Inventory Control: Part 3

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Inventory Control Part 3 Independent Demand
Inventories
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Types of Inventories

• By Function
• - Lot-Size (Cycle or Replenishment)
• - Instantaneous (Purchase)
• - Non-Instantaneous (Produce)
• - Safety (Fluctuation or Buffer)
• - Anticipation (Seasonal)
• - Transportation (Pipeline)
• - Hedge (Beyond Scope of Class)

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Safety Stocks

• Used for Emergencies
• Finished Goods Unexpected Demand (Level Related
  to Customer Service)
• Raw Materials Orders Not Received
• Work-in-Process (WIP) Worker Unavailable or
  Machine Breakdown - Decoupling Inventory
• Also Known as Buffer or Fluctuation Inventory

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Finished Goods Safety Stocks
Stored with Lot-Size Stocks
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Safety Stocks

• From Graph
  OP DDLT SS where
  OP Order Point
  DD
  Forecast Demand
  LT Lead Time
  SS Safety Stock
• So SS OP DDLT by Algebra
• OP Set from Customer Service Level (SL)

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Safety Stocks Example 1

• The Frigid Corporation manufactures
  refrigerators. The probability distribution of
  demand during lead time is
• Demand Probability
• 10 .20
• 20 .20
• 30 .30
• 40 .20
• 50 .10
• Suppose the customer service level is 70.
  Determine the reorder point (consider only 10,
  20, 30, 40, 50).

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Safety Stocks Example 1

• Let SL .7 (70)
• Demand Probability CDF
• 10 .2 .2
• 20 .2 .4
• 30 .3 .7 ?
• 40 .2 .9
• 50 .1 1.0
• OP 30 (Meets Demand 70 of Time)

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Safety Stocks Example1

• SS OP DDLT
• DDLT Expected Value of Demand
• DDLT .2(10).2(20).3(30).2(40).1(50)
• DDLT 28
• SS 30 28 2
• If SL is 80, What is OP and SS?
• If SL is 90, What is OP and SS?

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Safety StocksNormal Demand
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Safety Stocks Example 2

• The Inandout Production Company requires steel
  rods at the mean rate of 35 rods per day. This
  rate follows a normal distribution with a
  standard deviation of 3 per day. The service
  level has been set at 90. If lead time for
  reordering is one day, what is the optimum safety
  stock?

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Safety StocksExample 2

• Given SL .9 (90), DDLT 35, ?DDLT 3
• Z from Normal Table (text page 314) 1.28
• ( Z is also known as safety factor)
• Z (OP DDLT) / ?DDLT or
• OP DDLT Z ?DDLT 35 (1.28)(3) ? 39
• SS OP DDLT 39 35 4

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Types of Inventories

• Type Best Size
• 1. Lot-Size
• a. Instantaneous Q/2
• b. Non-Instantaneous IMAX/2
• 2. Safety OP - DDLT
• 3. Anticipation Guesstimate
• 4. Transportation (Usage) (Time)
• 5. Hedge Guesstimate

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Implementation ofInventory Control

• Q and N Cannot Both be Fixed
  (E.g. Q 10, A 100, N A/Q 100/10 10)
• N Varies and Q Fixed Order Point System (AKA
  Fixed Order Quantity). Requires Two-Bin System,
  Kanban, or Perpetual Inventory. Order say Q
  when Actual Inventory OP.
• Q Varies and N Fixed Periodic Review System
  (AKA Fixed Order Cycle System)

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Periodic Review System

• Let T D (R LT) SS Where
• T Target Inventory Level
• D Demand per Unit of Time
• LT Lead Time
• R Review Period (Fixed at 1/N)
• SS Safety Stock
• Order Q T I Where
• I Inventory on Hand.
• See Example on Page 321 of Text.

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