Chapter11TheOrderUp-ToModel.ppt

Chapter 11: The Order Up-To Model Medtronic’s InSync pacemaker supply chain and objectives Look at problem from two persopectives … One distribution center (DC) in Mounds View, MN. About 500 sales territories throughout the country. Consider Susan Magnotto’s territory in Madison, Wisconsin. Objective: Because the gross margins are high, develop a system to minimize inventory investment while maintaining a very high service target, e.g., a 99.9% in-stock probability or a 99.9% fill rate. Timing in the order up-to model Time is divided into periods of equal length, e.g., one hour, one month. During a period the following sequence of events occurs: A replenishment order can be submitted. Inventory is received. Random demand occurs. Lead times: An order is received after a fixed number of periods, called the lead time. Let l represent the length of the lead time. Order up-to model vs. newsvendor model Both models have uncertain future demand, but there are differences… Newsvendor applies to short life cycle products with uncertain demand and the order up-to applies to long life cycle products with uncertain, but stable, demand. The Order Up-To Model:Choosing a demand distribution/forecast Can calculate the mean m and standard deviation s from empirical data Calculate from monthly numbers For DC: average weekly demand = 80.6 and weekly standard deviation = 58.81 For sales territory average daily demand = 0.29 units The Order Up-To Model:Model design and implementation Order up-to model definitions On-order inventory [a.k.a. pipeline inventory] = the number of units that have been ordered but have not been received. On-hand inventory = the number of units physically in inventory ready to serve demand. Backorder = the total amount of demand that has has not been satisfied: All backordered demand is eventually filled, i.e., there are no lost sales. Inventory level = On-hand inventory - Backorder. Inventory position = On-order inventory + Inventory