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Inventory Tools - Calculations, The Secret Sauce

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Published by Catalyst, 2017-08-07 19:34:35

Inventory Tools - Calculations, The Secret Sauce

Inventory Tools - Calculations, The Secret Sauce

Inventory Calculations – The Secret Sauce

Inventory
Calculations
– The Secret Sauce -

A rapid fire session of inventory numbers. Hold on to your seats!

Here they are in one place. Keep this as a reference. Several inventory pros will have 60 – 120 seconds
to enlighten you as much as they can.

1

Inventory Calculations – The Secret Sauce

Foundations Round

1. The Due Order Steps:
Step 1: Determine the components: (Demand Forecast, LT Forecast, Order
Cycle, Safety Stock from Service Level)
Step 2: Determine the average service level goal for the line (dollar or unit)
Step 3: Build the depletion chart picture: The Item Low Stock Point / Order
Point, Vendor Order Trigger Point, OUTL
Step 4: Determine the Stock Status Position as it compares to it’s depletion
picture
Step 5: Decide if the order is ‘DUE’
Step 6: Build for the next order!
2. Period-End Reforecast
At the end of each period an item gets a new updated forecast, which is referred to
as, Period End Forecast. The expected demand for future orders is based on the
new forecast.
New Forecast = (Track x Most Recent Period of Demand) + (Reciprocal of Track x
Old Forecast)
3. Order Cycle Basic Calculations

a. Gross Bill Calculation in Order Cycle
The annual demand forecast for all active items * the average cost for
each item.
b. Cycle Stock Calculation in Order Cycle
The average cycle stock balance * the carrying cost.
4. Cycle Stock Calculation in Order Cycle
The average cycle stock balance * the carrying cost.
5. Safety Stock Calculation in Order Cycle
The average safety stock balance * the carrying cost.

2

Inventory Calculations – The Secret Sauce

Lightning Round

6. The Economic Order Quantity (Item Cycle)

EOQ = SQRT((2 * LineCost * (ForecastAverage * PeriodsPerYear)) /
(CarryingCost * ItemCost))

EconomicOrderCycleDays = (EOQ / (ForecastAverage * PeriodsPerYear)) *
(Annual Selling Days based on the Global Control Setting instead of Calendar
Days 365)

Selling Days cannot be = 0
Selling Days cannot be greater than 7 in a week
Selling Days must be defined at the Global level

7. Order Line Cost Calculation in Order Cycle
The cost to order all lines in a supplier in a year. Calculated on an item by item basis and
totaled. Calculated by taking each item’s (# item orders per year * the item line cost). Note,
the item orders per year is determined by the effective order cycle. So for a vendor with
one ITEM, it would look like this: Effective Order Cycle = 14 which equates to 26 item orders
per year * line cost ($1.00) = $26 for one Item.

8. The overstock calculation
Calculate Maximum, any on hand quantity over maximum = overstock.

Maximum is calculated as = 2 (Safety Stock) + Effective Order Cycle + Greater of
the (Buying Multiple or Minimum Quantity) + Convenience Pack Rounding Factor.

9. The % Order Cycle Used in the Safety Stock Calculation

10. Order Header Cost Calculation in Order Cycle
Equal to the header cost * number of orders/year (based on the order cycle).
For example, based on a 4 day order cycle and a header cost of $25: $25 * 91
orders / year = Order Header Cost of $2,275

11. Order Cycle Discount Calculated in Order Cycle
Discount for meeting a bracket. If you get 2 percent for meeting the vendor
bracket and you spend $100,000 annually with the vendor, the discount is
$2,000.

12. The Inner Margin (Forward Buy) Effect Rates for Discounts, Price Increases
and Dating.

3

Inventory Calculations – The Secret Sauce

13. The Forward Buy Effect Rate Impact:
SSO – Specified Stock Out: Driven from your service level goal
ESO – Expected Stock Out: Determined from your current stock status
position

4

Inventory Calculations – The Secret Sauce

Forecasting Round

14. Safety Stock

Key Safety Stock Calc

15. Average daily demand
If Monthly forecasting, the system uses = 30.415 days to divide into forecast to
determine Average Daily Demand.
If 13/4 Weekly forecasting, the System uses = 28 days to divide into forecast to
determine Average Daily Demand.
If weekly forecasting, the system uses Selling Days Per Week field (Company
Control Factors) to determine Average Daily Demand.
Example 1: Forecast = 50 and Selling Days per Week = 5 Example 1 Formula:
(50 ÷ 5 days = 10 units per day.)
Example 2: Forecast = 50
Example 2 Formula: (50 ÷ 6 days = 8.33 units per day.)
Example 3: Forecast = 50
Example 3 Formula: (50 ÷ 7 days = 7.14 units per day.)

Example: When Forecast = 200
Formula: (200 ÷ 28 = 7.4 units per day.)

Example: When Forecast = 200
Formula: (200 ÷ 30.415 = 6.575 units per day.)

5

Inventory Calculations – The Secret Sauce
16. The smoothing factor when grouping history (using 1,2,1 method)

17. The seasonal icon is driven by a comparison of the 3 highest consecutive
periods of demand vs. the 3 lowest consecutive periods of demand and if the
3 highest are 1.8 times higher than the 3 lowest, then display the seasonal
icon. Note: The multiplier can be managed uniquely in the Graphics Package.

18. The Composite Line math
a. If 1 year is used, the composite line calculation is the most recent year
b. If 2 years are used, a 60%, 40% weighting split is used to calculate
the composite line.
c. If 3 years of history are used, a 50%, 30%, 20% weighting split is
used to calculate the composite line.
d. If 4 years of history are used, a 40%, 30%, 20%, 10% weighting split
is used to calculate the composite line.

19. The alpha factor
20. The seasonal index for an item is calculated by:

a. Adding up all of the composite line numbers and getting an average
number.

b. Then take that average number and divide by 13 (12 if monthly).
c. The final step to get the index by 4-week/month is to go back to each

period and divide the composite line by the average calculated in step
20 b.
Illustration

6


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