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
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 could be greater than
26 then a different product should be used to manage the logistics for the service part.
- Purchase Cost : $20,000
- Sales Price : $40,000
- Lead Time Days : 700
- Annual Demand Level : 5
- Cost of Capital: 12 %
The below table shows the result from the FS Alpha sample optimization for the above parameters. Step through and play with the demo using this URL:
FS Alpha Service Parts Profit Optimization
Long Lead Time, Low Demand, Capital Intensive Service Parts Profit Optimization
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
Related Concepts, Formulas, and Guides
Service Parts Profit Optimization
For more concepts, guides, and formulas related to Service Parts Profit Optimization visit the Firefly Semantics Service Parts Profit Optimization Help Center: