEMENT AND DEMAND

FORECASTING

COST ASPECT AND MATERIAL

DECOUPLING POINT
COST ASPECT

• Reflenishment Cost (Fixed and Variable cost)

• Carrying Cost (Fixed and Variable cost)
• Stock-out Cost (Fixed and Variable cost)

We can distinguish
 Fixed (independent) costs
 Variable (dependant) costs
COST ASPECT
• REFLENISHMENT COST
– Cost of procurement and inbound logistics costs form a part of
Ordering Cost. Replenishment cost is dependant and varies
based on two factors - The cost of ordering excess and the
Cost of ordering too less.
– Both these factors move in opposite directions to each other.
Ordering excess quantity will result in carrying cost of inventory.
Where as ordering less will result in increase of replenishment
cost and ordering costs.
COST ASPECT

• REFLENISHMENT COST
– These two above costs together are called Total Stocking Cost.
If you plot the order quantity vs the TSC, you will see the graph
declining gradually until a certain point after which with every
increase in quantity the TSC will proportionately show an
increase.
– This functional analysis and cost implications form the basis of
determining the Inventory Procurement decision by answering
the two basic fundamental questions - How Much to Order and
When to Order.
– How much to order is determined by arriving at the Economic
Order Quantity or EOQ.
COST ASPECT

• REFLENISHMENT COST
– Fixed (independent cost)
• Fixed cost of a purchasing department and
other departments responsible for receipts
(rooms, media, salaries, overheads)
• Fixed transport cost (fleet depreciation,
salaries, overheads)
COST ASPECT
• REFLENISHMENT COST
– Variable cost (dependent on a number of orders)
• Order preperation costs
• Quality control costs
• Transport cost (fuel, maintenance)
• Customs clearance fee

NOTE: This can be calculated by multiplying a unit cost

related to single order/delivery and a number of deliveries
realised in the period.
COST ASPECT
• CARRYING COST
– Inventory storage and maintenance involves various types of
costs namely: (i)Inventory Storage Cost (ii)Cost of Capital. The
inventory storage costs as well as cost of capital is dependant
upon and varies with the decision of the management to
manage inventory in house or through outsourced vendors and
third party service providers.
– Inventory carrying involves Inventory storage and management
either using in house facilities or external warehouses owned
and managed by third party vendors.
COST ASPECT
• CARRYING COST
– Inventory Storage Cost
» Inventory storage costs typically include Cost of Building Rental and facility
maintenance and related costs. Cost of Material Handling Equipments, IT
Hardware and applications, including cost of purchase, depreciation or rental
or lease as the case may be. Further costs include operational costs,
consumables, communication costs and utilities, besides the cost of human
resources employed in operations as well as management.
– Cost of Capital
» Includes the costs of investments, interest on working capital, taxes on
inventory paid, insurance costs and other costs associate with legal liabilities.
COST ASPECT

• CARRYING COST
– Fixed (independent cost)
• Depreciation and exploitation costs of a
warehouse (building)
• Depeciation costs of a warehouse
equipment
• salaries plus overheads
COST ASPECT
• CARRYING COST
– Variable costs (dependent on stock quantity)
• Cost of maintaining special storing conditions
• Stock insurance costs
• Cost of losses and stock depreciation
• Cost of a tied-up capital (cost of credit or lost incomes
from a deposit)
• Variable cost over a given period depends on a storing
period (time) and stock value (e.g. purchase price)
COST ASPECT

• STOCK-OUT COSTS
– Stockout cost is the lost income and expense associated with a
shortage of inventory. This cost can arise in two ways, which
are:
– Sales-related. When a customer wants to place an order and there is no
inventory available to sell to the customer, the company loses the gross margin
related to the sale. In addition, the customer may be lost permanently, in which
case the company also loses the margins associated with all future sales.
– Internal process-related. When a company needs inventory for a production run
and the inventory is not available, it must incur costs to acquire the needed
inventory on short notice. For example, the firm may need to pay a rush fee and
overnight delivery charges to obtain the inventory. In addition, the production
planning staff must scramble to adjust the production plan, advancing some other
job in the schedule to replace the job that cannot be run until the required
inventory has been received.
COST ASPECT
• STOCK-OUT COSTS
– Fixed (independent cost)
• Additional transport cost for “emergency” purchase
• Fixed penalty fee paid to the customer
• Permanent loss of a customer (loss of future
incomes)
• Loss of the market reputation (temporary or
permanent loss of a group of customer
• Cost of stopping a product line
COST ASPECT
• STOCK-OUT COSTS
– Variable cost (dependent on the shortage quantity
• Higher price for “emergency” purchase
• Penalty fee based on the number of missing items
• Lost margin income due to particular transaction
• Less margin income due to selling a substitute product
• Cost of postponement (transaction and payment
postponed)
• Cost of lost production
MATERIAL DECOUPLING POINT

• DECOUPLING POINT
– The decoupling point is a standard term given to the position in
the material pipeline where the product flow changes from
“Push” to “Pull”. It should therefore also correspond to the
Demand Penetration Point.
– “The point in the product axis to which the customer’s order
penetrates. It is where order driven and the forecast driven
activities meet. As a rule, the Decoupling point coincides with
an important stock point – in control terms a main stock point –
from which the customer has to be supplied.”
MATERIAL DECOUPLING POINT
MATERIAL DECOUPLING POINT
• DECOUPLING POINT
– The material decoupling point thereby acts as a buffer between
upstream and downstream players in the supply chain. This
enables upstream players to be protected from fluctuating
consumer buying behavior therefore establishing smoother
upstream dynamics while downstream consumer demand is
still met via a product pull from the buffer stock.
MATERIAL DECOUPLING POINT
MATERIAL DECOUPLING POINT
• INDEPENDENT DEMAND
– An inventory of an item is said to be falling into the category of
independent demand when the demand for such an item is not
dependant upon the demand for another item.
• DEPENDENT DEMAND
– Dependent demand means that demand for the product in
question is influenced by the demand for some other product.
The demand for both products can either move in tandem or in
the opposite direction -- both categories are counted as
products with dependent demand.
MATERIAL DECOUPLING POINT
MATERIAL DECOUPLING POINT