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