Escolar Documentos
Profissional Documentos
Cultura Documentos
Outline
EOQ model Single period models Multiple order opportunities Risk Pooling
Definitions
Inventory-A physical resource that a firm holds in stock with the intent of selling it or transforming it into a more valuable state.
Inventory System- A set of policies and controls that monitors levels of inventory and determines what levels should be maintained, when stock should be replenished, and how large orders should be
2-3
Supply
Inventory & warehousing costs Production/ purchase costs Transportation costs Inventory & warehousing costs Transportation costs
2-4
2-5
2-6
In 1994, IBM continued to struggle with shortages in their ThinkPad line In 1993, Dell Computers was sharply off in its forecast of demand, resulting in inventory write downs The average carrying cost of inventory across all mfg.. in the U.S. is 30-35% of its value. Indian Oil, Bharat Petroleum, FCI
2-7
Uncertain demand makes demand forecast critical for inventory related decisions:
What to order? When to order? How much is the optimal order quantity?
INVENTORY POLICY!!
2-8
Estimation of customer demand Replenishment lead time The number of different products being considered The length of the planning horizon Costs
Order cost:
Product cost Administration cost (Purchase orders, receiving the orders) Transportation cost
State taxes, property taxes, and insurance on inventories Maintenance costs Obsolescence cost Opportunity costs
Economic Lot Size Model Single Period Models Multiple Order Opportunities Continuous Review Policy Periodic Review Policy
2-10
2-11
Assumptions
D items per day: Constant demand rate Q items per order: Order quantities are fixed, K, fixed setup cost, incurred every time the warehouse places an order. h, inventory carrying cost accrued per unit held in inventory per day that the unit is held (also known as, holding cost) Lead time = 0 (the time that elapses between the placement of an order and its receipt) Initial inventory = 0
2-12
Deriving EOQ
Average inventory level: Q/2 No of Orders=D/Q Average total cost per unit time:
KD hQ Q 2
(EOQ) Q =
*
2 KD h
2-13
EOQ: Costs
FIGURE Economic lot size model: total cost per unit time
2-14
Sensitivity Analysis
Total inventory cost relatively insensitive to order quantities Actual order quantity: Q Q is a multiple b of the optimal order quantity Q*. For a given b, the quantity ordered is Q = bQ*
b Increase in cost .5 25% .8 2.5% .9 0.5% 1 0 1.1 .4% 1.2 1.6% 1.5 8.9% 2 25%
2-15
Demand Uncertainty
The forecast is not 100% correct. The longer the forecast horizon, the worse the forecast Aggregate forecasts are more accurate.
2-16
Order Quantity > Demand => Dispose excess inventory Order Quantity < Demand => Lose sales/profits
2-17
2-18
Compare marginal profit of selling an additional unit and marginal cost of not selling an additional unit Marginal profit/unit = Selling Price - Variable Ordering (or, Production) Cost
To balance annual inventory holding costs and annual fixed order costs. To satisfy demand occurring during lead time. To protect against uncertainty in demand.
TWO POLICIES
2-20
Daily demand is random and follows a normal distribution. Inventory level is continuously reviewed
2-21
AVG = Average daily demand STD = Standard deviation of daily demand L = Replenishment lead time h = Cost of holding one unit of the product for one day at the distributor = service level.
2-22
2-23
Order Quantity, Q:
2 K AVG Q= h
2-24
1.29
1.34
1.41
1.48
1.56
1.65
1.75
1.88
2.05
2.33
3.08
z is chosen from statistical tables to ensure that the probability of stockouts during lead time is exactly 1 -
2-25
Inventory level before receiving an order = z STD L Inventory level after receiving an order = Q z STD L Average Inventory =
Q 2
z STD L
2-26
2-27
2-28
Value
44.58
32.08
86.20
176
Q=
Inventory level is reviewed periodically at regular intervals An appropriate quantity is ordered after each review Two Cases:
(s, S) policy
2-30
(s,S) policy
2-31
Determine a target inventory level, the basestock level review the inventory position and order enough to raise the inventory position to the base-stock level Assume: r = length of the review period L = lead time AVG = average daily demand STD = standard deviation of this daily demand.
2-32
2-33
2-34
may require the supplier, to maintain a specific service level Supplier will use that target to manage its own inventory
Facility may have the flexibility to choose the appropriate level of service the higher the service level, the higher the inventory level.
2-35
Retail Strategy
Given a target service level across all products determine service level for each SKU so as to maximize expected profit. Everything else being equal, service level will be higher for products with:
high profit margin high volume low variability short lead time
2-36
Risk Pooling
Demand variability is reduced Decrease in safety stock and therefore reduces average inventory. Demand Variation
2-37
Critical Points
The higher the coefficient of variation, the greater the benefit from risk pooling
risk pooling benefits are higher in situations where demands observed at warehouses are negatively correlated
Reallocation of items from one market to another easily accomplished in centralized systems.
2-38
Safety stock Service level Overhead costs Customer lead time Transportation costs
2-39
Electronic equipment manufacturer and distributor 2 warehouses for distribution in New York and New Jersey (partitioning the northeast market into two regions) Customers (that is, retailers) receiving items from warehouses (each retailer is assigned a warehouse) Warehouses receive material from Chicago Current rule: 97 % service level Each warehouse operate to satisfy 97 % of demand (3 % probability of stock-out)
2-40
New Idea
Replace the 2 warehouses with a single warehouse (located some suitable place) and try to implement the same service level 97 % Delivery lead times may increase But may decrease total inventory investment considerably.
2-41
Historical Data
PRODUCT A
Week Massachusetts New Jersey Total 1 33 46 79 2 45 35 80 3 37 41 78 4 38 40 78 5 55 26 81 6 30 48 78 7 18 18 36 8 58 55 113
PRODUCT B
Week Massachusetts New Jersey Total 1 0 2 2 2 3 4 6 3 3 3 3 4 0 0 0 5 0 3 3 6 1 1 2 7 3 0 3 8 0 0 0
2-42
Total
Total
A
B
77.9
2.375
20.71
1.9
0.27
0.81
2-43
Inventory Levels
Product Average Demand During Lead Time 39.3 1.125 38.6 1.25 77.9 2.375 Safety Stock Reorder Point Q
A B A B A B
65 4 62 5 118 6
132 25 31 24 186 33
2-44
Savings in Inventory
At NJ warehouse is about 88 units At MA warehouse is about 91 units In the centralized warehouse is about 132 units Average inventory reduced by about 25 percent
At NJ warehouse is about 15 units At MA warehouse is about 14 units In the centralized warehouse is about 20 units
Echelon inventory at any stage or level of the system equals the inventory on hand at the echelon, plus all downstream inventory (downstream means closer to the customer)
2-46
Echelon Inventory
Supplier
2-48
lead time between the retailer and the distributor plus the lead time between the distributor and its supplier, the wholesaler.
AVG = average demand at the retailer STD = standard deviation of demand at the retailer e e R = L AVG z STD L Reorder point
2-49
2-50
45 45 45 45
1.2 .9 .8 .7
2-51
2-52
Follow the same approach Echelon inventory at the warehouse is the inventory at the warehouse, plus all of the inventory in transit to and in stock at each of the retailers. Similarly, the echelon inventory position at the warehouse is the echelon inventory at the warehouse, plus those items ordered by the warehouse that have not yet arrived minus all items that are backordered.
2-53
Practical Issues
Periodic inventory review. Tight management of usage rates, lead times, and safety stock. Reduce safety stock levels. Introduce or enhance cycle counting practice. ABC approach. Shift more inventory or inventory ownership to suppliers. Quantitative approaches. FOCUS: not reducing costs but reducing inventory levels. Significant effort in industry to increase inventory turnover
SUMMARY
Matching supply with demand a major challenge Forecast demand is always wrong Longer the forecast horizon, less accurate the forecast Aggregate demand more accurate than disaggregated demand Need the most appropriate technique Need the most appropriate inventory policy
2-55