L2 Inventory management - inventory policies (continuous and periodic) Flashcards
Product fill rate
Proportion of product demand satisfied from inventory
Order fill rate
Proportion of orders filled from inventory
Cycle Service Level
Proportion of replenishment cycles without stockouts (all demands are met)
Cycle stock
Q/2
Safety stock tradeoff
Higher safety stock :
- Higher product availability
- Higher inventory holding cost
Lower safety stock:
- More stockouts
- Lower holding cost
Continuous review policy
- Inventory is continuously tracked
- An order for lot size Q is placed when inventory declines to the reorder point (ROP)
L = lead time
Gap between when order is placed and when order is received
ROP
ROP = Mean demand during lead time + Safety stock
z
z= ss/standard deviation during lead time
So can find CSL
Average total inventory level
Average total inventory level = cycle stock + safety stock
Periodic review policy
Inventory status is checked at regular intervals T and orders are placed to raise inventory level at Order Up to Level (OUL)
Comparison of policies
Continuous review:
- High value products
- Lower safety stock and justifies cost of monitoring inventory
- Lot size dictated by supplier
- Does not allow joint ordering
Periodic review:
- Low value products
- Higher safety stock and doesn’t justify cost of monitoring inventory
- Fixed order interval dictated by supplier (e.g. once a week)
- Items that require coordination (assembly of parts in manufacturing)
- Allows joint ordering f multiple items from same supplier
- Lower fixed ordering cost and transportation cost due to consolidation
Tradeoff of raising the level of safety inventory
- increases product availability
- increases inventory holding cost
