Prob_Inventory_Intro

# Prob_Inventory_Intro - Probabilistic Models for Inventory...

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1 Probabilistic Models for Probabilistic Models for Inventory Control Inventory Control IE 251 2 If Demand is deterministic (EOQ) Inv Time Q*=600 Order arrives Place Order Reorder Point=300 LT=3 wk Place Order Order arrives

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3 If Demand is stochastic Inv Time Q=600 Order arrives Place Order Reorder Point=300 LT=3 wk Place Order Order arrives LT=3 wk stock out 4 If Demand is stochastic Inv Time Q*=600 Order arrives Place Order Reorder Point=400 LT=3 wk Place Order Order arrives LT=3 wk stock out avoided
5 Average Inventory Profile Inv Time Q=600 Safety Stock=100 Avg. Cycle Inv=300 Avg. Inv =400 6 Terminology ± On-hand stock : Stock that is physically on the shelf ± Net stock =On-hand stock – Backorders ± Inventory Position =On-hand + On-order -Backorders - Committed ± Complete backordering : backordered demand is filled as soon as an adequate-size replenishment arrives ± Complete lost sales : when out of stock, demand is lost, customers go somewhere else.

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7 The ABC Inventory Classification System ± The ABC classification , devised at General Electric during the 1950s, helps a company identify a small percentage of its items that account for a large percentage of the dollar value of annual sales. These items are called Type A items. ¾ Adaptation of Pareto’s Law » 20% of the people have 80% of the wealth (in 1897 Italy) ± Since most of our inventory investment is in Type A items, high service levels will result in huge investments in safety stocks. It is recommend that fill rate be set at 80-85% for Type A items. Tight management control of ordering procedures is essential for Type A items. 8 ± For Type B items, it is recommend the fill rate be set at 95%. – Inventory policies for Type B items can generally be controlled by computer. ± For Type C items, a simple two-bin system is usually adequate. – Parameters are reviewed twice a year. Demand for Type C items may be forecasted by simple methods. The ABC Inventory Classification System 10 20 30 40 50 60 70 80 90 100 Percentage of items Percentage of dollar value 100 — 90 — 80 — 70 — 60 — 50 — 40 — 30 — 20 — 10 — 0 — Class C Class A Class B
9 Replenishment Policies ± When and how much to order – Continuous review with (s,Q) policy: » Inv. is continuously monitored and when it drops to s, an order of size Q is placed – Such policies can be implemented by » A point-of-sale computerized system. » The two-bin system. – Periodic review with (R,S) policy: » Inv. is reviewed at regular periodic intervals (R), and an order is placed to raise the inv. to a specified level (order-up-to level, S) 10 Order Point, Order Quantity Model (s,Q) ± Inventory position constantly monitored ± Stockout occurs if demand during lead time exceeds the reorder point ± Simple system… suppliers like the predictability of constant order quantities ± Two-bin system: use from bin 1 until empty which triggers reorder… replenishment fills bin 2 and remainder goes into bin1 s Safety Stock (SS) Time Inventory Level Inventory Level s+Q s+Q Lead Time Lead Time Place Place order order Receive order

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Prob_Inventory_Intro - Probabilistic Models for Inventory...

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