EXAMPLE BELOW:

Problem 1. (Chapter 3: The Logistics/Supply Chain Product) Davis Steel Distributors is planning to set up an additional warehouse in its distribution network. Analysis of item-sales data for its other warehouses shows that 30 percent of the items represent 75 percent of the sales volume. The company also has an inventory policy that varies with the items in the warehouse. That is, the first 20 percent of the items are the A items and are to be stocked with an inventory turnover ratio of 10. The next 30 percent of the items, or B items, are to have a turnover ratio of 8. The remaining C items are to have a turnover ratio of 6. There are to be 20 products held in the warehouse with sales on the warehouse forecasted to be $3 million annually. What dollar value of average inventory would you estimate for the warehouse? (Hint: This problem is similar to the class example of 80-20 curve. It is most convenient for you to work on this in Excel. Your final completed work should look like the excel on Module2Ch03Slide 3-8. You can simply turn in your excel file.) 80-20 Curve Example (Cont'd) A .30 Projected Item Cumulative cumulative (X) item sales no. fraction fraction(Y) 1 .10 .716 2 .20 .850 3 .907 4 .40 .938 5 .50 .958 6 .60 .971 7 .70 .981 8 .80 .989 9 .90 .995 10 1.00 1.000 B Projected cumulative sales $64,440 76,500 81,630 84,420 86,220 87,390 88,290 89,010 89,550 90,000 Projected Turnover Average item sales ratio inventory $64,440 8:1 $8,055 12,060 8:1 1,508 5130 5:1 1,026 2,790 5:1 558 1,800 5:1 360 1,170 2:1 585 900 2:1 450 720 2:1 360 540 2:1 270 450 2:1 225 $90,000 $13,397 Y=(1+A)*X/(A+X), A=0.0462, Y2=(1+0.0462)*0.2/(0.0462+0.2) = 0.84987 =0.85, S2=0.85*90,000=76,500, Item sale for #2 =Y2-Y1= 76,500-64,440=12,060, Average Inventory = 12,060/8 = 1507.5 = 1508 Y3 = (1+0.0462)*0.3/(0.0462+0.3) = 0.90658 =0.907, S3 =0.907*90,000 = 81630, Item sale for #3=81630-76500 =5130. Average Inv. = 5130/5 = 1026