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Lecture8 2011

The (Q, r) model is used to determine the optimal order quantity (Q) and reorder point (r) in an inventory system with stochastic demand and fixed lead times. The key assumptions are that demand occurs continuously, lead times are fixed, and a fixed ordering cost is incurred each time an order is placed. The (Q, r) policy dictates that when inventory drops to level r, an order of size Q is placed to bring inventory to level R=r+Q. The expected total cost considers ordering, holding, and backordering costs. Approximations are used to determine the optimal Q and r that minimize total expected costs. Increasing r reduces stockouts but increases safety stock, while increasing Q reduces

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29 views36 pages

Lecture8 2011

The (Q, r) model is used to determine the optimal order quantity (Q) and reorder point (r) in an inventory system with stochastic demand and fixed lead times. The key assumptions are that demand occurs continuously, lead times are fixed, and a fixed ordering cost is incurred each time an order is placed. The (Q, r) policy dictates that when inventory drops to level r, an order of size Q is placed to bring inventory to level R=r+Q. The expected total cost considers ordering, holding, and backordering costs. Approximations are used to determine the optimal Q and r that minimize total expected costs. Increasing r reduces stockouts but increases safety stock, while increasing Q reduces

Uploaded by

MiguelaTay
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 PPT, PDF, TXT or read online on Scribd
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The (Q, r) Model

Assumptions
Demand occurs continuously over time
Times between consecutive orders are stochastic
but independent and identically distributed
(i.i.d.)
Inventory is reviewed continuously
Supply leadtime is a fixed constant L
There is a fixed cost associated with placing an
order
Orders that cannot be fulfilled immediately from
on-hand inventory are backordered
2

The (Q, r) Policy


Start with an initial amount of inventory R.
When inventory level reaches level r, place
an order in the amount Q = R-r to bring
inventory position back up to level R.
Thereafter whenever inventory position drops
to r, place an order of size Q.
The base-stock policy is the special case of
the (Q, r) policy where Q = 1.

Inventory

Inventory versus Time

Q
r
l

Time
4

Notation
I: inventory level, a random variable
B: number of backorders, a random variable
X: Leadtime demand (inventory on-order), a random variable
IP: inventory position
E[I]: Expected inventory level
E[B]: Expected backorder level
E[X]: Expected leadtime demand
E[D]: average demand per unit time (demand rate)

Inventory Position

Inventory position = on-hand inventory + inventory on-order


backorder level
Under the (Q, r) policy, inventory position, IP, takes on values
takes on values r+1, r+2, ..., r+Q

The time IP remains at any value is the time between consecutive


demand arrivals. Since the times between consecutive arrivals are
independent and identically distributed, the long run fraction of
time IP remains at any value is the same for all values

Inventory Position (Continued)

IP is equally likely to take on values r+1,


r+2, ..., r+Q, or equivalently, IP is uniformly
distributed with
Pr(IP = i)=1/Q
where i = r+1, ..., r+Q.

Net Inventory
Net inventory IN=IB increases when a delivery
is made and decreases when demand occurs.
Let D(t, t+L] refer to the amount of demand
that takes place in the interval (t, t+L].
All the inventory that was on order at t will
be delivered in the interval (t, t+L]

Net Inventory (Continued)

IN(t+L)=IN(t) + IO(t) D(t, t+L]


IN(t+L)=IP(t) D(t, t+L]
IN=IP X

Inventory and Backorders

I=IN+=(IP -X)+
B=IN-=(IP-X)- =(X - IP)+
E[B]=E[(X - IP)+]
E[I]=E[(IP - X)+]

10

Probability of Stocking Out


Since IP and X are independent, we can
condition on IP to obtain
Pr(stocking out) 1 S (Q, r ) Pr( IN 0)
x r 1 Pr( IN 0 | IP x) Pr( IP x)
r Q

Pr( IN 0 | IP x)
x r 1
Q
r Q Pr( IP X 0 | IP x )
x r 1
Q
r Q Pr( X x )
r Q Pr( X x 1)
= x r 1
x r 1
Q
Q
r Q 1 Pr( X x )
xr
11
Q
r Q

Probability of Not Stocking Out


Pr(not stocking out) S (Q, r ) 1 x r

r Q 1

Pr( X x)
Q

1 Pr( X x)
Q
r Q 1 Pr( X x )
x r
Q
1
r Q 1
of not stocki
x r G (Probability
x)
out for the base-stock pol
Q
with base-stock x
1
r Q
x r 1 G ( x 1)
Q
xr

r Q 1

12

It can be shown that


E [( X r ) ] E[( X ( r Q )) ]
S (Q , r ) 1
Q
E[ B ( r )] E[ B( r Q )]
1
Q

Expected backorder
level under a basestock policy with
r 1
base-stock
r+1
( E[ B( r )] E[ D ]L level
[1 G ( x )])

x 0

Expected backorder
level under a basestock policy with
base-stock level
r+Q+1

13

Service Level Approximations


Type I Service:

S(Q, r) G (r )
Type II Service:
S(Q , r) 1 E [ B ( r )]/ Q

14

Expected Backorders and


Inventory
To emphasize the dependency of inventory
and backorder levels on the choice of Q and
R, we let I(Q, r) and B(Q, r) denote
respectively inventory level I and
backorder level B when we use a (Q, r)
policy.

15

Expected Backorders and


Inventory
(Continued)
Conditioning on the value IP also leads
to
r Q E [ B ( x )]
E [( X x ) ]
E [ B (Q , r )] x r 1
x r 1
Q
Q
r Q

r Q E [ I ( x )]
E [( x X ) ]
E [ I (Q , r )] x r 1
x r 1
Q
Q
r Q

16

Since IN = IP X, we have
E[IN] = E[IP] E[X] = r +(Q+1)/2 [D]L
E[I(Q,r)] = r +(Q+1)/2 E[D]L + E[B(Q,r)]

17

The Expected Total Cost


h: inventory holding cost per unit per unit
time
b: backorder cost per unit per unit time.
A: ordering cost per order

Y (Q , r ) AE [ D ]/ Q hE [ I (Q , r )] bE[ B(Q , r )]

18

he Expected Total Cost (Continued

Y (Q, r ) AE[ D ]/ Q hE[ I (Q, r )] bE[ B(Q, r )]


AE[ D ]/ Q h r (Q 1) / 2 E[ D ]L E[ B(Q, r )] bE[ B(Q, r )]
AE[ D ]/ Q h r (Q 1) / 2 E[ D ]L ( h b) E[ B(Q , r )]

19

Objective

We want to choose r and Q so that expected


total cost (the sum of expected ordering cost,
inventory holding cost and backorder cost per
unit time) is minimized.

20

Solution Approach

Y(Q, r) is jointly convex Q and in r.


Therefore, an efficient computational search
can be implemented to solve for Q* and r*,
the optimal values of Q and r, respectively.

21

An Approximate Solution Approach


1. Approximate E[B(Q,r)] by E[B(r)]
2. Assume demand is continuous
3. Treat Q and r as continuous
variables

Y (Q , r ) AE [ D ]/ Q h r (Q 1) / 2 E[ D ]L (h b) E [ B( r )]

Q*

2 AE [ D ]
h

b
G (r*)
bh
22

An Approximate Solution Approach


If the distribution of leadtime demand is
approximated by a normal distribution, then the
optimal reorder point can be approximated by

r * E [ D ]L zb /( bh ) Var ( X )
E[ D ]L zb /( b h ) Var ( D ) L
E[ D ]L zb /( b h ) D L

23

Model with Backorder Costs per


Occurrence

24

Model with Backorder Costs per


Occurrence

Y(Q, r) = AE[D]/Q + hE[I(Q,r)]+ kE[D](1 - S(Q,r))

25

Model with Backorder Costs per


Occurrence
Using the approximation
S(Q , r) 1 E [ B ( r )]/ Q

leads to
Y(Q,r) AE[D]/Q+h(r+(Q + 1)/2 E[D]L+ E[B(r)])+
kE[D]E[B(r)]/Q

26

Model with Backorder Costs per


Occurrence
Using the approximation
S(Q , r) 1 E [ B ( r )]/ Q

leads to
Y(Q,r) AE[D]/Q + h(r + (Q + 1)/2 E[D]L+ E[B(r)])+
kE[D]E[B(r)]/Q
An approximate solution is then given by
Q*

2 AE ( D )
h

kE ( D)
G ( r*)
kE ( D) hQ *
27

Insights from the (Q, r)


Model
Main Insights:
Increasing the reorder point r increases safety
stock but provides a greater buffer against
stockouts
Increasing the order quantity increases cycle
stock but reduces ordering (or setup) costs
Increasing the order quantity leads to a decrease
in the reorder point

28

Insights from the (Q, r)


Model
Main Insights:
Increasing the reorder point r increases safety stock but
provides a greater buffer against stockouts
Increasing the order quantity increases cycle stock but
reduces ordering (or setup) costs
Increasing the order quantity leads to a decrease in the
reorder point

Other Insights:
Increasing Ltends to increase the optimal reorder point
Increasing the variability of the demand process tends to
increase the optimal reorder point
Increasing the holding cost tends to decrease the optimal
order quantity and reorder point

29

The (R, r) Model


This is usually called the (S, s) model
Each demand order can be for multiple units
Demand orders are stochastic
A replenishment order is placed to bring
inventory position back to R
Decision variables are R (instead of Q) and
r

30

Dealing with Lead Time Variability


L: replenishment lead time (a random variable)
E(L): expected replenishment leadtime
Var(L): variance of lead time
D: demand per period
E(D) = expected demand per period
Var(D): variance demand
E(X)=E(L)E(D)
Var(X)=E(L)Var(D) + E(D)2Var(L)

31

Dealing with Lead Time Variability


(Continued)
Under the Normal approximation, the optimal reorder can be
obtained as

r * E ( D ) E ( L ) zb /( b h ) Var ( X )
E ( D ) E ( L) zb /( b h ) Var ( D ) E ( L) E ( D ) 2Var ( L)

32

Expected Leadtime Demand

E [ X ] E[ i 1 Di ] E[ E [ i 1 Di | L n ]]
L

Since E[ i 1 Di | L n ] E[ i 1 Di ] nE [ D ],
L

E [ X ] E[nE [ D ]] E [ L]E[ D ]

33

Variance of Leadtime Demand

Var[ X ] E

L
i 1

Di

E
i
i 1


E E

L
i 1

Di

i
D
i 1
L


| L n ,

34

Variance of Leadtime Demand

L
i 1

Di

| L n E

i E

i 1

Var

E E

i 1 Di
L

i 1 i


| L n

D
i 1 i

Di

i 1

nVar D n 2 E[ D ]2

E [ L ]Var D E [ L2 ]E [ D ]2

E [ L ]Var D E [ L2 ]E [ D ]2

35

Variance of Leadtime Demand


(Continued..)

Var( X ) E

E
i
i 1

i
D
i 1
L

= E [ L]Var( D ) E[ L ]E[ D ] E[ L]E[ D ]


2

E [ L]Var( D ) E[ D ]2 E[ L2 ] E [ L]2

=E[ L]Var( D ) E[ D ]2Var ( L)

36

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