Lecture 6 (1)

Question 1

Safety stock

Answer 1

Amount of inventory carried in addition to expected demand

s

Question 2

safety stock can be determined based on many different criteria

Answer 2

A common approach is to simply keep a certain number of weeks of supply needs to be kept in safety stock

A better approach is to use probability: consider probability of running out of stock

Assume demand over a period of time is normally distributed with a mean and a standard deviation

Question 3

The key difference between a fixed-order quantity model where demand is known and one where demand is uncertain is in computing

Answer 3

the reorder point

Question 4

Reoder point fomula

Answer 4

R = d^L +zomegaL

R = reorder point in units
d^* =average daily demand
L = lead time in days
z = number of standard deviations for a specified service probability
omegaL = standard deviation of usage during lead time

Question 5

Lead time

Answer 5

Time between placing an order and receiving the items

Question 6

Fixed-timer period models

Answer 6

Inventory is counted only at particular time (every week or every month)

Generate order quantities that vary from period to period, depending on usage rates

Safety stock must protect against stock outs

Decision: what is the order up-to level?

Question 7

fixed time period model with safety stock

Answer 7

Time periods are qual but ending inventory varies

Reorder quantities varies, depending upon ending inventory level

Question 8

Fixed time period model with safety stock formula

Answer 8

q = d°(T + L) + z*omega T+L - I

q = quantity to be order
T = number of days between reviews
L = lead time in days
(T+L) = Vulnerable period
d° = forecast average daily demand
z = number of standard deviations required for specified service level
omegaT+L = Standard deviation of demand during the review and lead time
I = current inventory level (including items on order)

Question 9

Fixed order quantity (continuous review)

Answer 9

Inventory is continuously tracked
Order for a lot size Q is placed when the inventory declines to the reorder point (R)

Costly but requires less safety stock

Question 10

Fixed time period (periodic review)

Answer 10

Inventory status is checked at regular periodic intervals

Order is placed to raise the inventory level to a specified threshold (order up-to level)

Requires higher level of safety stock

Question 11

Average inventory

Answer 11

Expected amount of inventory over time
Average inventory = Q/2 + SS

Question 12

Inventory turn

Answer 12

Number of times inventory is replaced over a year - a measure of efficiently inventory is used

Inventory turn = D/(Q/S +SS)

Question 13

Average inventory value formula

Answer 13

(Q/2 +SS)*C

Question 14

Price break inventory model

The price-break model or quantity discount model

Answer 14

Relaxes the constant price assumption by allowing purchase quantity discounts

Considers the tradeoff between purchasing in large quantity to take advantage of the price discount and issuing fewer orders, against holding higher inventory

Due to the step-wise shape of the total inventory cost curve, the optimal order quantity lies on either one of the feasible EOQs or at the price break point

Question 15

Price break model solution procedure

To find the lowest cost order quantity

Answer 15

1) sort prices from lowest to highest
2) Calculate the EOQ for each price (starting with the lowest) until a feasible order quantity is found

3) If the first feasible EOQ is for the lowest price, this quantity is best, otherwise

4) calculate the total cost for the first feasible EOQ and calculate total cost at each price break lower than the price associated with the first feasible EOQ

5) Compare total costs at the first feasible EOQ and the all lower price break points and chose the quantity that provides the lowest cost

Question 16

summary insights

Answer 16

basic fixed order quantity model EOQ optimally balances orderin vs holding costs –> optimal cycle stock levels

assumes constant demand (and no demand uncertainty) and constant price

When quantity discounts are avialable, the basic EOQ model needs to be modified

When there is demand uncertainty, additional stock - safety inventory - is required

Question 17

safety stock depends on

Answer 17

Demand variability, lead time, desired customer service level and replenishment policy

Question 18

Two basic multiperiod inventory replenishment policies are

Answer 18

Fixed order quantity inventory models

Fixed time period inventory models