Matching Supply with Demand: An Introduction to Operations Management 2nd Edition by Cachon Terwiesch

Question

Matching Supply with Demand: An Introduction to Operations Management 2nd Edition by Cachon Terwiesch

Edition 2ISBN: 978-0697811059

Matching Supply with Demand: An Introduction to Operations Management 2nd Edition by Cachon Terwiesch

Edition 2ISBN: 978-0697811059

Exercise 1

(Dell) What percentage of cost of a Dell computer reflects inventory costs? Assume Dell's yearly inventory cost is 40 percent to account for the cost of capital for financing the inventory, the warehouse space, and the cost of obsolescence. In other words, Dell incurs a cost of $40 for a $100 component that is in the company's inventory for one entire year. In 2001, Dell's 10-k reports showed that the company had $400 million in inventory and COGS of $26,442 million.

Explanation

Verified

Cost of inventory will include cost of financing inventory, cost of leasing / buying of the warehouse cost of inventory getting obsolete etc. There may be fluctuations in the inventory at the warehouse, thus average value is taken for calculation simplification.Little's Law states that the long-term average number of customers in a stable system is equal to the long-term average effective arrival rate, multiplied by the average time a customer spends in the system.In this problem, percentage of a computer's inventory cost is to be computed, which reflects the inventory cost. To solve this, it has been asked to assume annual inventory cost to be 40% which accounts for inventory financing cost, warehouse space cost cost of obsolesce. It is also given that 2001 - company's 10k report shows $400 million of inventory and COGS to be $26,442 million.
By using the concept of Little's Law, find the flow time as -

And,

Now, compute the per unit inventory cost -

So,

of cost of a computer reflects inventory costs.