Networked thinking and supply chain management in sales: Understock costs as well

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Text comes from: Supply Chain Management: Wie Sie mit vernetztem Denken im 21. Jahrhundert überleben (2015) from Erwin Langemann, published by FAZ Verlag, Reprints by friendly permission of the publisher.
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The company-wide supply chain management generates new markets and market opportunities along the supply chains, especially for logistics service providers and suppliers.

supply chain management

Here writes for you:


Erwin Langmann langmann_erwinErwin Langmann is a consultant for risk management with a focus on transport, logistics and supply chain management.


From the author:


How do new opportunities arise?

These new market opportunities result from the constant reduction of the service depth of the Company , also in the course of outsourcing.

Redesigning entire supply chains, power networks and value-added networks creates new procurement and sales markets.

Numerous and unimagined opportunities are now open to companies that perceive the newly acquired options for action. However, risks must be addressed, uncertainties must be accepted.

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Market failure or lack of creativity?

In many cases, market failures have so far been spoken of in certain market constellations. I strongly believe that in many cases of alleged market failures, only entrepreneurs in their entrepreneurial capacity are not creative and courageous enough.

Supply and value chains must be reconsidered and reorganized system-wide. New markets are created by pattern changes and not by increasing efficiency. But the change is first and foremost in the minds of entrepreneurs and managers.

Market movements require rapid action

Due to the enormous upheaval phases in the age of global supply chains market movements are in progress which require rapid action. The transparency of the supply networks and the resulting new visibility require entrepreneurial action.

No company can afford to keep the cost side under control. Therefore, they invest a lot of time and money to reduce their costs.

Checklist Costs

The figures for financial accounting are used as a basis. A further look into the cost accounting of the companies shows numerous meticulously recorded cost types. The following questions arise:

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  • Are all costs now?
  • Are these the right costs?
  • Are these the relevant costs?
  • Are these the costs we need for optimal management decisions?
  • What data does this cost take into account?
  • Or are the costs that lead us into the abyss in the worst case?

How can Supply Chain Management help?

Many questions, many open answers. With the new tools of supply chain management, you can not only name the costs of unused opportunities, but also calculate them for the future.

These costs do not appear in any accounting or cost accounting. It gives you, as a manager, a powerful tool that enables you to minimize all relevant costs of future activities and maximize your future profits.

To estimate the demand correctly

Let us try to illustrate this with a simple practical example. A textile retailer must order fashionable blouses of a certain size and color for the summer season. Reorders during the season are not provided due to the long procurement periods from overseas and the short season.

All unsold blouses must be sold in the retail sale at a special price. The textile retailer estimates the demand for its experiences in past seasons on 100 pieces with a possible uncertainty (variation) of +/- 30 pieces.

The net sales price is planned with 70 Euro, the purchase price with 25 Euro and the selling price at the end of the season with 20 Euro. On the basis of these few data alone, the so-called news vendor model can be used to calculate how high the maximum profit order quantity should be. In this specific case, it is about 138 pieces.

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It can already be seen from this simple example that for the relevant cost minimization both cost components are necessary, namely the excess inventory costs and the substandard costs. These two cost components are the risk costs of the stock.

In the cost accounting or accounting you will search in vain for both. The most important costs are not available for a management decision! The reason: In classic cost accounting only so-called money costs are recorded, but not the alternative costs relevant for management decisions, also called opportunity costs.

Overstock costs are cheaper

The excess inventory costs per piece are the difference between the procurement costs per unit minus the selling price per unit. In our example, this is the difference between 25 Euro and 20 Euro = 5 Euro. The understock costs per piece are calculated as the difference between the selling price per piece minus the purchase cost per piece. Here is the difference between 70 Euro and 25 Euro, thus 45 Euro.

It can be seen that the sub-stock costs per piece are significantly higher than the excess stock costs per piece. An insufficient supply quantity is therefore significantly more expensive than a too large supply quantity. Therefore, you will order a quantity that will be above the mean.

Calculate the risk

The key measure in the example is the ratio of the inventory cost per item to the total out-of-stock cost per item (the so-called risk inventory cost per item) as the sum of under-inventory and excess inventory costs per item. This is called the Critical Ratio (CR). In the example, 45 is Euro divided by 50 Euro (the sum of under- and overstock costs per item).

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This critical ratio is now to be classified in a normal distribution, with the available data of the expected average demand quantity of 100 pieces and the mean demand deviation of 30 pieces. This results in a critical ratio of 0,90.

Risk calculation with Excel

This means that in addition to the average amount of 100 pieces, there is still a safety buffer to add from 0,90. The security buffer of 0,90 corresponds to a so-called z-value of 1,27. If you multiply the mean deviation of 30 pieces with the z-value (the z-value is the safety factor of the normal distribution), then you get a lot of 38 pieces.

This can be calculated without problems in Excel using the function wizard with NORMINV. In a specific case, 100 + 38 = 138 blouses must be ordered. Then the costs are the lowest and the expected profit is the highest. Try it yourself with other numbers and you will be able to quickly grasp the relationships.

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    In short, what networking means in logistics: - Exciting contributionDcQEQZuKof

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