Cost vs Profit, not always conflict

Usually when increasing cost we expect that this will decrease profit. 

But the function bewteen cost and profit may not be that simple. If we look at the cost from the point of view of investment, it is easier to see that investment will likely stimulate profit growing. The growth rate of profit may be larger than that of your investment. So the cost increase, the profit may increase even more.

-Bing Liu

Integer ratio policy

The integer ratio policy suggests that the warehouse inventory Qw should be an integer multiple of the retailer inventory Qr, Qw = nQr. The intuition behind this is that would achieve minimal inventory holding cost. But I'm curious about a mathematical proof.

- Bing Liu

stupid question about service levels

In class, we talked about two types of services. 

1. probability of not stocking out
2. probaility of demand met from stock

Conceptually, what is the difference between this two types? If no demand being involved, does it make sense to talk about stock-out or not? Is there any possibility that the demand is met from other source?

- Bing Liu

Coordinated policy

Today in the last class meeting of this course, we talked about the coordination of retailer and warehouse inventories in order to achieve overall optimality. That reminds me of a talk a short while ago about the coordination between suppliers and customers.  But that paper concludes that the overall optimal strategy benefits the supplier but may hurt the customer.  The supplier should compensate the extra cost incurred at the customer to encourage coordination.

I believe there is the same problem to multi-echlon inventory managments although this might be under the unified financial administration of the same company. The warehouse management should take actions to encourage the retailer to coordinate for a win-win strategy.

-Bing Liu

Great Article on Starting Businesses in Logistics

I ran across this article in BusinessWeek, and thought it would be good to share with everyone:
http://www.businessweek.com/smallbiz/content/oct2008/sb20081024_482729.htm

It offers an interesting view on logistics businesses, which will be the career path of many in our class.

Does everyone agree that the business is "built around personal relationships and trust"?

-Andrew Freeman

Vote on Blogging and Inventory Management

Now that the semester is almost over, I think that it is an appropriate time for our class to assess the value of this blogging assignment.

Personally, I think that the blogs did not achieve Dr. Keskin's desired results set forth at the beginning of the assingment. There are probably many reasons for the outcome; however, I would suggest that future classes only maintain one blog as opposed to eight different blogs.

Does anyone else agree? What about a conflicting opinion?

-Andrew Freeman

Thoughts on "Human" Inventory

Citi Bank announced this morning that they would be cutting approxiamately 50,000 jobs. This is just one example of a company cutting jobs as a result of the stagnating economy.

I believe that we can look at this situation and apply some of inventory management principles (however, this opinion might be far from the truth).

For instance, these companies are drastically reducing their levels of human capital, which means they will have to do more with less. They are basically trying to run a leaner organization, which could possibly be related to a company reducing the amount of inventory they carry by employing lean concepts.

On the other hand, there is also an increasing supply of unemployed workers in the marketplace. These unemployed individuals are probably willing to work for a smaller salary in light of these uncertain economic times. If we consider the workforce as a cost, then companies can now take advantage of acquiring their workforce at a reduced rate.

Does anyone have any thoughts or opinions on this subject???

-Andrew Freeman

Everybody's thoughts on the future of American Autos

In light of the recent news that has surfaced from the "Big Three" American auto companies, I was interested to discuss the effects that this news has on their inventory policies. My guess would be that these companies are going to be stuck holding massive amounts of finished goods inventory and incurring exorbiant holding costs on these items. I am curious to know whether these increased inventory levels will pose any downward pressure on prices in the marketplace?

Furthermore, as our economy has progressively slowed down, does anyone have thoughts on the amount of inventory that these companies are going to be stuck with holding?

Thoughts, Ideas, and Opinions are welcome!

Andrew Freeman

Inventory as an asset

The company I used to work with usually holds a special inventory, a considerable amount of our own products for our R&D use for the development of next generation systems.  It is an inventory and an investment as well. Wall Street doesn't like that and usually considers it as a negative effect on the stock price. But we have to maintain those systems for new products.

I have no idea how they achieve an optimal quantity of that inventory. I doubt they ever use

any inventory control on it.

-Bing Liu

BBJ Article - Honda Accord

http://www.bizjournals.com/birmingham/stories/2008/10/13/daily1.html?surround=lfn&brthrs=1

This article describes the recent decision by Honda to start producing their Honda Accord in their Alabama manufacturing plant. According to the article, this decision has adjusted the overall production mix for the Alabama plant, which means their other "Alabama" vehicles will now be produced in smaller quantities (the Honda Pilot and the Honda Odyssey).

I thought this article was interesting because it can relate to some of the materials in our OM 523 class, specifically the Economic Production Quantities. Production managers at Honda must be keenly tuned into their demand patterns for ordering decisions, because their production rates are now changing. Therefore, in order for the company to avoid stock-out costs as well as avoid producing too many of these vehicles, their inventory managers must alter the EPQ calculations.

-Andrew Freeman

WSJ Article - "Firms Struggle with Commodities Costs"

Amidst the growing economic concerns that our country is facing, many businesses, both large and small, are experiencing significant changes to their cost structure(s). This article does a good job of highlighting the broad-spanning increase in commodities costs, which are causing havoc for many organizations.

We can relate this article to our EOQ discussions from class (Pause briefly for an outburst of pure excitement!!!)

The fundamental objective for our EOQ models is to minimize total costs, which is primarily a function of ordering and holding costs. As a result of violent fluctuations in the costs of various commodities, there has been an abrupt shift in firms' ordering and holding costs, which effectively changes an organization's EOQ calculations. For example, the increasing price of gasoline has made transportation more expensive; thus, these increasing transportation costs have changed relevant ordering costs for many products.

-Andrew Freeman

Inventory Management Thoughts from Andrew Freeman

I have recently been working on a Kaizen Event at my work, which is the Student Health Center. As we began the first phase of the 5-S process, which is sorting, we quickly realized that we were carrying way too much inventory. For example, we were stocked with dozens of crutches and they were taking up a significant amount of space in a treatment room. Therefore, I have concluded that we are incurring some sort of opportunity cost as part of our inventory holding cost(s).

As this project and other initiatives continue, I will hopefully be applying my classroom knowledge from OM 523 to help us better manager our inventory.

-Andrew Freeman

What's new with algebraic analysis on EOQ/EPQ?

In the paper "EOQ and EPQ with linear and fixed backorder costs: Two cases identified and models analyzed without calculus" by Sphicas, the author extends algebraic analysis to EOQ and EPQ with both linear and fixed backorder costs without using any skill of calculus. Moreover, this paper provides further insights into the EOQ and EPQ models with additional obervations.

The author states the conditions to determine whether backorders are too expensive or backorders should be carried by comparing the per unit operational cost without backorders and the total fixed cost of backordering everything. The size of the linear backorder cost doesn't affect the optimal choice.

A correction to previous works is that even if the value of 2KD(h+p) - (pai)^2 D^2 is positive, it may not achieve the optimal Q. The exact range for (pai)D was reported.

The eventual optimal total cost is the same as it would be if the maximum inventory was continuously carried and nothing else happened.

Another special case is identified that if only one backorder cost is assumed, both Q and S are infinite when considerring backorders. The author provides an eaiser proof of this known result than using calculus.

The algebraic analysis of EPQ model is basically similar.

- Bing Liu