RightChain Turns | Inventory Turn and Fill Rate Optimization

Inventory Policy Cost ™ vs. Customer Service Level • Inventory Policy Cost (IPC) = Lost Sales Cost + Inventory Carrying Cost = LSC + ICC • Lost Sales Cost (LSC) = Lost Demand x Unit Price x Shortage Factor = FAD x (1-UFR) x USP x SF • Example Calculation

• If the forecast annual demand for an item is 2,400 units, the unit fill rate is 90%, the unit selling price for the item is $2.00, and the shortage factor is 20% then the lost sales cost will be • 2,400 units per year x (1-.9) x $2.00 x .2 = $96.00

• Inventory Carrying Cost (ICC) = Average Inventory Value x Carrying Rate = AIL x UIV x ICR • Example Calculation

• If the average inventory level for an item is 10,000 units, the unit inventory value is $36.00, and the inventory carrying rate is 20% per year then the inventory carrying cost will be • 10,000 units x $36.00 x .2 = $72,000

• Inventory Policy Cost = [FAD x (1-UFR) x USP x SF] + [{SS + EOQ/2 + (L x FAD)/300} x UIV x ICR] EOQ = [(2 x POC x FAD)/(UIV x ICR)] 1/2 SS = f (forecast error, UFR, L)