Networked thinking & supply chain management in sales: under-inventory costs too

The company-wide supply chain management generates new markets and market opportunities along the supply chains, especially for logistics service providers and suppliers.

How do new opportunities arise?

These new market opportunities result from the constant reduction of the service depth of the Companys, also in the course of outsourcing.

Redesigning entire supply chains, power networks and value-added networks creates new procurement and sales markets.

Numerous and undreamt-of opportunities are now open to companies that take advantage of the new options for action. risks must of course be accepted, uncertainties must be accepted.

Market failure or lack of creativity?

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In many cases, certain market constellations have been prematurely referred to as market failure. I firmly believe that in numerous cases
the alleged failure of the market only the entrepreneurs in their entrepreneurial function are not creative and courageous enough
are.

The supply and value chains must be reconsidered and reorganized system-wide. New markets are created by changing patterns and not by increasing efficiency. The change but is first and foremost in the minds of entrepreneurs and
Execute manager.

Market movements require rapid action

Due to the enormous upheaval phases in the age of global supply chains market movements are in progress which require rapid action. The transparency of the supply networks and the resulting new visibility require entrepreneurial action.

No company can afford to not have the cost side under control
to have. Therefore invest them a lot of time and Moneyto her Costs
to lower.

Checklist Costs

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The figures from financial accounting serve as the basis for this. Another look at the company's cost accounting shows numerous meticulously recorded types of costs. This results in the following Ask:

• Are all costs now?
• Are these the right costs?
• Are these the relevant costs?
• Are these the costs we need for optimal management decisions?
• What data does this cost take into account?
• Or are the costs that lead us into the abyss in the worst case?

How can Supply Chain Management help?

Lots of questions, lots of open answers. With the new tools of supply chain management, you can not only name the costs of unused opportunities, but also
also for them Future to calculate.

These costs do not appear in any Accounting and in no cost accounting. This gives you, as a manager, a powerful tool in the Hand, which allows you to minimize all relevant costs of future activities and maximize your future profit.

To estimate the demand correctly

Let's try to illustrate this with a simple practical example. A textile retailer needs a particular fashionable blouse
Pre-order size and color for the summer season. Reorders
during the season are out due to the long lead times
Overseas and the short season not provided.

All blouses that have not been sold have to be put on sale at a special price
will. The textile retailer appreciates the demand for his
Experience in the past seasons on 100 pieces with one
possible uncertainty value (fluctuation) of +/- 30 pieces.

The net sales price is 70 euros, the purchase price 25 euros
and the sales price at the end of the season is planned to be 20 euros.
Based on this little data alone, the so-called news vendor model can be used to calculate how high the maximum profit order quantity should be. In the specific case there are around 138 pieces.

Oppurtunitätskosten

You can already see from this simple example that both cost components are necessary for the relevant cost minimization,
namely, the over-inventory cost and the under-inventory cost. These two cost components are the risk costs of the inventory.

In cost accounting or in bookkeeping you will look in vain
looking for both. The most important costs are not available for a management decision! The reason: In classic cost accounting, only so-called money costs are recorded, but not the alternative costs relevant for management decisions, also known as opportunity costs.

Overstock costs are cheaper

The excess inventory costs per piece result from the difference between the
Procurement costs per piece minus the sale price per piece.
In our example this is the difference between 25 euros and 20 euros = 5
Euro. The sub-inventory costs per piece result from the difference
Sales price per piece minus procurement costs per piece. Here is
that's the difference between 70 euros and 25 euros, so 45 euros.

You can see that the sub-stock cost per piece clear are higher
than the excess inventory cost per piece. Too little supply
is therefore significantly more expensive than a supply that is too large. Therefore
you will order a quantity that will be above the average.

Calculate the risk

The decisive measure in the example is the ratio of the under-inventory costs per piece to the total incorrect inventory costs per piece (the so-called risk inventory costs per piece) as the sum of the under-inventory and excess inventory costs per piece. This is called the critical ratio (CR). In the example it is 45
Euros divided by 50 euros (as the sum of under- and over-inventory
cost per piece).

This critical relationship is now to be classified in a normal distribution.
ordnen, with the available data of the expected mean
question quantity of 100 pieces and the mean demand deviation
of 30 pieces. This results in a critical ratio of 0,90.

Risk calculation with Excel

This means that in addition to the average quantity of 100 pieces
a safety buffer of 0,90 must be added. The safety buffer
of 0,90 corresponds to a so-called z-value of 1,27. If
now the mean deviation of 30 pieces with the z-value multi
multiplied (the z-value is the safety factor of the normal distribution),
this results in a quantity of 38 pieces.

You can do this without Problems Calculate in Excel using the function assistant with NORMINV. In this specific case, 100 + 38 = 138 blouses have to be ordered. Then the costs are lowest and the expected profit is highest. Try it yourself with other numbers and you will quickly grasp the connections.

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