Automated replenishment using an economic profit quantity
Prior art methods base inventory management on maximizing cost. The present invention shifts the focus to maximizing economic profit, taking income tax into account. Systems and methods are provided for digitally calculating an economic profit quantity that maximizes economic profit, defined as the excess of net operating income over capital charge, as well as the corresponding values of economic profit and recommended safety stock. Methods are provided for utilizing the economic profit quantity and associated recommended safety stock quantity for automatically placing orders, for choosing among suppliers, and for calculating space requirements.
1. A method, comprising:
a. receiving by a digital processing system a request in digital form for estimation of an economic profit quantity and a reorder time, wherein economic profit quantity is a quantity of inventory to be ordered or produced, which corresponds to a maximum in estimated economic profit, economic profit being defined as the excess of net operating income over capital charge;
b. obtaining, in digital form, a plurality of parameters needed for the estimation of the economic profit quantity;
c. computing using logic executing within the digital processing system an estimation of the economic profit quantity, the logic
i) utilizing a parameter from the plurality of parameters,
ii) calculating net operating income using a functional relationship with income tax rate,
iii) calculating capital charge using a functional relationship with expected capital value of inventory, and
iv) calculating expected capital value of inventory using a functional relationship with safety stock quantity; and
d. estimating the reorder time at which the economic profit quantity should be ordered or produced, the time determined by the inventory dropping below a reorder point that depends upon an estimated demand and a lead time; and
e. returning, in digital form, the estimation of the economic profit quantity.
2. The method of claim 1 , wherein computing the economic profit quantity involves finding a quantity that maximizes an expression for economic profit.
3. The method of claim 1 , wherein computing the economic profit quantity involves finding a quantity that corresponds to an extreme value of an expression distinct from, but functionally related to, economic profit.
4. The method of claim 1 , further comprising:
e. estimating, by logic executing within the digital processing system, a recommendation for a safety stock quantity; and
f. returning, in digital form, wherein the safety stock quantity being recommended is based upon a calculation in which safety stock quantity depends functionally upon economic profit quantity.
5. The method of claim 1 , further comprising:
e. calculating, by logic executing within the digital processing system, an estimation of economic profit corresponding to the estimation of the economic profit quantity; and
f. returning, in digital form, the estimation of economic profit.
6. The method of claim 1 , wherein, in the step of obtaining, a parameter is obtained from digital storage.
7. The method of claim 1 , wherein the request is received through a digital network.
8. A method, comprising:
a. communicating by a digital processing system a first request in digital form for estimation of a first economic profit quantity and a reorder time, wherein economic profit quantity is a quantity of inventory to be ordered or produced, which corresponds to a maximum in estimated economic profit, estimated economic profit being defined as the excess of net operating income over capital charge; and
b. receiving, by the digital processing system, in digital form in response to the first request, an estimation of the first economic profit quantity, wherein
i) net operating income has been calculated using a functional relationship with income tax rate,
ii) capital charge has been calculated using a functional relationship with expected capital value of inventory, and
iii) expected capital value of inventory has been calculated using a functional relationship with safety stock quantity, and
c. estimating the reorder time at which the economic profit quantity should be ordered or produced, the time determined by the inventory dropping below a reorder point that depends upon an estimated demand and a lead time.
9. The method of claim 8 , wherein the first request is transmitted across a digital network.
10. The method of claim 8 , further comprising:
c. executing logic on a digital processing system that automatically causes a quantity of goods or material Q to be ordered or produced, such that Q differs from the first estimation of economic profit quantity by not more than ±20 percent of the estimation of first economic profit quantity.
11. The method of claim 8 , further comprising:
c. receiving, in digital form, a recommendation for a safety stock quantity, corresponding to the estimation of the first economic order quantity, wherein the safety stock quantity being recommended is based upon a calculation in which safety stock quantity depends functionally upon economic profit quantity.
12. The method of claim 11 , further comprising:
d. executing logic, on an digital processing system, that automatically causes a quantity of goods or material Q to be ordered or produced such that Q differs from the recommendation of safety stock quantity by not more than ±20 percent of the recommendation of safety stock quantity.
13. The method of claim 8 , further comprising:
c. receiving, in digital form, an estimation of economic profit that corresponds to the estimation of the first economic profit quantity.
14. The method of claim 8 , further comprising:
c. causing a parameter necessary for estimation of the first economic profit quantity to be obtained from electronic digital storage; and
d. communicating the parameter in digital form.
15. The method of claim 8 , wherein the first economic profit quantity is associated with ordering a quantity of goods or material of an item type from a first supplier, the method further comprising:
c. communicating a first request in digital form for estimation of a second economic profit quantity, wherein the second economic profit quantity is associated with ordering the same quantity of goods or material of the item type from a second supplier; and
d. executing digital logic that automatically selects a preferred supplier to be the first supplier if the estimation of the first economic profit quantity exceeds the estimation of the second economic profit quantity, and to be the second supplier if the estimation of the second economic profit quantity exceeds the estimation of the first economic profit quantity.
16. The method of claim 15 , further comprising:
e. executing logic on an digital processing system that automatically causes a quantity of goods or material Q to be ordered from the preferred supplier, such that if the preferred supplier is the first supplier, then Q differs from the estimation of the first economic profit quantity by not more than ±20 percent of the estimation of the first economic profit quantity, and if the preferred supplier is the second supplier, then Q differs from the estimation of the second economic profit quantity by not more than ±20 percent of the estimation of the second economic profit quantity.
17. An apparatus, comprising:
a. a digital processing system; and
b. logic, implemented in software, accessed from non-transitory, tangible storage, or digital hardware in the digital processing system, that
i) receives a request in digital form for estimation of an economic profit quantity and a reorder time, wherein economic profit quantity is a quantity of inventory to be ordered or produced, which corresponds to a maximum in estimated economic profit, economic profit being defined as the excess of net operating income over capital charge,
ii) obtains, in digital form, a plurality of parameters needed for the estimation of the economic profit quantity,
iii) computes an estimation of the economic profit quantity, the logic including the steps of
A) utilizing a parameter from the plurality of parameters,
B) calculating net operating income using a functional relationship with income tax rate,
C) calculating capital charge using a functional relationship with expected capital value of inventory, and
D) calculating expected capital value of inventory using a functional relationship with safety stock quantity, and
iv) estimates the reorder time at which the economic profit quantity should be ordered or produced, the time determined by the inventory dropping below a reorder point that depends upon an estimated demand and a lead time, and
v) returns, in digital form, the estimation of the economic profit quantity.
18. The apparatus of claim 17 , further comprising:
c. a digital storage system containing a plurality of parameters adapted to being used in estimation of the economic profit quantity;
d. a digital network adapted to communication between the digital processing system and the digital storage system; and
e. logic, implemented in software or digital hardware in the digital processing system, that obtains the plurality of parameters from the digital storage system through the digital network, and uses them in estimation of the economic profit quantity.
19. The method of claim 1 , wherein net operating income is defined as (1-T)(G-F-M), and wherein T is corporate income tax rate; G includes revenues due to price changes, volume, and translation; F is cost of goods sold; and M includes costs of administration.
20. The method of claim 1 , wherein capital charge is defined as the product of W and K, where W is weighted average cost of capital and K is operating capital.
21. The method of claim 1 , further comprising the steps of:
e. calculating a safety stock quantity that is functionally related to the reorder quantity; and
f. replenishing a safety stock when inventory on hand drops below the safety stock quantity.
22. The method of claim 1 , wherein the calculation of reorder quantity is performed reorder quantity is performed using an iterative numerical method.
23. An apparatus, comprising:
a. a digital processing system; and
b. logic, implemented in software, accessed from non-transitory tangible storage, or digital hardware in the digital processing system, that
i) communicates a first request in digital form for estimation of a first economic profit quantity_and a reorder time, wherein economic profit quantity is a quantity of inventory to be ordered or produced, which corresponds to a maximum in estimated economic profit, estimated economic profit being defined as the excess of net operating income over capital charge, and
ii) receives, in digital form in response to the first request, an estimation of the first economic profit quantity, wherein
A) net operating income has been calculated using a functional relationship with income tax rate,
B) capital charge has been calculated using a functional relationship with expected capital value of inventory, and
C) expected capital value of inventory has been calculated using a functional relationship with safety stock quantity, and
iii) estimates the reorder time at which the economic profit quantity should be ordered or produced, the time determined by the inventory dropping below a reorder point that depends upon an estimated demand and a lead time.