Lecture 6 (1) Flashcards
Safety stock
Amount of inventory carried in addition to expected demand
s
safety stock can be determined based on many different criteria
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
The key difference between a fixed-order quantity model where demand is known and one where demand is uncertain is in computing
the reorder point
Reoder point fomula
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
Lead time
Time between placing an order and receiving the items
Fixed-timer period models
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?
fixed time period model with safety stock
Time periods are qual but ending inventory varies
Reorder quantities varies, depending upon ending inventory level
Fixed time period model with safety stock formula
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)
Fixed order quantity (continuous review)
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
Fixed time period (periodic review)
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
Average inventory
Expected amount of inventory over time
Average inventory = Q/2 + SS
Inventory turn
Number of times inventory is replaced over a year - a measure of efficiently inventory is used
Inventory turn = D/(Q/S +SS)
Average inventory value formula
(Q/2 +SS)*C
Price break inventory model
The price-break model or quantity discount model
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
Price break model solution procedure
To find the lowest cost order quantity
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