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Reorder Points
Demand per
day
ROP =
=dxL
d=
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D
Number of working days in a year
Supply Chain Management
Q*
Slope = units/day = d
ROP
(units)
Figure 11.5
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Time (days)
Lead time = L
Supply Chain Management
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Inventory level
Maximum
inventory
Time
Figure 11.6
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Holding cost
per unit per year
Q
d
=Q 1
p
p
H
8
2DS
=
H[1 - (d/p)]
Q* =
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2DS
H[1 - (d/p)]
2DS
H[1 - (d/p)]
Q* =
2(1,000)(10)
=
0.50[1 - (4/8)]
80,000
10
Q* =
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2DS
annual demand rate
H 1
annual production rate
11
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QH
D
S+
+ PD
Q
2
12
Discount
Number
Discount
Discount (%) Price (P)
Discount Quantity
0 to 999
no discount
$5.00
1,000 to 1,999
$4.80
$4.75
Table 11.2
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14
Total cost Rs
Total cost
curve for
discount 1
1st price
break
0
2nd price
break
1,000
2,000
Order quantity
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Figure 11.7
15
Order
Quantity
Annual
Product
Cost
Annual
Ordering
Cost
Annual
Holding
Cost
Discount
Number
Unit
Price
$5.00
700
$25,000
$350
$350
$25,700
$4.80
1,000
$24,000
$245
$480
$24,725
$4.75
2,000
$23.750
$122.50
$950
$24,822.50
Total
Table 11.3
Choose the price and quantity that gives the lowest total cost
Buy 1,000 units at $4.80 per unit
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16
Uncertain Demand
Q
Place
order
Q
DDLT
ROP
Receive
order
Stockout
LT
LT
Time
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17
Probabilistic Demand
Risk of a stockout
(5% of area of
normal curve)
Probability of
no stockout
95% of the time
Mean
demand
350
ROP = ? kits
Quantity
Safety
stock
0
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Number of
standard deviations
18
ROP = d x L + ss
19
Inventory level
Probabilistic Demand
Figure 11.8
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Lead
time
Place Receive
order
order
Supply Chain Management
16.5 units
Time
20
Probabilistic Example
Average demand = = 350 kits
Standard deviation of demand during lead time = dlt = 10
kits
5% stockout policy (service level = 95%)
Using Appendix I, for an area under the curve of 95%,
the Z = 1.65
Safety stock = Z
Zdlt = 1.65(10) = 16.5 kits
Reorder point
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Probabilistic Demand
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Number of Units
ROP
Probability
30
40
50
60
70
.2
.2
.3
.2
.1
1.0
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Additional
Holding Cost
20
(20)($5) = $100
10
0
Total
Cost
Stockout Cost
$0
$100
= $240
$290
$960
24
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25
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lead time
26
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Probabilistic Example
Z for 98% = 2.055
28
Probabilistic Example
Average daily demand (normally distributed) = 150
Standard deviation = d = 16
Average lead time 5 days (normally distributed)
Standard deviation = lt = 1 day
95% service level desired
Z for 95% = 1.65
From Appendix I
ROP = (150 packs x 5 days) + 1.65
1.65dlt
= (150 x 5) + 1.65 (5 days x 162) + (1502 x 12)
= 750 + 1.65(154) = 1,004 packs
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