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