Assume an organization\'s current service level on order fill is as follows: Cur

Question

Assume an organization's current service level on order fill is as follows: Current order fil-70% Number of orders per year-10,000 Percent of unfilled orders back-ordered-85% Percent of unfilled orders canceled = 15% Back order costs per order $100 Lost pretax profit per canceled order = $15,000 Invoice deductions per order - $250.00 Begin with the lost cash flow to the seller at this 70 percent service level? * Cash Flow Lost = (3,000 x 85% x $100) + (3,000 x 15% x $15,000) + (3,000 x 85% x 250) ($255,000)$6,750,000 $637,500) = $7,642,500 cash flow lost at 70% order fill rate 1.) What is the nature of cash flow lost to increasing order fill rate? Calculate cash flow lost for order fill rates from 70% to 95%, by 5% increments. It may help to graph your answer or look at the percent change in cash flow lost for each 5% increase in order fill rate. In words, what is the nature of cash flow lost to increasing order fill rate? 2.) What does this mean to supply chain managers regarding investments to decrease cash flow lost?

Explanation / Answer

If current order fill is 70%

Cash flow lost = (3000 x 85% x $100) + (3000 x 15% x $15000) + (3000 x 85% x 250)

= $255000+6750000+637500

= $ 7642500.00

If current order fill is 75% Cash flow lost = (2500*85%*$100) + (2500*15%*$15000) + (2500*85%*$250) $212500 + $5625000 + $531250 = $6368750 If current order fill is 80% Cash flow lost = (2000*85%*$100) + (2000*15%*$15000) + (2000*85%*$250) $170000 + $4500000 + $425000 = $5095000 If current order fill is 85% Cash flow lost = (1500*85%*$100) + (1500*15%*$15000) + (1500*85%*$250) $127500 + $3375000 + $318750 = $3821250 If current order fill is 90% Cash flow lost = (1000*85%*$100) + (1000*15%*$15000) + (1000*85%*$250) $85000 + $2250000 + $212500 = $2547500 If current order fill is 95% Cash flow lost = (500*85%*$100) + (500*15%*$15000) + (500*85%*$250) $42500 + $1125000 + $106250 = $1273750 percentage change in cash flow lost = Changes in cash flow lost Decrease in cash flow lost % decrease in cash flow cost 7642500 6368750 1273750 16.66666667 5095000 1273750 20 3821250 1273750 25 2547500 1273750 33.33333333 1273750 1273750 50 The result of improving the order fill rate by every 5% results in cash flow lost avoidance by $1273750.00. In other words a 5% improvement in order fill results in a 16.667%-50% improvement in cash flow. Obviously increase in order fill rate require some type of investment in inventories and/or in technology. So a strategic manager would be required to determine the change in ROI as a results of improvement in order fill rate.

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