Local Profit Optimization | Concept

Ole Ersoy
Apr - 06  -  2 min

Local Profit Optimization is the determination of the Optimal Stocking Level for the parameters:

  • Purchase Cost
  • Sales Price
  • Lead Time Days
  • Annual Demand Level
  • Cost of Capital

Local Profit Optimization is performed by calculating the Marginal Profit and comparing it to Marginal Cost per Service Part Stocked.

When Marginal Cost exceeds Marginal Profit the optimal local stocking level has been found.

Local Profit Optimization is different from Global Profit Optimization since it only considers one Annual Demand Level.

Global Profit Optimization, which will be performed by FS Beta, considers all possible annual demand levels, which range from 0 to 26, and performance scoring analysis using the probability of each Annual Demand Level is used to select the optimal scenario to stock for.

If the annual demand for the service part is likely to be greater than 26 then a different product should be used to manage the logistics for the service part.

Examples

  • Purchase Cost : $20,000
  • Sales Price : $40,000
  • Lead Time Days : 700
  • Annual Demand Level : 5
  • Cost of Capital: 12 %

See the Canary Demo for the optimization table.

Notice that when the stocking level reaches 17 units, the Marginal Net Profit goes negative.

This means that Marginal Cost is greater than Marginal Profit, and thus the optimization stocking level is 16 units.