Inventory ABC analysis Can be classified by many different things?revenue, asset turnover, etc? ROA analysis ROA = net profit margin X asset turnover Net profit margin = net profit ÷ sales revenue Asset turnover = sales ÷ total assets A decrease in inventory, increases ROA Use of ICC EOQ (basic formula) EOQ = square root of (2 X annual demand X order costs) all ÷ (unit value X ICC%) EOQ is when order costs = ICC Total Annual Cost Total annual cost = total annual order costs + total annual ICC Total annual order costs = cost per order X # or orders per year Total annual ICC = average inventory (½ of Order Quantity +safety stock) X value per unit X ICC % EOQ is optimized when total annual ICC = total annual order costs Reorder Point w/(un)certainty ROP = demand X LT + safety stock Safety Stock Safety stock = square root of (average LT)(std dev of daily demand)² + (average daily demand)²(std dev of LT)² 1 std dev = 84% protection from stockout 2 std dev = 97.7% protection from stockout 3 std dev = 99.8% protection from stockout To find 2nd or 3rd std dev, take answer from safety stock equation from above and multiply by 2 or 3 respectively Average D during LT = average replenishment cycle X average daily demand ROP = average D during LT + # found from safety stock formula DRP scheduling Square root of N x? = (x?) X square root of (n? ÷ n?) x? = total inventory in future facilities x? = total inventory in existing facilities n? = # of future facilities n? = # of existing facilities
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