Chapter 6 Part 4

Chapter 6 Part 4 - Inventory Decision Making Chapter 6...

Info iconThis preview shows pages 1–4. Sign up to view the full content.

View Full Document Right Arrow Icon
1 1 Inventory Decision Making Chapter 6 (Part 4) 2 Estimation of Discrete Distribution The frequency counts of past demand during lead time can be used to determine a probability distribution as follows: 1. add the frequencies to obtain the number of observations (i.e., sample size) 2. divide each frequency by the sample size frequency 800 = 0.06 800 = 0.01 Demand Number of Cycles Probability 100 8 110 48 120 192 .24 130 304 .38 140 192 .24 150 48 .06 160 8 .01 800 1.00
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
2 3 Expected Value The expected value, or mean , of a random variable X with probability distribution p(X) is expressed as: E(X) = ∑ x i p(x i ) Determine the expected value for the following demand distribution. Demand Probability 100 0.01 110 0.06 120 0.24 130 0.38 140 0.24 150 0.06 160 0.01 x i p(x i ) 100 (0.01) = 1.0 110 (0.06) = 6.6 120 (0.24) = 28.8 49.4 33.6 9.0 1.6 130.0 4 The second of two perspectives involving uncertainty when determining the reorder point (ROP) for the basic EOQ model will be considered now. 1. Reorder point based on customer service level 2. Reorder point based on minimizing costs EOQ Reorder Point Under Uncertainty
Background image of page 2
3 5 Assumptions The EOQ model assumptions hold, except that demand is uncertain with a discrete probability distribution which can be estimated. Two expected costs need to be calculated based on the discrete demand distribution: expected carrying cost per year E[CC] = W V e expected stockout cost per year E[SC] = G R / Q ROP is based on minimizing expected total cost expressed as: Expected Total Cost = E[CC] + E[SC] ROP Based on Minimizing Costs 6 Excess Inventory or Shortage? Consider each of the combinations of demand and reorder points shown below. When is there excess inventory and when is there a shortage (which may result in lost sales or backorders)? Insert these quantities in the table.
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 4
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 04/11/2011 for the course WCOB 2023 taught by Professor Billthompson during the Spring '07 term at Arkansas.

Page1 / 9

Chapter 6 Part 4 - Inventory Decision Making Chapter 6...

This preview shows document pages 1 - 4. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online