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06 Inventory Management ROP

This document summarizes inventory management systems. It discusses continuous review/Q systems where the order quantity (Q) is fixed and demand is reviewed continuously. It also discusses periodic review/P systems where the time interval (T) between reviews is fixed. It provides formulas to calculate reorder points and order-up-to levels under different demand and lead time assumptions. It also compares the advantages of continuous versus periodic review systems.

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132 views15 pages

06 Inventory Management ROP

This document summarizes inventory management systems. It discusses continuous review/Q systems where the order quantity (Q) is fixed and demand is reviewed continuously. It also discusses periodic review/P systems where the time interval (T) between reviews is fixed. It provides formulas to calculate reorder points and order-up-to levels under different demand and lead time assumptions. It also compares the advantages of continuous versus periodic review systems.

Uploaded by

kavish09
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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Inventory

Management
Review Period
Sanjay Choudhari

Indian Institute of Management


Indore

Inventory Control Systems


Two important questions:

How much?

When?

Review Period
Continuous Review / Q
System
Q is fixed

Periodic Review / P system

T is fixed

1. Q*= EOQ :
Economic Order
Quantity

1. T : Time interval

2. R : Reorder point

2. OUL = TI : Target
inventory level

Continuous Review Period


Demand is either Deterministic or Stochastic
Lead Time is either Deterministic or Stochastic
Constant demand rate, constant lead time
Variable demand rate, constant lead time
Constant demand rate, variable lead time
Variable demand rate, variable lead time

Continuous Review Systems


IP
Order
received

On-hand inventory

Order
received

IP

IP

Order
received

Order
received
Q

R
Order
placed

Order
placed

Order
placed

0
LT
TBO1

LT2
TBO2

Q System When Demand Is Uncertain

LT

TBO3

Time

Demand During Lead Time


t = 2

t = 2

t = 2

Demand for day 1

Demand for day 2

Demand for day 3

t = 3.46

15
Demand for 3-days lead time

Demand During Lead Time


Cycle-service level = 85%

Probability of stockout
(1.0 0.85 = 0.15)
Average
demand
during
lead time

R
zdLT

Continuous Review Period


Reorder point (R) = Expected demand + Safety stock
during lead time

d LT

=
Where

dLT
dLT
d

LT d d LT
2

dLT

Z*

SAP

= Standard deviation of demand during lead time

= Mean demand

LT

= Lead time

d
LT

= Std. deviation of the demand


= Std. deviation of the lead time

Z = Standard normal deviate associated with the cycle service level

Continuous Review Period


Cycle Service
Level :
Probability that a stockout will not occur
during the lead time of inventory cycle

Service Levels, Safety Stock and


Shortages

Service level

Cycle Service Level:

Prob (No stock-out during lead time)

Fraction of annual demand satisfied


immediately from stocks
Fill rate:

Expected number of unit short in each order cycle

Robert G. Brown shows relationship..


the number of standard deviations of safety
stock, the service level and the expected number of units
short correspondence

Service Levels, Safety Stock and


Shortages

D
No of stockout / year EN E (n ) *
Q

Where, E(n) = Expected no. of units short per Cycle


= E(z)* dLT
EN = (1- Fill Rate) * D
D = Annual demand
Q = EOQ
E (Z) =

Expected number of units short from a normalized


table where mean = 0 and = 1

dLT = Standard deviation of demand during lead time

Periodic Review
Inventor y

Variable Demand (d),


Constant Lead Time (LT)

OUL
Imax

Q1

Q2

Q3

Q1

Q2

SS
LT
Order
Placed

T
Order
Received

LT
Order
Placed

Q3
Imin
T

Order
Received

LT
Order
Placed

Order
Received

Tim
e

Periodic Review
Order upto level (OUL) = Expected demand + Safety stock
during protection interval

d (T LT )

+ Z*

dLT

Where

dLT
dLT
d

(T LT )

LT

= Standard deviation of demand during lead time

= Mean demand

LT

= Lead time

d
LT

= Std. deviation of the demand

T = Review period

= Std. deviation of the lead time

Z = Standard normal deviate associated with the cycle service level

Total Annual Inventory Cost


Continuous Review : Q System

Periodic Review : P System

No of orders is fixed due to


constant Review Period T

Comparative Advantages
Continuous Review : Q System
Lower
Fixed

safety stocks
lot sizes can result in quantity discounts

Review

frequency may be individualized

Periodic Review : P System


Convenient,

Less time consuming

Allow

for combining orders to the same


supplier

Inventory

recordkeeping cost can be reduced :


need to know IP when review is made

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