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Inventory Control: Part 3 –Independent Demand Inventories

Inventory Control: Part 3 –Independent Demand Inventories. Types of Inventories. By Function - Lot-Size (Cycle or Replenishment) - Instantaneous (Purchase) - Non-Instantaneous (Produce) - Safety (Fluctuation or Buffer) - Anticipation (Seasonal) - Transportation (Pipeline)

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Inventory Control: Part 3 –Independent Demand Inventories

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  1. Inventory Control: Part 3 –Independent Demand Inventories

  2. Types of Inventories • By Function - Lot-Size(Cycle or Replenishment) - Instantaneous (Purchase) - Non-Instantaneous (Produce) - Safety (Fluctuation or Buffer) - Anticipation (Seasonal) - Transportation (Pipeline) - Hedge (Beyond Scope of Class)

  3. Safety Stocks • Used for Emergencies • Finished Goods: Unexpected Demand (Level Related to Customer Service) • Raw Materials: Orders Not Received • Work-in-Process (WIP): Worker Unavailable or Machine Breakdown - Decoupling Inventory • Also Known as Buffer or Fluctuation Inventory

  4. Quantity Maximum probable demand during lead time Expected demand during lead time (DDLT) OP Safety stock (SS) Time LT Finished Goods Safety Stocks: Stored with Lot-Size Stocks

  5. Safety Stocks • From Graph: OP = DDLT + SS where OP = Order Point DD = Forecast Demand LT = Lead Time SS = Safety Stock • So: SS = OP – DDLT by Algebra • OP Set from Customer Service Level (SL)

  6. Safety Stocks Example 1 The Frigid Corporation manufactures refrigerators. The probability distribution of demand during lead time is: Demand Probability 10 .20 20 .20 30 .30 40 .20 50 .10 Suppose the customer service level is 70%. Determine the reorder point (consider only 10, 20, 30, 40, 50).

  7. Safety Stocks Example 1 • Let SL = .7 (70%) Demand Probability CDF 10 .2 .2 20 .2 .4 30 .3 .7  40 .2 .9 50 .1 1.0 • OP = 30 (Meets Demand 70% of Time)

  8. Safety Stocks Example1 • SS = OP – DDLT DDLT= Expected Value of Demand DDLT= .2(10)+.2(20)+.3(30)+.2(40)+.1(50) DDLT= 28 SS = 30 – 28 = 2 • If SL is 80%, What is OP and SS? • If SL is 90%, What is OP and SS?

  9. Risk of a Stock Out Probability of No Stock Out (Service Level) Quantity Safety Stock Mean OP Safety Stocks:Normal Demand

  10. Safety Stocks Example 2 The Inandout Production Company requires steel rods at the mean rate of 35 rods per day. This rate follows a normal distribution with a standard deviation of 3 per day. The service level has been set at 90%. If lead time for reordering is one day, what is the optimum safety stock?

  11. Safety Stocks:Example 2 • Given: SL = .9 (90%), DDLT = 35, DDLT = 3 Z from Normal Table (text page 314) = 1.28 ( Z is also known as safety factor) Z = (OP – DDLT) / DDLT or OP = DDLT + Z DDLT = 35 + (1.28)(3)  39 SS = OP – DDLT = 39 – 35 = 4

  12. Types of Inventories Type Best Size 1. Lot-Size a. Instantaneous Q*/2 b. Non-Instantaneous IMAX*/2 2. Safety OP - DDLT 3. Anticipation Guesstimate 4. Transportation (Usage) (Time) 5. Hedge Guesstimate

  13. Implementation ofInventory Control • Q* and N* Cannot Both be Fixed (E.g. Q* = 10, A= 100, N* = A/Q* = 100/10 = 10) • N Varies and Q* Fixed: Order Point System (AKA Fixed Order Quantity). Requires Two-Bin System, Kanban, or Perpetual Inventory. Order say Q* when Actual Inventory ≤ OP. • Q Varies and N* Fixed: Periodic Review System (AKA Fixed Order Cycle System)

  14. Periodic Review System • Let T = D (R + LT) + SS Where T = Target Inventory Level D = Demand per Unit of Time LT = Lead Time R = Review Period (Fixed at 1/N*) SS = Safety Stock • Order Q = T – I Where I = Inventory on Hand. • See Example on Page 321 of Text.

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