10 Important Formulas for a Supply Chain Professional

1. Economic Order Quantity (EOQ): 

EOQ = sqrt((2DS)/H)

Application: Determines the optimal order quantity that minimizes inventory holding.

- D: Demand rate (units per time period)

- S: Setup or ordering cost per purchase order

- H: Holding cost per unit per time period

2. Reorder Point (ROP): 


Application: Identifies the inventory level at which a replenishment order should be placed to avoid stock outs.

- D: Average daily demand (units per time period)

- L: Lead time (time period)

- T: Safety stock factor (to account for demand variability)

3. Safety Stock:

 Safety Stock = (Z * sigma * sqrt(LT)) + Buffer Stock

Application: Accounts for demand variability and uncertainty during lead time to protect against stock outs.

- Z: Z-score for desired service level (corresponds to a specific service level percentage)

- sigma: Standard deviation of demand (units)

- LT: Lead time (time period)

4. Total Cost of Ownership (TCO): 

TCO = FC + VC + IC

Application: Evaluates the full cost of procuring and maintaining a product or service.

- FC: Fixed costs (e.g., purchase cost, implementation cost)

- VC: Variable costs (e.g., operating costs, maintenance costs)

- IC: Inventory carrying costs (e.g., storage, insurance, obsolescence)

5. Service Level: 

Service Level = (1 - Stock outs / Total Demand) * 100

Application: Measures the ability to fulfill customer demand without stockouts.

- Stockouts: number of instances where demand exceeds available stock

- Total Demand: total demand during a specific period (units)

6. Capacity Utilization Rate: 

Capacity Utilization Rate = (Actual Output / Maximum Possible Output) * 100

Application: Evaluates how efficiently a facility or resource is being utilized.

- Actual Output: actual production quantity or output (units)

- Maximum Possible Output: maximum capacity or production quantity (units)

7. Cycle Time: 

Cycle Time = Production Time / Output Quantity

Application: Measures the time required to complete a process or produce a unit.

- Production Time: time taken to produce a batch or unit (time period)

- Output Quantity: number of units produced (units)

8. Order Cycle Time: 

Order Cycle Time = Order Receipt to Delivery Time

Application: Measures the time taken from receiving an order to delivering it.

- Order Receipt to Delivery Time: elapsed time for an order to be processed and delivered (time period)

9. Fill Rate: 

Fill Rate = (Total Units Shipped / Total Units Ordered) * 100

Application: Evaluates the percentage of ordered units that are successfully filled

- Total Units Shipped: number of units shipped (units)

- Total Units Ordered: number of units ordered (units)

10. Gross Margin: 

Gross Margin = Revenue - Cost of Goods Sold

- Revenue: total sales revenue (currency)

- Cost of Goods Sold: direct costs of producing goods (currency).

Read also:

Post a Comment

Previous Post Next Post