Page 166 - DMGT523_LOGISTICS_AND_SUPPLY_CHAIN_MANAGEMENT

Unit 7: Inventory Management

Least Total Cost Notes
The least-total-cost approach seeks the quantity that minimizes total cost for successive periods.
In this sense, least total cost, which is the balancing of ordering and carrying, is similar to EOQ
in objective. The fundamental difference is that order interval is varied to seek the least total
cost. The calculation is based on a ratio of ordering to carrying cost (CdCi), called the economic
part period. The economic part period defines the quantity of a specific component that, if
carried in inventory for one period, would result in a carrying cost equal to the cost of ordering.
The least-total-cost technique selects order sizes and intervals that most nearly approximate the
economic part-period calculation. Thus, order sizes remain fairly uniform; however, substantial
differences do occur in elapsed time between order placements. The least-total-cost technique
overcomes the failure of the least unit cost to consider trade-offs across the overall planning
period.

Part-period Balancing

Part-period balancing is a modified form of the least-total-cost technique that incorporates a
special adjustment routine called look-ahead look-back.
The main benefit of this feature is that it extends the planning horizon across more than one
ordering point to accommodate usage peaks and valleys when calculating order quantities.
Adjustments are made in order time or quantity when a forward or backward review of more
than one order requirement indicates that modifications to the economic part-period may be
beneficial. The typical procedure is to first test the look-ahead feature to determine if more time
results in approximation of the economic part-period quantity. Look-back is typically utilized if
look-ahead leaves the lot size unchanged. In this sense, look-back means that a future order,
which under the economic part-period rule would normally be scheduled for delivery during
the fourth period, should be advanced if earlier delivery would reduce total cost. The net result
of incorporating the look-ahead/look-back feature is that it turns the application of the economic
part period concept into a simultaneous review of multiple periods.

Self Assessment

Fill in the blanks:

7. The …………………… determines when a re-supply shipment should be initiated.
8. The …………………… is the replenishment order quantity that minimizes the combined
cost of inventory maintenance and ordering.

9. The …………………… technique builds on the EOQ logic. Here, three steps are performed
to accomplish component procurement.

7.4 Managing Uncertainty

Global optimization is made even more difficult because supply chains need to be designed for,
and operated in, uncertain environments, thus creating sometimes enormous risks to the
organization. A variety of factors contribute to this:
1. Matching supply and demand is a major challenge:

(a) Boeing Aircraft announced a write-down of $2.6 billion in October 1997 due to “raw
material shortages, internal and supplier parts shortages and productivity
inefficiencies . . .”

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