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Chapter 5 - Managing Class A Items

This document discusses models for managing Class A inventory items. It describes two types of Class A items and provides guidelines for their control. It then summarizes three models: (1) a (Q,s) model for slow-moving items that uses a base stock policy and backorder costs; (2) a (Q,s) model for faster items that approximates costs using normal distribution and calculates optimal Q and s; (3) an (s,S) model that uses continuous review and considers Poisson and non-unit demand with forecast error distributions. Examples are provided for applying the models.

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42 views23 pages

Chapter 5 - Managing Class A Items

This document discusses models for managing Class A inventory items. It describes two types of Class A items and provides guidelines for their control. It then summarizes three models: (1) a (Q,s) model for slow-moving items that uses a base stock policy and backorder costs; (2) a (Q,s) model for faster items that approximates costs using normal distribution and calculates optimal Q and s; (3) an (s,S) model that uses continuous review and considers Poisson and non-unit demand with forecast error distributions. Examples are provided for applying the models.

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Chapter 5: Managing Class A Items

¨Characteristics
¨(Q,s) Model for Slow-moving A Items
¨(Q,s) Model for Fast-moving A Items
¨(s, S) Model
1. Characteristics of class A items
 Class A items have the high value of usage (high value D.v, in
which, D is the average demand per unit of time and v is the
unit price.
 There are two types:
 The item type with high value of unit price (v) but low
demand (D).
 The item type with high demand (D) and low unit price (v).
Guidelines for control of A items
1. Inventory records should be maintained on a perpetual basis.

2. Keep top management informed.

3. Estimate and influence demand


¨ Provide manual input to forecasts (ex: ask customers for their demands in advance)

¨ Ascertain the predictability of demand.

¨ Manipulate a given demand pattern.

4. Estimate and influence supply.

5. Use conservative initial provisioning.

6. Review decision parameters frequently.

7. Determine precise values of control quantities.

8. Confront shortages as opposed to setting service levels.

¨ Backorders in short time should be considered.


2. (Q,s) Model for Slow-moving A Items

¨Very slow-moving items:


¨ Considering fixed cost b = B2v per unit backordered.
¨ With B2: fraction charge per unit shortage.
¨Faster-moving items:
¨ Considering the fixed cost per stockout occasion (B1).
Very slow-moving, expensive items, Q = 1
¨ Use Q = 1 if < 0.0763v
¨ Use base stock model.
¨ Assumptions:
¨ Continuous-review, order-point s (or r), Q=1.
¨ Poisson demand.
¨ Lead time L is constant.
¨ Complete backordering of demands when out of stock.

¨ Fixed cost, b = B2v, per unit backordered. (B2: fraction


charge per unit shortage)
Decision Rule

Pr ( 𝑋=𝑠+1 ) 𝒓
= → 𝑆=𝑠+1=?
Pr ( 𝑋 ≤ 𝑠 +1 ) 𝐷 𝐵2

POISSON.DIST(s+1,L,FALSE)
EXCEL:
POISSON.DIST(s+1,L,TRUE)
Example
Solution

¨ L=DL=1.7 pcs
¨ Try with excel:

POISSON.DIST(s+1,L,FALSE)
POISSON.DIST(s+1,L,TRUE)
In case Q ≥ 1
¨It is similar to the (r,Q) or (s,Q) model.
¨Decision rule:
𝑄

∑ Pr ( 𝑋 = 𝑠+ 𝑗 ) h
𝑗=1
=
𝑄
𝐷 𝐵2
∑ Pr ( 𝑋 ≤ 𝑠+ 𝑗 )
OR: 𝑗 =1

2 AE [ D ] b
Q*  Pr  X  r *  G ( r*) 
h bh
3. (Q,s) Model for Faster-moving Items
Using cost of each shortage B1
¨Use normal distribution approximation.
¨The cost function:

𝑇 𝐶(𝑄 ,𝑠)=
𝐴𝐷 𝑄
𝑄 s2
AD  Q
()
+ h+ ( 𝑆𝑆 ) h+
𝐷 𝐵1


𝑄
Pr(¿𝑠𝑡𝑜𝑐𝑘𝑜𝑢𝑡)¿
DB1
s
TC Q, s       s  x0  f x x0 dx0  h   f x x0 dx0
Q 2 0  0
Q
Let s   L  k L
AD  Q  DB
TC Q, k      k L  h  1 Pr X  k 
Q 2  Q
Where:
- B1= cost per stock out
- h = r.v
(Q,s) Model for Faster-moving Items
Using cost of each shortage B1
¨ Decision Rules:
 B  2 AD  B1 
Q *  EOQ 1  1 Pr  X  k   1  Pr  X  k 
 A  h  A 

 1  B    EOQ  2 
k  2 ln   1  L*   
 2 2  A  Q   L  
A: Ordering cost
D: Demand rate
h: Holding cost
σL: standard deviation of lead time demand
Pr(X≥k): Prob. of random variable X ~ Normal (L, σL) = 1- NORM.S.DIST(k, TRUE)
Start with Q*=EOQ to determine k. Then use k to determine Q* again and so
on. Stop when Q* and k are converged.
Example
Solution
4. (s, S) Model

¨Continuous review
¨Q = S – s
¨Demand:
¨ Case 1: Poisson (unit-sized).
¨ Case 2: non-unit-sized transactions  sequential and
simultaneous approaches.
¨ Considering B1, normal distributed forecast
errors.
Simple Sequential Determination of
s and S
¨Undershoots: how far below s the inventory position is
located when an order is placed?
¨Sequential approach: neglect undershoots
¨ Step 1: Set Q = EOQ
¨ Step 2: From Q, find s:
¨ Step 2.1: check  if yes go to step 2. Otherwise, continue step 3 with
¨ Step 2.2: set k at its lowest alloable value (by management)
¨ Step 2.3:

¨ Step 3: S = s+Q
Example
Solution
Simultaneous Selection of s and S
Using the Undershoots Distribution
¨Nonzero undershoots
¨Stockout: undershoots + lead time demand> s
x’ = z + x
Where: z is undershoot, x is lead time demand
¨ x  normal
¨z distribution:
Simultaneous s and S approach (cont.)
¨Mean and variance of the undershoot z:

¨Mean and variance of x’(normal): assume x, z are


independent
Procedure
¨Step 1: select k and Q to simultaneously satisfy

¨Step 2:

¨Step 3: S = s + Q
Example
Solution
¨Calculate E(t’) and var(t’):
Solution
¨Step 1:

¨Step 2:

¨Step 3:

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