Question

Inventory

Explanation: Catco purchases parts, such as tires, engines, seats, and axles for construction equipment (such as a bulldozer). Catco is concerned with how much inventory is in the supply chain for several important reasons. When Catco purchases the parts (sends a purchase order (PO) to a supplier), Catco is now responsible to pay for the parts, which they do with cash (financial term, not really $20 bills). Cash must be financed through debt or equity (think interest rate on your credit card). This interest rate (weighted average cost of capital) is usually between 6-12% depending on the credit worthiness of the company. In addition, Catco needs to use warehouse space to store the parts when they arrive, they need to insure the parts, some get damaged, and possibly some will become obsolete (they will move to a new model of construction equipment that does not use the same part so it is no longer useful and they need to dispose of it). These costs added together make up an inventory “holding cost” which is typically between 12-24% of the value of the item.

Sample Calculation: Catco produces about 120 bulldozers per week and works four (Mon-Thurs) 10-hour shifts. They need 4 tires per bulldozer and 480 tires can fit on a single truck. Catco orders once a week (assume they pay when they order). Transportation takes one week. They hold 2 weeks worth of tires in safety stock. Map out the inventory in the supply chain. How much do they have at any given time (how much at the beginning of the week vs. the end of the week)? If the tires cost $50 each and the annual inventory holding cost is 18%:

What is the annual holding cost of transportation inventory?

What is the annual holding cost of safety stock inventory?

What is the cost per tire for transportation inventory and safety stock inventory?

Answer 1

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