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Final report for Logistics Analytics at the University of Tennessee.

Final report for Logistics Analytics at the University of Tennessee.

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    Cabot Case Cabot Case Document Transcript

    • Louisiana Processing Luncheon Meat Since 1974Cabot Food CompanyInventory Management for Enhanced Performance Andy Wyatt Jordan Drummel Paul Kapcar December 3, 2010
    • University of TennesseeTable of ContentsBackground 1Contribution and Cost of Good Sold (COGS) per Case 22006 Sales Projections 2Standard Deviation of Sales 3Safety Stock 3Stock Protection Level Variation 3Reorder Points 4Expected Service Level 4Total Cost of Inventory 5 Appendix A: Contribution and Cost of Goods Sold 6 Appendix B: Sales Volume and Order Quantity 7 Appendix C: Standard Deviation of Sales 9 Appendix D: Safety Stock 11 Appendix E: Stock Protection Level 12 Appendix F: Reorder Point 13 Appendix G: Service Levels 14 Appendix H: Total Cost 15Name of report i
    • University of Tennessee - Logistics 411Cabot Food Company :Inventory Management for Enhanced PerformanceBackgroundCabot is a well-established foods company specializing in luncheon meat and has been selling its products throughoutthe United States since 1974. Though the company sold a variety of products, its competitive strength lay in two mainlines of luncheon meat: Lunch Delight and Tasty. 1Lunch Delight Sales Projection Data 2004 2005 2006 $6,000,000 $6,900,000 $72,000,000 Actual +15% +20%Approximately 50% of the sales revenue was attributable to direct variable costs for both the brands; 75% of the directvariable costs were estimated to be actual meat costs (again for both the brands). These costing percentages wereexpected to hold for the next few years. Lunch Delight was sold to retail outlets for $9.5 per pound. Profit Actual Meat Costs Other Variable Costs Sales Revenue 50% 13% 38% Approximately 50% of the sales revenue was attributable to direct variable costs for both the brands1 Cabot Food Company by Rajiv P. Dant and Daniel L. Kurfees, Appalachian State University. Revised Spring 2007 by Funda Sahin.Cabot Food Company 1
    • University of Tennessee - Logistics 411Contribution and Cost of Good Sold (COGS) per CaseCabot sells Lunch Delight to retailers at $9.50 per pound, shipments are packed in 30 lb. cases, resulting in a $285cases. Cabot managers estimate 50% of sales revenue is attributable to direct variable costs, and of the direct variablecosts 75% are the actual meat costs. The current cost approximations are expected to hold for the next few years.Under these approximations, each case sold has a 50% contribution margin; thus, $142.50 out of every $285 in revenueremains after variable costs are deducted (see Appendix A for detailed calculation). Contribution Costs of Good Sold Other Variable Costs Per Case Breakdown $106.88 $35.63 $142.502006 Sales ProjectionsAs mentioned previously, the 2005 sales indicated a 15% and a 20% growth over the 2004 sales level for Lunch Delightfor 2005 and 2006, respectively. Lunch Delight is shipped in 30 pound cases at a sell price of $285; each order placedincurs a $40 ordering cost and a 20% inventory carrying cost. Cabot places orders in simple economic order quantities. 2(D)(S) (I)(C) Formula utilized for Economic Order Quantity2 D= Demand (annual), S = Order Placement Cost, I = Inventory Carrying cost and C = Product costLunch Delight 2006 Sales Volume Projections (see Appendix B for detailed calculation): Annual Volume (cases) Average Daily Volume Economic Order Quantity 25,264 101 3082Commonly termed EOQCabot Food Company 2
    • University of Tennessee - Logistics 411Standard Deviation of SalesCabot’s Lunch Delight product has a 25 case per day standard deviation of sales (see Appendix C for detailedcalculation). The standard deviation of sales was found using data provided by the sales department regardingdistribution of daily demand from retailers for 2005 on reviewing the last 50 working days:Demand for Lunch Delight During Lead Time, 2005 Cases Frequency 200 10 202 11 250 40 260 11 268 10Cabot advised utilization of the following equation for standard deviation of sales calculation: Formula utilized for standard deviation calculation 3 f= frequency and d= differenceSafety StockCabot’s Lunch Delight product is transported from Texas to Louisiana with an average transit time of 5 days, howeverdue to the selection of rail as the mode of transportation, Cabot experiences lead time variation. This variation is astandard deviation of 3 days. Cabot has selected a minimum stock protection level of 95% in it’s Louisiana distributioncenter. This requires safety stock levels of 507.09 cases (see Appendix D for detailed calculation).Safety Stock Calculation = SS = z-score * s’ z-score is directly related to stock protection levelStock Protection Level VariationWe calculate safety stock as a proportion of the stock protection level. The higher the protection level the more additionalinventory is need to suffice. The fifty day demand data present previous shows a normal distribution of demand, thus weused 1.645, a z-score from a normal distribution z-score table that corresponds to 95%. Since the safety stock levels are3 Difference in number of cases from expected value of casesCabot Food Company 3
    • University of Tennessee - Logistics 411directly related to stock protection levels it is important to determine the effects of raising or lowering the stock protectionlevel where looking at an optimal service level (see Appendix E for detailed calculation).Inventory and Inventory Cost Variation with Change Stock Protection Levels : Stock Protection Inventory Change in Inventory Inventory Carrying Change in Inventory Level (Cases) (Cases) Cost Carrying Cost 92% 433 -74 $9,257.63 -$1,581.37 95% 507 $10,839.00 - 99% 717 210 $15,326.16 $4,487.15Reorder PointsAs show previously when Cabot alters Stock Protection levels there is a corresponding increase or decrease in Inventorylevels and the costs of inventory. Altering the Stock Protection levels also affects the Reorder point. This is due to themethod of calculating Reorder points: ROP = (d)(LT) + Safety Stock d = demand (per unit of lead time) LT = Lead time (in days)Reorder points for the different Stock Protection levels (see Appendix F for detailed calculation): At 92% Stock Protection: 505.265 + 433.11 cases = 938.38 cases At 95% Stock Protection: 505.265 + 507.09 cases = 1012.35 cases At 99% Stock Protection: 505.265 + 717.01 cases = 1,222.276 casesExpected Service LevelChanges in reorder points, as a result of changes in stock protection levels, yield a change in Expected Service Level. Itis important to set a service level that will allow minimized costs, while serving customers with consistency. Bellowexpected service levels are presented with their corresponding stock protection level, z score, and expected z score.Expected z scores are found using a table and either the desired service level or z score (see Appendix G for detailedcalculation). Stock Protection Expected Z- Expected Service Z-score Level Score Level 92% 1.405 0.0363 96.36% 95% 1.645 0.0209 97.88% 99% 2.326 0.0035 99.66%Cabot Food Company 4
    • University of Tennessee - Logistics 411Total Cost of InventoryTotal Cost of Inventory at 95% service levelCabot requested a total cost calculation at a 95% service level. This allowed them to have a stock protection level ofabout 89%. Total Cost were calculated using the following formula (see Appendix H for in depth calculation):Total Costs = [ (D)(S) ÷ Q ] + (I)(C) * [ (Q ÷ 2) + (Z)(S’) ] + [ (k)(D)(E(z))(S’) ÷ Q ] + Outbound Transit Cost + Inbound transitTotal Cost Components Order Placement Inventory Safety Stock Stock Out Inbound Outbound Carrying Transportation Transportation $3,286.34 $3,286.34 $8,289.04 $113,511.83 $8,100.00 $3,240.00Total Cost at 95% service level was $139713.54. Not surprisingly stock out costs make up the majority of total costs, for$90 per stock out cost make each stock out a substantial cost. Also a 95% service level increases the amount stockouts when compared to a higher service level. Order Placement Inventory Carrying Safety Stock Stock Out Inbound Transportation Outbound Transportation Total Cost Breakdown 81.25% 6% 2.35% 5.93% 2.35% 2% The two exploded pieces combined comprise total transportation costsCabot Food Company 5
    • University of TennesseeAppendix A: Contribution andCost of Goods Sold*All data for Lunch DelightContribution Margin = $ 142.5 per caseSales Price per Pound = $9.50Pounds per Case = 30 lb.Sales Revenue per Case = Sales Price per Pound * Pounds per Case $9.50 * 30 = $285Direct Variable Cost percent of Sales Revenue = 50%Direct Variable Cost per Case = Sales Revenue per Case * Direct Variable Cost percent of Sales Revenue $285 * 50% = $142.5Contribution Margin per Case 4 = Sales Revenue per Case - Direct Variable Cost per case $285 - $142.5 = $142.5Percent Contribution Margin per Case = Contribution per Case ÷ Sales Revenue per Case $142.5 ÷ $285 = 50%Cost of Goods Sold = $106.88 per caseDirect Variable Cost per Case = $142.5Actual Product (meat) Cost Percent of Direct Variable Cost = 75%Assumption: Cost of Goods Sold = Actual Product (meat) Costs Cost of Goods Sold = Direct Variable Cost per Case * Actual Product (meat) Cost Percent of Direct Variable Cost $142.5 * 75% = $106.88 per case3 Formula given in 11/29/10 class sessionCabot Food Company 6
    • University of TennesseeAppendix B: Sales Volume andOrder Quantity*All data for Lunch DelightProjected Annual Volume = 25,264 cases2004 Sales = $6,000,000Projected percent increase in sales over 2004 = 2005 projection = 15% 2006 projection = 20%2006 Sales Projection = 2004 Sales * 2006 projection % $6,000,000 * 1.20 = $7,200,000Sales Revenue per Case = $285Projected Annual Volume = 2006 Sales projection ÷ Sales Revenue per Case $7,200,000 ÷ $285 = 25,264 casesProjected Average Daily Volume = 101.05 cases per yearProjected Annual Volume = 25,264.16 casesCabot Working Days in a Year = 250 daysProjected Average Daily Volume = Projected Annual Volume ÷ Cabot Working Days in a Year 25,264 cases ÷ 250 days = 101.05 cases per yearOrder Quantity = 307.49 casesProjected Annual Volume = 25,264 casesEstimated Order Processing Cost = $40Inventory Carrying Costs as Percent of Product Cost = 20%Cost of Goods Sold = $106.88 per caseGiven: Cabot purchases meat from Texas Meat Processing Plant, Inc. in simple economic order quantitiesAssumption: Cabot utilizes Cost of Goods Sold as the cost component of their simple EOQ calculationCabot Food Company 7
    • University of TennesseeAppendix B continuedOrder Quantity Continued: Economic Order Quantity = Square Root of [ 2 * Projected Annual Volume * Estimated Order Processing Cost Inventory Carrying Cost * Cost of Goods Sold ] Square Root of [ 2 * 25,264.16 * $40 20% * $106.88 ] = 307.49 cases Cabot Food Company 8
    • University of TennesseeAppendix C: Standard Deviationof SalesExpected Value (cases) = 241 casesObservation: Demand pattern is unstableAssumption: When demand pattern is unstable, Weighted Moving Average is the appropriate method for calculating theExpected Value Instance of demand cases frequency weight ( w ) (w) • (x) (n) (x) ( f ) ( f ÷∑ f ) 1 200 10 0.12 24.39 2 202 11 0.13 27.10 3 250 40 0.49 121.95 4 260 11 0.13 34.88 5 268 10 0.12 32.68 Sum ( ∑ ) 1180 82 1.00 241.00Expected Value = 241 cases ∑ [(Weight for instance of demand n ) ( number of cases per instance of demand n )] ∑ weights ∑ [ (.12)( 200)+(.13)(202)+(.49)(250)+(.13)(260)+(.12)(268) ] = 241 ∑ [(.12)+(.13)+(.49)+(.13)+(.12)] Standard Deviation of Sales = 25 casesStandard Deviation of Sales Equation: f= frequency and d= differenceCabot Food Company 9
    • University of TennesseeAppendix C continued cases frequency difference ( d ) d2 f • d2 f-1 (x) ( f ) ( EV - x ) 200 10 41 1681 16,810 9 202 11 39 1521 16,731 10 EV = 241 250 40 -9 81 3240 39 260 11 -19 361 3971 10 268 10 -27 729 7290 9 Sum ( ∑ ) 48,042 77Sum of frequency multiplied by difference squared: ∑ f • d2 = 48,042Sum of frequency minus 1: ∑ f - 1 = 77Standard deviation of Sales = 24.98 cases 48042 = 24.98 77Cabot Food Company 10
    • University of TennesseeAppendix D: Safety StockSafety Stock = 512 casesStock protection level = 95%Corresponding z-score (Z) = 1.645Lead Time (LT) = 5 daysStandard Deviation in Lead Time (σ(LT)) = 3 daysStandard Deviation of Sales (σ(D)) = 24.978 Variance = σ(D)2 = 623.922Average Daily Demand (d) = 101.053Observation: Lead time is uncertain S’ = Square root of [ LT(σ(D)2) + d2(σ(LT)2) ] = Square root of [ 5(623.92) + (101.05)2(3)2 ] = Square root of [ 3,119.61 + 91904.71 ] = Square root of [ 95,024.32 ] = 308.26Safety Stock = Z * S’ 1.645 * 308.26 = 507.09 casesCabot Food Company 11
    • University of TennesseeAppendix E: Stock ProtectionLevelInventory and Inventory Cost variation with Change Stock Protection Levels :S’ = 308.26Safety Stock = Z * S’Inventory Carrying Cost = 20%Cost of Goods Sold = $106.88 per caseSafety Stock Cost = Inventory Carrying Cost * Cost of Goods Sold * Z * S’ Stock Protection Safety Stock Safety Stock Z-score S’ Level (Z * S’) Cost 92% 1.405 308.26 433.11 $9,258.06 95% 1.645 308.26 507.09 $10,839.51 99% 2.326 308.26 717.01 $15,326.86Additional inventory calculation:Assumption: Changes in inventory levels and corresponding inventory costs effect safety stock costs singularly. Thestock protection level will not alter the order quantity.At Stock Protection level of 99%:Additional Inventory held = Absolute Value | 95% Safety Stock levels - 99% Safety Stock levels | = | 507 - 717 | = 210 CasesAdditional Inventory costs = Absolute Value | 95% Safety Stock costs - 99% Safety Stock costs | = | $10,839.51 - $15,326.86 | = $4,487.15At Stock Protection level of 92%:Reduction in Inventory held = Absolute Value | 95% Safety Stock levels - 92% Safety Stock levels | = | 507 - 433 | = 74 CasesReduction in Inventory costs = Absolute Value | 95% Safety Stock costs - 92% Safety Stock costs | = | $10,839.51 - $9,258.06 | = $1,581.37Cabot Food Company 12
    • University of TennesseeAppendix F: Reorder PointReorder Point Corresponding to Stock Protection Levels :Economic Order Quantity: 307.49 casesSafety Stock Levels (Z*S’): At 92% Stock Protection: 433.11 cases At 95% Stock Protection: 507.09 cases At 99% Stock Protection: 717.01 casesAverage Daily Demand: 101.053 casesLead Time: 5 daysReorder Point= Average Daily Demand * Lead TIme (Same units as Demand) + Safety Stock 101.053 * 5 days + Safety StockObservation: Only Safety stock varies with Stock Protection level. At 92% Stock Protection: 505.265 + 433.11 cases = 938.38 cases At 95% Stock Protection: 505.265 + 507.09 cases = 1012.35 cases At 99% Stock Protection: 505.265 + 717.01 cases = 1,222.276 cases Cabot Food Company 13
    • University of TennesseeAppendix G: Service LevelsExpected Service Levels :Economic Order Quantity: 307.49 casesExpected Z score (Ez) : At 92% Stock Protection: .0363 At 95% Stock Protection: .0209 At 99% Stock Protection: .0035Economic Order Quantity = 307.49S’ = 308.26Expected Service Level= 1- [ (S’)(Ez) ÷ Economic Order Quantity ] At 92% Stock Protection: 1 - [ (308.26)(.0363) ÷ 307.49 ] = 96.36% At 95% Stock Protection: 1 - [ (308.26)(.0209) ÷ 307.49 ] = 97.88% At 99% Stock Protection: 1 - [ (308.26)(.0035) ÷ 307.49 ] = 99.66% Stock Protection Expected Z- Expected Service Z-score Level Score Level 92% 1.405 0.0363 96.36% 95% 1.645 0.0209 97.88% 99% 2.326 0.0035 99.66%Cabot Food Company 14
    • University of TennesseeAppendix H: Total CostTotal Inventory Cost at 95% service level = $139,713.54Service level = 1- [ (S’)(Ez) ÷ Economic Order Quantity ] 95% service level = 1 - [ (308.26)(Ez) ÷ 307.49 ] 1 - .95 = [ (308.26)(Ez) ÷ 307.49 ] [ (.05)(307.49) ÷ (308.26) ] = Ez Ez = .0498 Z-Score (Z) = 1.258Total Cost: [ (D)(S) ÷ Q ] + (I)(C) * [ (Q ÷ 2) + (Z)(S’) ]5 + [ (k)(D)(E(z))(S’) ÷ Q ] + Outbound Transit Cost + Inbound transit cost(D) = 25263.16 cases(S) = $40Economic Order Quantity (Q) = 307.49 Cases(I) = 20%(C) = $106.88(Z) = 1.258(S’) = 308.26Stock Out Loss (K) = $90(E(z)) = .0498Average Daily Demand (d) = 101.05 casesIn-Transit Carrying Cost = 15%Inbound Transit Costs: $8100Assumption: Costs due to Lead Time Variation is accounted for in Safety Stock element of Total costLead Time = 5 days = (Average Daily demand * Lead Time) * In-transit Carrying Cost * Cost of Goods Sold = [ (101.05 Cases * 5 days)) ] * .15 * $106.88 = $8100Outbound Transit Cost: $3240Lead Time = 2 days = (Average Daily demand * Lead Time) * In-transit Carrying Cost * Cost of Goods Sold = [ (101.05 Cases * 2 days) ] * .15 * $106.88 = $32405 Please note that the equation for inventory carry cost and safety stock costs have been combined in this equationCabot Food Company 15
    • University of TennesseeAppendix H continuedTotal Costs =[ (D)(S) ÷ Q ] + (I)(C) * [ (Q ÷ 2) + (Z)(S’) ] + [ (k)(D)(E(z))(S’) ÷ Q ] + Outbound Transit Cost + Inbound transit cost[ (25263.16 cases)($40) ÷ 307.49 Cases ] + (.2)($106.88) [(307.49 Cases ÷ 2) + (1.258)(308.26)]+ [ ($90)(25263.16 cases)(.0498)(308.26) ÷ 307.49] + $3240 + $8100= [$3286.34] + [$11,575.37] + [$113513.83] + [$3240] + [$8100] = $139,713.54Cabot Food Company 16