Home' MHD Supply Chain Solutions : MHD May-Jun 2017 Contents Approach
Receiving Costs should include time spent
which related to the frequency of order
placement, payment and receipt. If the
frequency of ordering does not impact
employment time usage, it should not be
included. Ask the question; if these orders
were not being placed, would this time still be
required? If so it is a fixed cost and should not
Just like the Carrying Cost calculations,
best practice Receiving cost calculations only
observe incremental ordering costs over and
above fixed business costs.
Include time costs incurred by the following
departments, provided they are involved in the
ordering and receipting process. Your organisation
may have different names or more touchpoints
involved, if so, also include them (see Table 2.).
Freight cost that vary significantly with order
frequency can also be added to Equation 4.
Costs directly associated with completion of
receiving processes, such as phone calls and
stationary usage can have their relative variable
cost percentage added in to Equation 4.
Economic order quantities are an invaluable tool
in optimising supply chains. However, confusing
and varying definitions of EOQ mean that
many organisations are incurring themselves
unnecessary cost. This article has set out to
redefine how the key components of EOQ,
carrying and receiving cost, are determined
to maximise the benefit of EOQ. In doing so,
the derivation of EOQ has been revised to
more accurately represent the reality of the
replenishment decision making process. EOQ
calculations should only consider the costs
which orders actually affect: variable costs!
Though this article has predominantly focused
on a distributor’s supply chain, the same
overarching logic applies to manufacturers
and MRO. By using the above approach,
the variable supply chain cost curve can be
optimised and subsequently lower total supply
chain costs, while maintaining all other supply
chain performance metrics.
Charles Edwards is a consultant with
GRA, based in Melbourne. Charles’ previous
clients include the Defence Force, MRO
and ASX-listed retail businesses within
Australia. Charles has experience in supply
chain strategic review, sales and operations
planning, inventory optimisation, 3D printing
and demand and replenishment planning.
He is particularly interested in overarching
business strategy and the impacts of
disruptive technologies on the supply chain.
For more information visit www.gra.com.
attributable to variable cost is determined, it
should then be multiplied by the total annual
storage cost for a location to determine the
variable storage cost attributable to inventory
holding. The total annual storage cost is shown
in Table 1.
If there are significant offsite storage areas,
it is worth adding the additional labour time
spent managing these areas. This can also
include stock stored in ‘difficult to access’
locations, such as over-shelves and in back
storage rooms, as there is additional labour
and time required to move these items back to
their ‘shippable’ locations.
Where any warehousing is outsourced, the
variable cost component should be accounted
for. Typically, the variable component of storage
costs is about 10-20% total site costs.
Obsolescence, damage and theft
Typically, the full value of obsolescence,
damage and theft should be used given the
linear relationship with inventory levels.
Demurrage costs should be included as they
vary with inventory levels.
Only taxes on the value of the inventory (if
applicable) are variable and should be included.
Calculating receiving costs
For order frequency decision making, receiving
cost should be determined as:
Receiving costs include labour time costs
that are purely associated with the order and
receipt process and are typically assessed over
a one-year period. As higher order frequencies
result in a net increase in processing times,
receiving cost should be calculated based on
the percentage of time various departments
spend on activities related to the purchasing
Time Costs to Include
Time Costs to Exclude
• Time spent placing and
• Time spent contacting the
vendor (regarding orders)
• Time spent expediting/delaying
• Time spent forecasting
• Time spent setting up new items
• Any other non-order related
• Time spent processing receipts
• Time spent paying vendors
• Time spent tendering
• Time spent setting up new
• Time spent receipting stock
and associated paper/electronic
• Time spent conducting quality
inspections (if applicable)
• Time spent repackaging
• Unloading trucks
• Making shipments
Table 2. Time costs to include and exclude in receiving cost calculations.
WHAT IF MY COMPANY
If your company outsources logistics,
the ‘Receipting Team’ costs in Table 2
should be replaced by the equivalent
annual 3PL fees.
Similarly, if the information is avail-
able, 3PL freight costs which vary with
order frequency can also be included.
Waste Removal and cleaning
Repairs and Maintenance
Time spent managing idle stock (including cycle counting)
Table 1. Costs to include in total annual storage costs.
MHD SUPPLY CHAIN SOLUTIONS — MAY / JUNE 2017
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