inventory management and risk pooling.pptVIP

Continuous Review Policy Example A distributor of TV sets that orders from a manufacturer and sells to retailers Fixed ordering cost = $4,500 Cost of a TV set to the distributor = $250 Annual inventory holding cost = 18% of product cost Replenishment lead time = 2 weeks Expected service level = 97% Month Sept Oct Nov. Dec. Jan. Feb. Mar. Apr. May June July Aug Sales 200 152 100 221 287 176 151 198 246 309 98 156 Continuous Review Policy Example Average monthly demand = 191.17 Standard deviation of monthly demand = 66.53 Average weekly demand = Average Monthly Demand/4.3 Standard deviation of weekly demand = Monthly standard deviation/√4.3 Parameter Average weekly demand Standard deviation of weekly demand Average demand during lead time Safety stock Reorder point Value 44.58 32.08 89.16 86.20 176 Weekly holding cost = Optimal order quantity = Average inventory level = 679/2 + 86.20 = 426 Continuous Review Policy Example Optimal inventory policy assumes a specific service level target. What is the appropriate level of service? May be determined by the downstream customer Retailer 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 2.2.9. Service Level Optimization Service Level Optimization FIGURE 2-11: Service level inventory versus inventory level as a function of lead time Trade-Offs Everything else being equal: the higher the service level, the higher the inventory level. for the same inventory level, the longer the lead time to the facility, the lower the level of service provided by the facility. the lower the inventory level, the higher the impact of a unit of inventory on service level and hence on expected profit 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, servic