CH-9 Managing Inventory in the Supply Chain – Supply Chain Management: A Logistics Perspective : Book Guide

CHAPTER 9 MANAGING INVENTORY IN THE SUPPLY CHAIN LEARNING OBJECTIVES After reading this chapter, you should be able to do the following: • Appreciate the role and importance of inventory in the economy. • List the major reasons for carrying inventory. • Discuss the major types of inventory, their costs, and their relationships to inventory decisions. • Understand the fundamental differences among approaches to managing inventory. • Describe the rationale and logic behind the economic order quantity (EOQ) approach to inventory decision making, and be able to solve some problems of a simple nature. • Understand alternative approaches to managing inventory—just-in-time (JIT), materials requirement planning (MRP), distribution requirements planning (DRP), and vendor-managed inventory (VMI). • Explain how inventory items can be classified. • Know how inventory will vary as the number of stocking points changes. • Make needed adjustments to the basic EOQ approach to respond to several special types of applications. CHAPTER OVERVIEW Introduction The effective management of inventories in the supply chain is one of the key factors for success in any organization. Inventory as an asset on the balance sheet and as a variable expense on the income statement has taken on greater importance as organizations attempt to more effectively manage assets and working capital. However, inventory takes on added importance because of its direct impacts on service levels. As such, inventory management has taken a strategic position in many firms today. Organizations would ideally want to have enough inventory to satisfy the demands of its customers for its products with no lost revenue because of stockouts. However, the organization does not want to have too much inventory on hand because it consumes valuable working capital. Inventory in the U.S. Economy The influence of information technology during the late 1990s and its impact on inventories was reflected in the U.S. economy’s ability to grow dramatically while holding inflation in check. With information technology advances escalating in the early twenty-first century, organizations are still implementing programs to take inventories out of the supply chain. The major cost tradeoff in logistics is between transportation and inventory. However, the cost of fuel today, coupled with capacity constraints in the transportation industry, has escalated the costs of transportation, and it will be interesting to see if the traditional tradeoffs between transportation and inventory costs will remain the same in this new environment. Inventory in the Firm: Rationale for Inventory Inventory plays a dual role in organizations and it impacts the cost of goods sold as well as supporting order fulfillment (customer service). Consumer-packaged goods (CPG) firms and the wholesalers and retailers that are a part of their distribution channels face a special challenge in keeping inventories at acceptable levels because of the difficulty of forecasting demand and increasing expectations from customers concerning product availability. The point is that managing inventory is a critical factor for success in many organizations. Many organizations have responded to this challenge—as indicated by the macro data presented in the previous section—and have reduced inventory levels while maintaining appropriate customer service levels. Their ability to achieve the twin goals of lower inventory (efficiency) and acceptable customer service levels (effectiveness) is based on a number of factors. Batching Economies or Cycle Stocks Batching economies or cycle stocks usually arise from three sources—procurement, production, and/or transportation. Scale economies are often associated with all three, which can result in the accumulation of inventory that will not be used or sold immediately. This means that some cycle stock or inventory will be used up or sold over some period of time. Larger purchased volumes result in lower prices per unit and vice versa. Transportation firms usually offer rate/price discounts for shipping larger quantities. Note that purchase economies and transportation economies are complementary. The third batching economy is associated with production. Many organizations feel that their production costs per unit are substantially lower when they have long production runs of the same product. Uncertainty and Safety Stocks All organizations are faced with uncertainty. On the demand or customer side, there is usually uncertainty in how much customers will buy and when they will buy it. On the supply side, there might be uncertainty about obtaining what is needed from suppliers and how long it will take for the fulfillment of the order. Tradeoff analysis is appropriate and can be accomplished using the appropriate tools to assess the risk and measure the inventory cost. Setting safety stock levels for an organization is both an art and a science. Time/In-Transit and Work-in-Process Stocks The time associated with transportation (e.g., supplier to manufacturing plant) and with the manufacture or assembly of a complex product means that even while goods are in motion, an inventory cost is associated with the time period. The longer the transport time period, the higher the cost. The time period for in-transit inventory and work-in-process (WIP) inventory should be evaluated in terms of the appropriate tradeoffs. The various transportation modes available for shipping freight have different transit time lengths, transit time variability, and damage rates. WIP inventories are associated with manufacturing. The length of time WIP inventory sits in a manufacturing facility waiting to be included in a particular product should be carefully evaluated in relationship to scheduling techniques and the actual manufacturing/assembly technology. Seasonal Stocks Seasonality can occur in the supply of raw materials, in the demand for finished product, or in both. Organizations that are faced with seasonality issues are constantly challenged when determining how much inventory to accumulate. While the supply of the raw material is available during only one part of the year, demand is stable throughout the year. This scenario many times is faced with high storage costs and/or high obsolescence costs and sometimes seasonality can impact transportation as well. Anticipatory Stocks A fifth reason to hold inventory arises when an organization anticipates that an unusual event might occur that will negatively impact its source of supply. Examples of these events would include strikes, significant raw materials or finished goods price increase, a major shortage of supply because of political unrest or weather. Summary of Inventory Accumulation Most organizations will accumulate some level of inventory for very good reasons. In many instances, the inventory cost might be more than offset by savings in other areas. The basic principle is that decisions to accumulate inventory need to be evaluated using a tradeoff framework. In addition to the other reasons discussed, there are other reasons for accumulating inventory such as maintaining suppliers or employees. The Importance of Inventory in Other Functional Areas Logistics interfaces with an organization’s other functional areas, such as marketing and manufacturing. The interface is usually more prominent in the inventory area. As background for analyzing the importance of inventory in the logistics system, several aspects of how logistics relates to other functional business areas with respect to inventory must be discussed. •Marketing - The primary mission of marketing is to identify, create, and help satisfy demand for an organization’s products/services. Marketing tends to have a favorable view on holding sufficient and/or extra inventory to ensure product availability to meet customer needs. •Manufacturing - In many organizations, manufacturing operations are measured by how efficiently they can produce each unit of output. This situation typically means that manufacturing operations tend to be optimized when they have long production runs of a single product while minimizing the number of changeovers. These long productions runs will result in high inventory levels but low labor and machine costs per unit. •Finance – Inventories impact both the income statement and balance sheet of an organization. Inventories create both an asset and liability on the balance sheet as well as a cash flow impact on the income statement. As such, finance usually looks favorably at low inventories to increase inventory turns, reduce liabilities and assets, and increase cash flow to the organization. Proper inventory management and control affects customers, suppliers, and an organization’s functional areas. In spite of the many possible advantages to holding inventory in a logistics system, the costs of holding this inventory are a major expense. So, in making decisions about inventory levels, an organization needs to assess the tradeoffs between costs and the resulting service. Inventory Costs Inventory costs are important for three reasons. First, inventory costs represent a significant component of logistics costs in many organizations. Second, the inventory levels that an organization maintains at nodes in its logistics network will affect the level of service the organization can offer its customers. Third, cost tradeoff decisions in logistics frequently depend on and ultimately impact inventory carrying costs. Inventory Carrying Costs Inventory carrying costs are those that are incurred by inventory at rest and waiting to be used. From a finished goods inventory perspective, inventory carrying costs represent those costs associated with manufacturing and moving inventory from a plant to a distribution center to await an order. There are four major components of inventory carrying cost: capital cost, storage space cost, inventory service cost, and inventory risk cost. •Capital Costs - Sometimes called the interest or opportunity cost, capital cost focuses on the cost of capital tied up in inventory and the resulting lost opportunity from not investing that capital elsewhere. One calculation method is the hurdle rate, the minimum rate of return on new investments. Another way of calculating capital cost is for an organization to use its weighted average cost of capital (WACC). WACC is the weighted average percent of debt service of all external sources of funding, including both equity and debt. The inventory valuation method used is critical to accurately determining capital cost and is subsequently critical to determining overall inventory carrying cost. The commonly accepted accounting practice of valuing inventory at fully allocated manufacturing cost is unacceptable in inventory decision making because raising or lowering inventory levels financially affects only the variable portion of inventory value and not the fixed portion of allocated cost. •Storage Space Cost – This includes handling costs associated with moving products into and out of inventory, as well as storage costs such as rent, heating, and lighting. Storage space costs are relevant to the extent that they either increase or decrease as inventory levels rise or fall. •Inventory service cost - This includes insurance and taxes. •Inventory risk cost – This is the final major component of inventory carrying cost and reflects the very real possibility that inventory dollar value might decline for reasons beyond an organization’s control. •Calculating the Cost of Carrying Inventory - Calculating the cost to carry (or hold) a particular item in inventory involves three steps. First, the value of the item stored in inventory must be determined. Second, determine the cost of each individual carrying cost component and add them together to determine the total direct costs consumed by the item while being held in inventory. Two types of costs should be considered here: variable-based costs and value-based costs. Third, divide the total costs calculated in Step 2 by the value of the item determined in Step 1. •Nature of Carrying Cost - Items with basically similar carrying costs should use the same estimate of carrying cost per dollar value. However, items subject to rapid obsolescence or items that require servicing to prevent deterioration might require separate cost estimates. Ordering and Setup Cost A second cost affecting total inventory cost is ordering cost or setup cost. •Ordering Cost - This refers to the expense of placing an order and does not include the cost of the product itself. •Setup cost – This refers more specifically to the expense of changing or modifying a production or assembly process to facilitate line changeovers. •Nature of ordering and setup costs - The costs associated with ordering inventory have both fixed and variable components. Separating the fixed and variable portions of order/setup cost is essential. When calculating annual ordering costs, organizations usually start with the cost or charge associated with each individual order or setup. •Future Perspective - Although an accurate, comprehensive statement of inventory cost must include the portion related to ordering and setup activities, the magnitude of these costs is likely to decrease in the future. Considering the move to highly automated systems for order management and order processing and the streamlining of inventory receiving practices, the variable cost of handling individual orders is certain to decrease significantly. In organizations where vendor-managed inventory (VMI) programs are being utilized, the concept of placing orders itself loses significance, and therefore the concept of ordering cost loses relevance. Carrying Cost versus Order Cost Order cost and carrying cost respond in opposite ways to changes in the number of orders or size of individual orders. Total cost also responds to changes in order size. Expected Stockout Cost Stockout cost is the cost associated with not having a product available to meet demand and several consequences might occur. First, the customer might be willing to wait and accept a later shipment (back order). Second, the customer might decide to purchase a competitor’s product in this instance, resulting in a direct loss of profit and revenue for the supplier. Third, the customer might decide to permanently switch to a competitor’s product. Stockout costs can be difficult to determine because of the uncertainty of future consequences that might occur. Stockouts will occur because of the uncertainties in both demand and lead time. •Safety Stock - Determining safety stock levels and the related inventory carrying costs might be relatively straightforward, but not so for determining the cost of a lost sale. Likewise, determining the cost of a production shutdown for lack of raw materials is also a challenge. •Cost of Lost Sales - Determining safety stock levels and the related inventory carrying costs might be relatively straightforward, but not so for determining the cost of a lost sale. Likewise, determining the cost of a production shutdown for lack of raw materials is also a challenge. In-Transit Inventory Carrying Cost Another inventory carrying cost that many organizations ignore is that of carrying inventory in transit. Someone will own the inventory while it is in transit and will incur the resulting carrying costs. In-transit inventory carrying cost becomes especially important on global moves since both distance and time from the shipping location increase. •Determining the Cost of In-transit Inventory -First, the capital cost of carrying inventory in transit generally equals that of carrying inventory in a warehouse. If the organization owns the inventory in transit, the capital cost will be the same. Second, storage space cost generally will not be relevant to inventory in transit since the transportation service provider typically includes equipment (space) and necessary loading and handling costs within its overall transportation price. Third, while taxes generally are not relevant to inventory service costs, the need for insurance requires special analysis. Fourth, obsolescence or deterioration costs are lesser risks for inventory in transit because the transportation service typically takes only a short time. Also, the fact that inventory is moving to the next node in the supply chain assumes that there is a demand for that inventory, lessening the probability that it will not be sold. Generally, carrying inventory in transit usually costs less than carrying inventory in the warehouse. However, an organization seeking to determine actual cost differences more accurately should examine the details of each inventory cost in depth. Fundamental Approaches to Managing Inventory Managing inventory involved two fundamental questions: how much to order and when to order. But now questions regarding where inventory should be held and what specific line items should be available at specific locations pose challenges to managers. The current dynamic operating environment has caused organizations to examine their inventory policies as well as their customer service policies and find the optimal solution that balances both service and cost. Many approaches exist to identify and analyze this tradeoff. Organizations will choose the approach that serves them the best as defined by their markets and corporate goals. Several factors make this objective achievable: (1) “real-time” order management systems, (2) improved technologies to manage logistics information, (3) more flexible and reliable transportation resources, and (4) improvements in the ability to position inventories so that they will be available when and where they are needed. Key Differences Among Approaches to Managing Inventory Differences in approaches include dependent versus independent demand, pull versus push, and system-wide versus single-facility solutions to inventory management decisions. •Dependent Versus Independent Demand - Demand for a given inventory item is termed “independent” when such demand is unrelated to the demand for other items. Conversely, demand is defined as “dependent” when it is directly related, or derives from, the demand for another inventory item or product. An important point to remember is that developing inventory policies for items exhibiting independent demand requires that forecasts be developed for these items. The approaches to inventory management to be discussed include just-in-time (JIT), materials requirement planning (MRP), and manufacturing resource planning (MRP II). These are usually associated with items having dependent demand. Alternatively, DRP generally involves the movement of items having independent demand. The economic order quantity (EOQ) and vendor-managed inventory approaches apply to both independent and dependent demand items. •Pull Versus Push - The “pull” approach relies on customer orders to move product through a logistics system, while the “push” approach uses inventory replenishment techniques in anticipation of demand to move products. A principal attribute of pull systems is that they can respond quickly to sudden or abrupt changes in demand because they produce to an order and have very little, if no, finished goods inventory. Pull systems usually run on short-term forecasts, allowing them the flexibility to adapt to swings in demand. JIT is a pull system since organizations place orders for more inventory only when the amount on hand reaches a certain minimum level, thus “pulling” inventory through the logistics system as needed. Having established a master production schedule, MRP develops a time-phased approach to inventory scheduling receipt. MRP and MRP II approaches are push based because they generate a list of required materials in order to assemble or manufacture a specific amount of finished products DRP involves the allocation of available inventory to meet market demands. DRP, on the outbound or physical distribution side of logistics, is also a push-based strategy. VMI uses preset reorder points and economic order quantities along with on-hand inventory levels in customers’ warehouses to generate replenishment orders and can be considered a push approach. Finally, the EOQ approach is generally a pull approach, •System-Wide Versus Single-Facility Solutions - A final inventory management issue is whether the selected approach represents a system-wide solution or whether it is specific to a single facility, such as a distribution center. Basically, a system-wide approach plans and executes inventory decisions across multiple nodes in the logistics system. MRP and DRP are typically system-wide approaches to managing inventory. Both approaches plan inventory releases and receipts between multiple shipping and receiving points in the network. On the other hand, a single-facility approach plans and executes shipments and receipts between a single shipping point and receiving point. EOQ and JIT are normally considered single-facility solutions. Both release orders from a single facility to a specific supplier for inventory replenishment. Usually, MRP and DRP are employed to plan system inventory movements, and EOQ and JIT are used to execute these plans at a single-facility level. VMI can be used to plan system-wide replenishment as well as execute replenishment on a single-facility basis. Principal Approaches and Techniques for Inventory Management The variables affecting the decision regarding the approach to inventory management are almost overwhelming. Models developed to aid in decision making frequently represent a simplified reality. The complexity and accuracy of a model relate to the assumptions the model makes. Often, the more the model assumes, the easier the model is to work with and understand; however, simple model output is often less accurate. Fixed Order Quantity Approach (Condition of Certainty) The fixed order quantity model involves ordering a fixed amount of product each time reordering takes place, and uses a minimum stock level to determine when to reorder the fixed quantity. This is called the reorder point. When the number of units of an item in inventory reaches the reorder point, the fixed order quantity (the EOQ) is ordered. The fixed order quantity model is often referred to as the two-bin model. When the first bin is empty, the organization places an order. Both notions (trigger and bin) imply that an organization will reorder inventory when the amount on hand reaches the reorder point. •Inventory Cycles - Figure 9-5 shows the fixed order quantity model with three inventory cycles, or periods. Establishing a reorder point provides a trigger or signal for reordering the fixed quantity. Business inventory situations base the reorder point on lead time and the demand during lead time. The constant monitoring necessary to determine when inventory has reached the reorder point makes the fixed order quantity model a perpetual inventory system. •Simple EOQ Model The following are the basic assumptions of the simple EOQ model: 1. A continuous, constant, and known rate of demand 2. A constant and known replenishment or lead time 3. All demand is satisfied 4. A constant price or cost that is independent of the order quantity (i.e., no quantity discounts) 5. No inventory in transit 6. One item of inventory or no interaction between items 7. Infinite planning horizon 8. Unlimited capital •Mathematical Formulation The EOQ model can be developed in standard mathematical form, using the following variables: Below is the calculation of Q, the economic order quantity. •Reorder Point - Knowing when to order was as necessary as knowing how much to order. The when, reorder point, depends on the inventory level on hand. Under the assumptions of certainty, an organization needs enough inventory to last during the replenishment time or lead time. Therefore, given a known lead time, multiplying lead time length by daily demand determines the reorder point. Replenishment time consists of several components: order transmittal, order processing, order preparation, and order delivery. •A Note Concerning the Min-Max Approach - One widely used adaptation of the fixed order quantity approach is the min-max inventory management approach, which applies when demand might be larger and when the amount on hand might fall below the reorder point before the organization initiates a replenishment order. In this case, the min-max approach increments the amount ordered by the difference between the reorder point and the amount on hand. •Summary and Evaluation of the Fixed Order Quantity Approach - Many organizations have become more sophisticated in their use of EOQ-based approaches, adapting them to include a push as well as a pull orientation. As a result, many EOQ-based systems effectively blend both push and pull concepts. One principal shortcoming of the EOQ-based approach is that it suits inventory decision making at a single facility more than it suits decision making at multiple locations and can sometimes encounter problems when parallel points in the same logistics system experience peak demands simultaneously. Fixed Order Quantity Approach (Conditions of Uncertainty) Until now, the reorder point was based on the amount of inventory on hand and demand was known and constant. When inventory on hand reached zero, a new order was received in an economic order quantity and stockout costs were not incurred. Most firms would not operate under conditions of certainty for a variety of reasons and several factors can affect lead time. Because of all the potential factors that can influence the reliability of demand and lead time, inventory models need to be adjusted to account for this uncertainty. •Reorder Point—A Special Note - The reorder point under the basic model is the on-hand inventory level needed to satisfy demand during lead time. Calculating the reorder point is relatively easy since demand and lead time are constant. Under uncertainty, an organization must reformulate the reorder point to allow for safety stock. In effect, the reorder point becomes the average daily demand during lead time plus the safety stock. •Uncertainty of Demand - The first factor that might cause uncertainty deals with demand or usage rate. While focusing on this variable, the following assumptions concerning EOQ still apply: 1. A constant and known replenishment or lead time 2. A constant price or cost that is independent of order quantity or time 3. No inventory in transit 4. One item of inventory or no interaction between items 5. Infinite planning horizon 6. No limit on capital availability In order to find the number of units the organization expects to be short or in excess at each of the seven possible reorder points. The variables for this calculation are as follows: The total cost model can be expanded to include the safety stock and stockout cost as shown using the formula shown below. The optimum solution to the problem with conditions of uncertainty is a fixed order quantity of 245 units, and the organization will reorder this amount when inventory reaches a level of 140 units (the calculated reorder point). This situation requires a recalculation of total annual cost as shown using the formula shown below. •Uncertainty of Demand and Lead Time Length - Consider the possibility that both demand and lead time might vary and builds on the preceding section in attempting to make this inventory approach more realistic and determining how much safety stock to carry will be noticeably more complex now than when only demand varied. Borrowing Formula 9.1 presented in this chapter, the mean and standard deviation for demand during lead time can be calculated as shown in Formulas 9-12 and 9-13. Fixed Order Interval Approach The second form of the fixed order interval approach to inventory management is also called the fixed period or fixed review period approach, which involves ordering inventory at fixed or regular intervals. In comparison with the basic EOQ approach, the fixed interval model does not require close surveillance of inventory levels; thus, the monitoring is less expensive, which is best used for inventory items that have a relatively stable demand. Using this approach for volatile demand items might quickly result in a stockout since time triggers orders rather than inventory levels. Like the fixed order quantity approach to inventory management, the fixed order interval approach typically combines elements of both the pull and push philosophies. Summary and Evaluation of EOQ Approaches to Inventory Management There are four basic forms of the EOQ inventory model: fixed quantity/fixed interval, fixed quantity/irregular interval, irregular quantity/fixed interval, and irregular quantity/irregular interval, each with its own advantages and disadvantages, based on factors such as lead time, demand, and variability. Firms that are expanding beyond the basic order quantity and order interval approaches have had considerable success with concepts such as JIT, MRP, MRP II, and DRP. Additional Approaches to Inventory Management The interest in reducing inventory levels along the supply chain is indicative of the importance of inventory as a cost of doing business as for many, inventory is the first or second largest asset on the balance sheet. Firms can reduce their costs of doing business and improve their return on investment or assets (ROI/ROA) by decreasing inventory levels as long as service levels are met when decreasing inventories. There are several approaches to inventory management which will be examined: JIT, MRP, and DRP. The Just-in-Time Approach This section emphasizes additional factors that characterize a true just-in-time system. •Definition and Components of JIT Systems – Generally, JIT systems are designed to manage lead times and to eliminate waste. Ideally, product should arrive exactly when an organization needs it, with no tolerance for late or early deliveries. Many JIT systems place a high priority on short, consistent lead times. However, in a true JIT system, the length of the lead time is not as important as the reliability of the lead time. The JIT concept is an Americanized version of the Kanban system, which the Toyota Motor Company developed in Japan. Kanban refers to the cards attached to carts delivering small amounts of needed components and other materials to locations within manufacturing facilities. Each card precisely details the necessary replenishment quantities and the exact time when the replenishment activity must take place. Four major elements underlie the JIT concept: zero inventories; short, consistent lead times; small, frequent replenishment quantities; and high quality, or zero defects. JIT is an operating concept based on delivering materials in exact amounts and at the precise times that organizations need them—thus minimizing inventory costs. JIT can improve quality and minimize waste and completely change the way an organization performs its logistics activities. The underlying theme of the phrase “just-in-time” suggests that inventories should be available when an organization needs them. Generally, just-in-time systems are designed to manage lead times and to eliminate waste. Four major elements underlie the JIT concept: zero inventories; short, consistent lead times; small, frequent replenishment quantities; and high quality, or zero defects. •JIT Versus EOQ Approaches to Inventory Management – There are key ways in which the JIT philosophy differs from customary inventory management in many organizations. •First, JIT attempts to eliminate excess inventories for both the buyer and the seller. •Second, JIT systems typically involve short production runs and require production activities to change frequently from one product to another. This approach minimizes the economies of scale that are generated from long production runs of a single product. It also results in higher changeover costs, assuming that the cost of each changeover is constant. However, shorter production runs will result in lower finished goods inventory levels. So, the tradeoff here is between changeover costs and finished goods inventory levels. •Third, JIT minimizes wait times by delivering materials and products when and where an organization needs them. Automobile manufacturers, using JIT, have components and parts delivered to the assembly line when needed, where needed, and in the exact quantity needed. •Fourth, the JIT concept uses short, consistent lead times to satisfy the need for inventory in a timely manner. This is why many suppliers tend to locate their facilities close to their customers who are planning to use the JIT approach. •Fifth, JIT-based systems rely on high-quality incoming parts and components and on exceptionally high-quality inbound logistics systems. •Sixth, the JIT concept requires a strong, mutual commitment between the buyer and the seller, one that emphasizes quality and seeks win-win decisions for both parties. •SUMMARY and Evaluation of JIT - The just-in-time concept can enable logistics managers to reduce unit costs and to enhance customer service. A close examination of JIT-based approaches shows that they resemble the more reactive systems such as the EOQ and fixed order quantity approaches since JIT is demand responsive. The principal difference between JIT and the more traditional approaches is the JIT commitment to short, consistent lead times and to minimizing or eliminating inventories. In effect, JIT saves money on downstream inventories by placing greater reliance on improved responsiveness and flexibility. Ideally, the use of JIT helps to synchronize the logistics system so thoroughly that its operation does not depend on inventories strategically located at points throughout the logistics system. Materials Requirements Planning Another inventory and scheduling approach that has gained wide acceptance is materials requirements planning. MRP deals specifically with supplying materials and component parts whose demand depends on the demand for a specific end product. Only recently have technology and information systems permitted organizations to benefit fully from MRP and to implement such an approach. •Definition and Operation of MRP Systems - MRP begins by determining how much end products (independent demand items) customers desire and when they are needed, then disaggregates the timing and need for components based on the end-product demand by using the following key elements: o Master production schedule (MPS) o Bill of materials file (BOM) o Inventory status file (ISF) o MRP program o Outputs and reports •Summary and Evaluation of MRP Systems - The MRP program develops a time-phased approach to inventory scheduling and inventory receipt. As it generates a list of required materials in order to assemble or manufacture specified number of independent demand items, the system MRP represents a push approach. Typically, MRP applies primarily when the demand for parts and materials depends on the demand for some specific end product. Since actual demand is key to the establishment of production schedules, MRP systems can react quickly to changing demand for finished products. MRP can achieve objectives more commonly associated with the JIT-based approaches, while at times decisions made through the pull concept do not reflect the future events for which the JIT policies are intended. The principal advantages of most MRP-based systems include the following: o They attempt to maintain reasonable safety stock levels and to minimize or eliminate inventories whenever possible. o They can identify process problems and potential supply chain disruptions long before they occur and take the necessary corrective actions. o Production schedules are based on actual demand as well as on forecasts of independent demand items. o They coordinate materials ordering across multiple points in an organization’s logistics network. o They are more suitable for batch, intermittent assembly, or project processes. o Shortcomings of MRP-based approaches include the following: o Their application is computer intensive, and making changes is sometimes difficult once the system is in operation. o Both ordering and transportation costs might rise as an organization reduces inventory levels and possibly moves toward a more coordinated system of ordering product in smaller amounts to arrive when the organization needs it. o They are not usually as sensitive to short-term fluctuations in demand as are order point approaches (although they are not as inventory intensive, either). o They frequently become quite complex and sometimes do not work exactly as intended. •A Note Concerning MRPII Systems - Manufacturing resource planning has a far more comprehensive set of tools than MRP alone. Although MRP is a key step in MRPII, MRPII allows an organization to integrate financial planning and operations/logistics. MRPII serves as an excellent planning tool and helps describe the likely results of implementing strategies in areas such as logistics, manufacturing, marketing, and finance. Thus, it helps an organization to conduct “what if?” analyses and to determine appropriate product movement and storages strategies at and between points in the logistics system. Distribution Requirements Planning Distribution requirements planning is a widely used and potentially powerful technique for outbound logistics systems to help determine the appropriate level of inventory to be held to meet both cost and service objectives. DRP determines replenishment schedules between an organization’s manufacturing facilities and its distribution centers. DRP is usually coupled with MRP systems in an attempt to manage the flow and timing of both inbound materials and outbound finished goods. The underlying rationale for DRP is to more accurately forecast demand and to explode that information back for use in developing production schedules. DRP develops a projection for each SKU and requires the following: • Forecast of demand for each SKU • Current inventory level of the SKU (balance on hand, BOH) • Target safety stock • Recommended replenishment quantity • Lead time for replenishment •Summary and Evaluation of DRP - A DRP system can accomplish for outbound shipments what MRP accomplishes for inbound shipments and is an example of a push approach and can be used for both single-facility and system-wide applications. The key to a successful DRP approach is having accurate demand forecasts by SKU by distribution center. Vendor-Managed Inventory A relatively new inventory management technique, vendor-managed inventory, manages inventories outside an organization’s logistics network or is a technique to manage its inventories held in its customer’s distribution centers. The basic principles underlying the concept of VMI are relatively simple. First, the supplier and its customer agree on which products are to be managed using VMI in the customer’s distribution centers. Second, an agreement is made on reorder points and economic order quantities for each of these products. Third, as these products are shipped from the customer’s distribution center, the customer notifies the supplier, by SKU, of the volumes shipped on a real-time basis. This notification is also called “pull” data. VMI was traditionally used for independent demand items between suppliers and Retailers and can be used for both independent and dependent demand items. Many organizations are now using VMI in conjunction with CPFR to manage system-wide inventories. Remember that CPFR is a concept that allows suppliers and their customers to mutually agree upon system-wide demand for products. A major benefit of VMI is the knowledge gained by the supplier of real-time inventory levels of its products at its customer locations. The use of VMI to manage inventories is not affected by which organization owns those inventories. Some customers have been investigating the use of what can be called almost consignment inventory as the supplier manages and owns the inventory in the customer’s distribution until that inventory is pulled for shipment. Classifying Inventory Multiple product lines and inventory control require organizations to focus on more important inventory items and to utilize more sophisticated and effective approaches to inventory management. Inventory classification is usually a first step toward efficient inventory management. ABC Analysis This classification technique assigns inventory items to one of three groups according to the relative impact or value of the items that make up the group. A items are considered to be the most important, with B items being of lesser importance, and C items being the least important. Important to remember here is that the criteria used to evaluate an item will determine the group to which it is assigned. Pareto’s Law, or the “80–20 Rule,” - Based on the principle that a relatively small percentage of a population might account for a large percentage of the overall impact or value. This rule has been found to exist in many practical situations. ABC classification is relatively simple. The first step is to select some criterion, such as revenue, for developing the ranking. The next step is to rank items in descending order of importance according to this criterion and to calculate actual and cumulative total revenue percentages for each item. This calculation will allow the items to be grouped into the ABC categories. Quadrant Model This is typically used to classify raw materials, parts, or components for a manufacturing firm, the quadrant model can also be used to classify finished goods inventories using value and risk to the firm as the criteria. Value is measured as the value contribution to profit; risk is the negative impact of not having the product available when it is needed. Inventory at Multiple Locations—The Square-Root Rule The square-root rule helps determine the extent to which inventories might be reduced through such a consolidation strategy. In general, the greater the number of stocking locations, the greater the amount of inventory needed to maintain customer service levels. Conversely, as inventories are consolidated into fewer stocking locations, aggregate inventories will decrease. The square-root rule states that total safety stock inventories in a future number of facilities can be approximated by multiplying the total amount of inventory in existing facilities by the square root of the number of future facilities divided by the number of existing facilities. Mathematically, this relationship can be stated as shown in the below formula. The model is based on several reasonable assumptions: (1) inventory transfers between stocking locations are not common practice; (2) lead times do not vary, and thus inventory centralization is not affected by inbound supply uncertainty; (3) customer service levels, as measured by inventory availability, are constant regardless of the number of stocking locations; and (4) demand at each location is normally distributed. Combining the square-root rule with ABC analysis explains why aggregate inventories are reduced when stocking locations are reduced. SUMMARY •Inventory as a percent of overall business activity continues to decline. Explanatory factors include greater expertise in managing inventory, innovations in information technology, greater competitiveness in markets for transportation services, and emphasis on reducing cost through the elimination of non-value-adding activities. •As product lines proliferate and the number of SKUs increases, the cost of carrying inventory becomes a significant expense of doing business. •There are a number of principal reasons for carrying inventories. Types of inventory include cycle stock, work-in-process, inventory in transit, safety stock, seasonal stock, and anticipatory stock. •Principal types of inventory cost are inventory carrying cost, ordering and setup cost, expected stockout cost, and in-transit inventory carrying cost. •Inventory carrying cost is composed of capital cost, storage space cost, inventory service cost, and inventory risk cost. There are precise methods to calculate each of these costs. •Choosing the appropriate inventory model or technique should include an analysis of key differences that affect the inventory decision. These differences are determined by the following questions: (1) Is the demand for the item independent or dependent? (2) Is the distribution system based upon a push or pull approach? (3) Do the inventory decisions apply to one facility or to multiple facilities? •Traditionally, inventory managers focused on two important questions to improve efficiency, namely, how much to reorder from suppliers and when to reorder. •The two aforementioned questions were frequently answered using the EOQ model, trading inventory carrying cost against ordering costs, and then calculating a reorder point based on demand or usage rates. •The two basic forms of the EOQ model are the fixed quantity model and the fixed interval model. The former is the most widely used. Essentially, the relevant costs are analyzed (traded off), and an optimum quantity is decided. This reorder quantity will remain fixed unless costs change, but the intervals between orders will vary depending on demand. •The basic EOQ model can be varied or adapted to focus more specifically on decisions that are impacted by inventory-related costs, such as shipment quantities where price discounts are involved. •Just-in-time inventory management captured the attention of many U.S. organizations during the 1970s, especially the automobile industry. As the name implies, the basic goal is to minimize inventory levels with an emphasis on frequent deliveries of smaller quantities and alliances with suppliers or customers. To be most effective, JIT should also include quality management. •Materials requirements planning and distribution requirements planning are typically used in conjunction with each other. In addition, a master production schedule is utilized to help balance demand and supply of inventory. DRP is used on the outbound side of a logistics system. Demand forecasts of individual SKUs are developed to drive the DRP model. Then, an MPS schedule is developed to meet the scheduled demand replenishment requirements. •VMI is used to manage an organization’s inventories in its customers’ distribution centers. Using pull data, suppliers monitor inventory levels and create orders to ship product to bring inventory levels up to an economic order quantity in the customers’ distribution centers. •ABC analysis is a useful tool to improve the effectiveness of inventory management. Another useful tool is the quadrant model. •When organizations are adding warehouses to their logistics networks, a frequently asked question is, “How much additional inventory will be required?” The square-root rule is a technique that can be used to help answer this question. ANSWERS TO STUDY QUESTIONS 1. Explain why inventory costs and inventory levels have declined relative to GDP over the last 20 years. Is this beneficial to the economy? Why or why not? The influence of information technology during the late 1990s and its impact on inventories was reflected in the U.S. economy’s ability to grow dramatically while holding inflation in check. This exchange of “information for inventory” showed the impact that inventories have on our economy. With information technology advances escalating in the early twenty-first century, organizations are still implementing programs to take inventories out of the supply chain. The results of this aggressive management of inventories can be seen in Table 9-1, which shows inventory investment as a percent of U.S. gross domestic product (GDP) from 1996 through 2014. As would be expected, the level or value of inventory increases with growth in the U.S. economy. However, the important question is whether total inventory in the economy grows at the same rate as GDP. Obviously, it is best for inventory to increase at a slower rate than GDP. This means that the economy is generating more revenue with less assets and working capital investment. Table 9-1 shows that the nominal GDP grew by 135 percent in the time period between 1996 and 2014 while the value of business inventory increased by 101.3 percent during the same time period. However, inventory costs as a percent of GDP declined from 16.3 percent in 1996 to 14.3 percent in 2014. So, even though the absolute value of inventory increased during this time period, it decreased as a percent of GDP. This declining trend indicates that the economy is producing more revenue with less assets and working capital. While the trend is down, the year-to-year changes indicate the element of volatility faced by many organizations. The focus of these data should be on the trend, which clearly indicates a relative decline in inventory value and inventory carrying cost as a percent of GDP—a positive metric for the economy and business organizations in general. Inventories represent a cost of doing business and are included in the prices of products and services. Reductions in inventory costs, especially if there is no decline in customer service, are beneficial to both buyers and sellers. 2. What are the major components of inventory carrying cost? How would you measure capital cost for making inventory policy decisions? Inventory carrying costs are those that are incurred by inventory at rest and waiting to be used. From a finished goods inventory perspective, inventory carrying costs represent those costs associated with manufacturing and moving inventory from a plant to a distribution center to await an order. There are four major components of inventory carrying cost: capital cost, storage space cost, inventory service cost, and inventory risk cost. Sometimes called the interest or opportunity cost, capital cost focuses on the cost of capital tied up in inventory and the resulting lost opportunity from investing that capital elsewhere. The opportunity cost of this inventory is the return on capital the organization might have realized if it had invested in another opportunity rather than in raw materials, plants, and labor. Another way of calculating capital cost is for an organization to use its weighted average cost of capital (WACC). WACC is the weighted average percent of debt service of all external sources of funding, including both equity and debt. This method reflects the direct debt service costs of having capital tied up in inventory. Normally only direct materials, direct labor, and direct plant cost are included in the out-of-pocket investment in inventory. Including inbound transportation costs to a distribution center in inventory value is consistent with this notion of including variable costs in inventory value. Storage space cost includes handling costs associated with moving products into and out of inventory, as well as storage costs such as rent, heating, and lighting. Contrast the use of public warehousing versus private warehousing as with public warehousing, almost all handling and storage costs vary directly with the level of stored inventory. As a result, these variable costs are relevant to decisions regarding inventory. When an organization uses private warehousing, however, many storage space costs (such as depreciation on the building) are fixed and are not relevant to inventory carrying costs. Inventory service cost includes insurance and taxes. Depending on the product value and type, the risk of loss or damage might require high insurance premiums. Inventory risk cost reflects the very real possibility that inventory dollar value might decline for reasons beyond an organization’s control. Any calculation of inventory risk costs should include the costs associated with obsolescence, damage, pilferage, and other risks to stored products. The extent to which inventoried items are subject to such risks will affect the inventory value and thus the carrying cost. 3. How can inventory carrying cost be calculated for a specific product? What suggestions would you offer for determining the measure of product value to be used in this calculation? Calculating the cost to carry (or hold) a particular item in inventory involves three steps. First, the value of the item stored in inventory must be determined. Each organization has predetermined accounting practices to determine the value of inventory for balance sheet purposes. The most relevant value measure for determining carrying costs is the cost of goods sold or the direct labor, materials, and overhead consumed by that item plus the direct costs of moving that item from the manufacturing facility into a distribution center for storage. Second, determine the cost of each individual carrying cost component and add them together to determine the total direct costs consumed by the item while being held in inventory. Two types of costs should be considered here: variable-based costs and value-based costs. Variable-based costs are those that are specifically out-of-pocket expenditures, for example, inbound freight expense to the distribution center. Value-based costs are those that use the total value (or total direct costs consumed) of the item at the location where carrying costs are being determined, for example, taxes. Normally, inventory carrying costs are calculated on an annual basis. This assumes that the item will be held in storage for a one-year time period. These two costs must be adjusted for the actual length of time the item will be in storage. One word of caution when calculating inventory carrying costs: a decision must be made (in accordance with the organization’s accounting standards) as to which costs are “one-time” and which costs are “reoccurring.” This will be especially true when the length of time an item is stored will be greater than one year. 4. Explain the differences between inventory carrying costs and ordering costs. As shown in Table 9-9, order cost and carrying cost respond in opposite ways to changes in the number of orders or size of individual orders. Total cost also responds to changes in order size. Close examination indicates that order costs initially decrease more rapidly than carrying costs increase, which decreases total costs. In other words, a positive tradeoff occurs, since the marginal savings in order costs exceed the marginal increase in inventory carrying costs. However, at a certain point, this relationship begins to change and total costs start to increase. A negative tradeoff occurs here because the marginal order cost savings are less than the marginal carrying cost increase. 5. Why is it usually more difficult to determine the cost of lost sales for finished goods than it is for raw materials inventories? Determining safety stock levels and the related inventory carrying costs might be relatively straightforward, but not so for determining the cost of a lost sale as there are formulas and criteria that assist with inventory questions. However lost sales calculations are much more difficult, particularly where the customer chooses an alternative vendor. 6. How does inventory carrying cost for inventory in transit differ from the cost of inventory at rest? Another inventory carrying cost that many organizations ignore is that of carrying inventory in transit. This cost might be less apparent than those discussed earlier. However, under certain circumstances, it might represent a very significant expense. Remember, someone will own the inventory while it is in transit and will incur the resulting carrying costs. For example, an organization selling its products “free-onboard” (FOB) destination is responsible for transporting the products to its customers, since title does not pass until the products reach the customer’s facility. Financially, the product remains under the ownership of the shipper until it is unloaded from the transportation vehicle at the customer’s location. In-transit inventory carrying cost becomes especially important on global moves since both distance and time from the shipping location both increase. Since this “moving” inventory is shipper-owned until delivered to the customer, the shipper should consider its delivery time part of its inventory carrying cost. The faster delivery occurs, the sooner the transaction is completed and the faster the shipper receives payment for the shipment. This also means the shipper owns the product in transit for a shorter period of time. Since faster transportation typically means higher transportation cost, the shipper might want to analyze the tradeoff between transportation cost and the cost of carrying inventory in transit. 7. What is the difference between independent and dependent demand items? Why is this distinction important to inventory managers? Demand for a given inventory item is termed “independent” when such demand is unrelated to the demand for other items. Conversely, demand is defined as “dependent” when it is directly related, or derives from, the demand for another inventory item or product. For example, the demand for a desktop computer is independent, while the demand for its computer chip is dependent. This dependency can be vertical (the desktop needs the chip for assembly) or horizontal (the desktop needs an instruction manual for final delivery to customer). So, for many manufacturing processes, basic demand for raw materials, component parts, and subassemblies depends on the demand for the finished product. In contrast, the demand for the end-use items, which are typically sold to a customer, is independent of the demand for any other higher-order manufactured item. An important point to remember is that developing inventory policies for items exhibiting independent demand requires that forecasts be developed for these items. Alternatively, forecasting is less relevant for items having dependent demand, since the required quantities for these items depend entirely on the demand for the end-use product. So, once the difficult task of forecasting demand for end-use items is completed, determining the demand for dependent items requires simple calculations based on the bill of materials for that item. 8. Compare and contrast the fixed quantity version of EOQ with the fixed interval version. In which situations would each be used? As its name implies, the fixed order quantity model involves ordering a fixed amount of product each time reordering takes place. The exact amount of product to be ordered depends on the product’s cost and demand characteristics and on relevant inventory carrying and reordering costs. Organizations using this approach generally need to develop a minimum stock level to determine when to reorder the fixed quantity. This is called the reorder point. When the number of units of an item in inventory reaches the reorder point, the fixed order quantity (the EOQ) is ordered. The reorder point, then, triggers the next order. The second form of the basic approach is the fixed order interval approach to inventory management, also called the fixed period or fixed review period approach. In essence, this technique involves ordering inventory at fixed or regular intervals; generally, the amount ordered depends on how much is in stock and available at the time of review. Organizations usually count inventory near the interval’s end and base orders on the amount on hand at that time. In comparison with the basic EOQ approach, the fixed interval model does not require close surveillance of inventory levels; thus, the monitoring is less expensive. This approach is best used for inventory items that have a relatively stable demand. Using this approach for volatile demand items might quickly result in a stockout since time triggers orders rather than inventory levels. If demand and lead time are constant and known in advance, then an organization using the fixed order interval approach will periodically reorder exactly the same amount of inventory. If either demand or lead time varies, however, the amount ordered each time will vary, becoming a result of demand as well as lead time length. 9. Why has the JIT approach to inventory control become popular in some industries? How does the JIT approach compare to the EOQ approach to inventory management? Should JIT be adopted by all inventory managers? Why or why not? One of the most common approaches to inventory management is the just-in-time approach. In today’s business environment, discussions focus on JIT manufacturing processes, JIT inventories, or JIT delivery systems. The underlying theme of the phrase “just-in-time” suggests that inventories should be available when an organization needs them—not any earlier or later. This section emphasizes additional factors that characterize a true just-in-time system. Generally, just-in-time systems are designed to manage lead times and to eliminate waste. Ideally, product should arrive exactly when an organization needs it, with no tolerance for late or early deliveries. Many JIT systems place a high priority on short, consistent lead times. However, in a true JIT system, the length of the lead time is not as important as the reliability of the lead time. Experience indicates that effectively implementing the JIT concept can dramatically reduce parts and materials inventories, work-in-process inventories, and finished product. In addition, JIT relies heavily on the quality of the manufactured product and components and on a capable and precise logistics system to manage materials and physical distribution. JIT attempts to eliminate excess inventories for both the buyer and the seller. Some feeling exists that the JIT concept simply forces the seller to carry inventory previously held by the buyer. However, successful JIT applications will significantly reduce inventories for both parties. JIT systems typically involve short production runs and require production activities to change frequently from one product to another. This approach minimizes the economies of scale that are generated from long production runs of a single product. It also will result in higher changeover costs, assuming that the cost of each changeover is constant. However, shorter production runs will result in lower finished goods inventory levels. So, the tradeoff here is between changeover costs and finished goods inventory levels. Many organizations have been successful at reducing changeover costs, thus taking advantage of lower inventory costs. The balance of the question is subjective and should be scored as such. 10. Explain the essential characteristics of MRP, DRP, and VMI. How do they operate with each other to provide a systematic approach to managing supply chain inventories? The inventory techniques discussed so far are usually used to manage inventories within an organization’s logistics network. JIT and MRP manage raw materials and component inventories on the inbound side of a manufacturing facility. DRP manages finished goods inventories between the manufacturing facility and its distribution centers. VMI is used by an organization to manage its inventories held in its customer’s distribution centers. An MRP system recalculates net requirements and coverage as a result of changes in the master production schedule, demand, inventory status, or product composition. MRP systems meet their objectives by computing net requirements for each inventory item, time-phasing them, and determining their proper coverage. The goals of an MRP system are to: (1) ensure the availability of materials, components, and products for planned production and for customer delivery; (2) maintain the lowest possible inventory levels that support service objectives; and (3) plan manufacturing activities, delivery schedules, and purchasing activities. In doing so, an MRP system considers current and planned quantities of parts and products in inventory, as well as the timing needed for these parts and products. MRP begins by determining how much end products (independent demand items) customers desire and when they are needed. Then MRP disaggregates the timing and need for components based on the end-product demand. Distribution requirements planning is a widely used and potentially powerful technique for outbound logistics systems to help determine the appropriate level of inventory to be held to meet both cost and service objectives. DRP determines replenishment schedules between an organization’s manufacturing facilities and its distribution centers. The success stories involving DRP indicate that organizations can improve service (decrease stockouts), reduce the overall level of finished goods inventories, reduce transportation costs, and improve distribution center operations. DRP is usually coupled with MRP systems in an attempt to manage the flow and timing of both inbound materials and outbound finished goods. The underlying rationale for DRP is to more accurately forecast demand and to explode that information back for use in developing production schedules. In that way, an organization can minimize inbound inventory by using MRP in conjunction with production schedules. Outbound (finished goods) inventory is minimized through the use of DRP. The basic principles underlying the concept of VMI are relatively simple. First, the supplier and its customer agree on which products are to be managed using VMI in the customer’s distribution centers. Second, an agreement is made on reorder points and economic order quantities for each of these products. Third, as these products are shipped from the customer’s distribution center, the customer notifies the supplier, by SKU, of the volumes shipped on a real-time basis. This notification is also called “pull” data. That is, as the customer “pulls” a product from storage to be shipped to a store or other facility, the supplier is notified that the product has been pulled for shipment, thus diminishing on-hand inventories. Fourth, the supplier monitors on-hand inventories in the customer’s distribution center, and when the on-hand inventory reaches the agreed-upon reorder point, the supplier creates an order for replenishment, notifies the customer’s distribution center of the quantity and time of arrival, and ships the order to replenish the distribution center. So, the customer has no need to place an order for replenishment; through real-time information sharing, the supplier has knowledge of product demand and “pushes” inventory to the customer’s location. 11. What are the benefits of classifying inventory using ABC analysis? What are the different types of criteria that could be used to classify inventory? ABC analysis assigns inventory items to one of three groups according to the relative impact or value of the items that make up the group. A items are considered to be the most important, with B items being of lesser importance, and C items being the least important. Important to remember here is that the criteria used to evaluate an item will determine the group to which it is assigned. Using revenue per item as the criterion might assign Item 1 to the A group, while using profit per item as the criterion might assign Item 1 to the C group. Determining which criteria to use for inventory classification will depend on the goals the organization is trying to achieve. Also remember that an organization might determine that it needs more or less than three groupings. ABC classification is relatively simple. The first step is to select some criterion, such as revenue, for developing the ranking. The next step is to rank items in descending order of importance according to this criterion and to calculate actual and cumulative total revenue percentages for each item. This calculation will allow the items to be grouped into the ABC categories. The last step assigns the items into ABC groups. This step is the most difficult and no simple technique is available. While the analysis is supported by data inputs, the ultimate decisions will require subjective judgment on the part of the decision maker. As the item rankings are examined, significant natural “breaks” sometimes appear. This is not always the case, and the decision maker will have to consider other variables such as the item’s importance and the cost of managing that item. 12. What is the underlying principle of the square-root rule? How do inventories change as the number of warehouses in a logistics network changes? The square-root rule helps determine the extent to which inventories might be reduced through such a consolidation strategy. Assuming that total customer demand remains the same, the square-root rule estimates the extent to which aggregate inventory need will change as an organization increases or decreases the number of stocking locations. In general, the greater the number of stocking locations, the greater the amount of inventory needed to maintain customer service levels. Conversely, as inventories are consolidated into fewer stocking locations, aggregate inventories will decrease. The square-root rule states that total safety stock inventories in a future number of facilities can be approximated by multiplying the total amount of inventory in existing facilities by the square root of the number of future facilities divided by the number of existing facilities. Case Studies CASE 9.1 MAQ Corporation CASE QUESTIONS 1. If you were employed by the consulting firm, how would you construct your method of analysis? 2. What criteria would you use? 3. What would the cutoff levels be? Be sure to provide explanations of the reasoning supporting your decisions. Below is the answer to all three questions. The cutoff level depends. Provided above are examples where the cutoffs can be, which were the closest to the 80:20 rule as possible. Case 9.2 Baseball Card Emporium 1. What is the economic order quantity for BBE in units? In pounds? 2. What is the total cost (not considering transportation-related costs) of the EOQ? 3. What is the total cost for using motor carrier transportation? 4. What is the total cost for using air carrier transportation? 5. Which alternative should BBE use? USE Motor Carrier; Air is more expensive by $3,055.85 ($12,869.21 - $9,813.36) Solution Manual for Supply Chain Management: A Logistics Perspective John J. Coyle, John C. Langley, Robert A. Novack, Brian J. Gibson 9781305859975