InventoryManagementforIndependentDemand.ppt

We want to minimize TC D, S, and H are constant. TC is a function of Q. Economic Order Quantity (3) Let Q* be the economic order quantity. Then For Q*, annual order cost = annual inventory cost Simple Reorder Point Use this method when daily demand is constant. R = reorder point d = daily demand (may have to compute this) L = lead time (Caution: if lead time is given in weeks, convert this to days. A week may be 5, 6, or 7 days). R = dL Reorder Point with Safety Stock Safety stock (SS) is extra inventory that is kept to meet unexpected demand. Reorder point without safety stock Reorder point with safety stock Reorder Point with Safety Stock (2)How much safety stock (SS) ? Reorder point with safety stock: Service level is the probability of having enough inventory to meet demand during lead time The probability of a stockout is (1 - service level) Demand during lead time is normally distributed with mean and standard deviation sdL Reorder Point with Safety Stock (2)How much safety stock (SS) ? z is the number of standard deviations required to meet the desired service level SS = zsdL Reorder point with safety stock: R = + zsdL Reorder Point with Safety StockExample Given D = annual demand = 10,000 N = number of business days per year = 250 The company operates 5 days per week = average daily demand sdL = standard deviation of demand during lead time = 20 L = lead time = 1 week Service level = 96% Find: reorder point with safety stock: R = + zsdL Computing Reorder Point with Safety Stock If average daily demand ( ) is not given, compute it. Note: = D/N and D = = 10,000/250 = 40 If the lead time is given in weeks or months, compute lead time in days. L = 1 week = 1(5) = 5 days Note: 1 week is the number of days per week that the company operates. This may be 5, 6, or 7. Computing Reorder Point with Safety Stock (2) Find the z value for the service level (96%) Probability of a stockout = 1 – service level = 4% z 50% 46% App