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Simple approach

Simple approach. Basic Principles. Inventories should be run on the basis of Inventory Position not on net inventory on hand!! Inventory Position = On hand + On Order - Backlog. Key for safety is demand over delivery lag. Stocks (S,s). Safety Stocks & Reorder point s. s. Equations.

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Simple approach

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  1. Simple approach

  2. Basic Principles • Inventories should be run on the basis of Inventory Position not on net inventory on hand!! • Inventory Position = On hand + On Order - Backlog Key for safety is demand over delivery lag

  3. Stocks (S,s)

  4. Safety Stocks & Reorder point s s

  5. Equations • P{Backlog} = b • P{Demand in L > s} = b • 1-N{s| mean D in L, sigma D in L} • F{(s-mean D in L)/sigma D in L} =b

  6. Exemple • D = 40 s = 10 • L = 5 • b = 0.05 • From Tables k = 1.64 • …

  7. Lot Sizing

  8. Stock Avg = Q/2 C= KD/Q + c Q/2 Number of Lots = D/Q Define G = KD y h = c/2 C = G/Q + hQ D:Demand K: Ordering cost c: Holding cost Instantaneous Regular Forever Avg Cost/period EOQ D Q T

  9. EOQ formula Min {G/Q + h Q} -G/Q2 + h = 0

  10. Properties • Total cost split in two equal ammounts • Ordering • Holding • Inventories are proportional to square root of demand • Flat cost curve • Take it with lots of salt! • Expandable and generalizable

  11. Sensitivity K = 100,200,500 and 1000

  12. Exemple 2 • K = 100€ per order • c = 0.1 € unit month • D = 50 units/month (s,S) policy, with s = critical base stock and S = s+Q

  13. Average On hand Inventory • (ss+Q + ss)/2 = ss+Q/2 Q ss If Demand is the sum of D random individual demands, each for average 1 unit , its sigma will be proportional to sqroot(D) Well managed inventories should be proportional to the square root of Demand

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