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CHAPTER12

This document summarizes several inventory management models: 1) Probabilistic models account for unknown demand using probability distributions. Safety stock is held to reduce stockouts. The optimal amount minimizes total costs of stockouts and holding excess inventory. 2) Service level represents the probability of meeting demand. Higher demand variability requires more safety stock to maintain the same service level. 3) Models determine reorder points based on expected demand, lead times, demand variability, and desired service levels. The reorder point is adjusted based on whether demand or lead times vary. 4) Single period models are for seasonal products. The optimal stock level balances stockout and overage costs based on the desired service level.

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74 views

CHAPTER12

This document summarizes several inventory management models: 1) Probabilistic models account for unknown demand using probability distributions. Safety stock is held to reduce stockouts. The optimal amount minimizes total costs of stockouts and holding excess inventory. 2) Service level represents the probability of meeting demand. Higher demand variability requires more safety stock to maintain the same service level. 3) Models determine reorder points based on expected demand, lead times, demand variability, and desired service levels. The reorder point is adjusted based on whether demand or lead times vary. 4) Single period models are for seasonal products. The optimal stock level balances stockout and overage costs based on the desired service level.

Uploaded by

Majid Khan
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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CHAPTER12: INVENTORYMANAGEMENTProbabilistic Models & Safety Stock°Inventory models that apply

when product demand is unknown but can be specified usingprobability distributionTo reduce stockouts, you can
hold extra units in inventory (safety stock)ROP = d * L + ssod = daily demandoL = Order lead time, # of days it
takes to deliver an ordeross = safety stockAnnual stockout costs = (Sum of units short for each demand level *
Probability ofthat demand level * Stockout cost/unit * Number of orders per year) + amount ofunits in safety stock *
holding cost/unitChoose amount of safety stock that minimizes total costs°Service Level: The complement of the
probability of a stockoutService Level = 1 – probability of a stockoutUncertain demand raises the probability of a
stockoutProbability that a demand or a collection of demands is met°Use prescribed service levels to set safety
stock when stockout costs can’t be determinedROP = Expected demand during lead time + ZσdLToZ = # of
standard deviationsoσdLT= Standard deviation of demand during lead timeoSafety Stock = ZσdLToZ value is found
using a normal table with service level numberDemand is Variable and Lead time is constant°ROP =
(Averagedaily demand * Lead time in days) * ZσdLT°Where σ= standard deviation of demand during lead time =
σd√(lead time)°And σd= standard deviation of demand per dayLead Time is variable and Demand is constant°ROP
= (daily demand *averagelead time in days) + Z * (Daily Demand) * σLT°Where σLT= standard deviation of lead
time in daysSingle Period Model°Describes a situation in which one order is placed for a product°At the end of the
sales period, any remaining product has little or no value°Used for seasonal products (newspaper, magazines,
Christmas trees)°Cs= Cost of Shortage = sales price/unit – cost/unit°CO= Cost of overage = cost/unit – salvage
value/unit (if applicable)°Service Level (probability of not stocking out) = Cs÷ (Cs+ Co)°Find Z value using the
service level°Optimal stocking level = daily demand + Zσ°If service level is under 0.50, company should order less
than daily demandFixed-Period (P) Systems°Previous inventory models have been fixed-quantity (Q)
systemsSame fixed amount is added to inventory every time an order is placedOrders are event triggered, when
inventory decreases to ROP, new order is placed

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