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supply chain
Inventory Models
Continuous Periodic
Review system Review system
Constant Variable
Demand model Demand model
Continuous Review System (Q)
A continuous review (Q) system or reorder point
(ROP) system or fixed order-quantity system tracks the
remaining inventory of an item each time a withdrawal is
made to determine whether it is time to reorder.
In practice, these reviews are done frequently (e.g. daily)
and often continuously (after each withdrawal).
At each review a decision is made about an items
inventory position.
If it is considered to be too low, the system triggers a new
order.
Multi Period Inventory Model
R = d L + zL = d L + zd L
Total Cost:
TC = DC + QH/2 + DS/Q + (zL)H
Finding Safety Stock and R
Example-1
Records show that the demand for dishwasher detergent during
the lead time is normally distributed, with an average of 250
boxes and L = 22. What safety stock should be carried for a 95
percent cycle-service level? What is the value of Reorder point?
Safety stock = zL
= 1.64(22) = 36 1.64 is the number of standard
deviations, z, to the right of
= 36 boxes
average demand during the lead
time that places 95% of the area
Reorder point = dL + IS
under the curve to the left of that
= 250 + 36 point.
= 286 boxes
Finding Safety Stock
With a normal Probability Distribution
for an 95% Cycle-Service Level
Probability of
stockout
Average (0.05)
demand
during
lead time R
zL
IS
Example-2
Suppose,
Annual demand, D = 1000 units
Economic order quantity, Q* = 200 units
Desired service level, P = 95%
Std. dev of demand during lead time, L = 25 units
Lead time, L = 15 days
Determine reorder point? Assume demand is for 250
working days in a year.
Periodic Review System (P)
An alternative inventory control system is the Periodic review
system (P) or fixed interval reorder system or periodic reorder
system.
In the periodic review system (P) an items inventory position
is reviewed periodically rather than continuously.
A new order is always placed at the end of each review and the
time between orders (TBO) is fixed at P.
Demand is a random variable. So, demand between reviews
varies.
In a P system, the lot size Q may change from one order to the
next, but the time between orders is fixed.
Periodic Review System (P)
There are no constraints on the size of the lot
There is no uncertainty in lead times or supply
Lot size Q varies for different orders
Orders placed at every time period, P
Quantity ordered is upto target inventory level, T
Periodic Review System (P)
The downward-sloping line represents on-hand inventory.
When the predetermined time P has elapsed since the last
review, an order is placed to bring the inventory position,
represented by the dashed line, up to the target level T.
The lot size for the first review is:
Q1=T -IP1.
When the new order arrives, at the end of the lead time, IP and
OH are identical.
Lot sizes vary from one cycle to the next.
Periodic Review System (P)
The time interval for which inventory must be
planned when each new order is placed (protection
interval) is (P+L) periods.
Total Cost:
TC = (d P/2)H + (D/d P)S + z P L .H + Dc
Example-1
Profit calculation:
P = f(Q, D) = Ds + (Q-D)r Qp ; D Q
P = f(Q, D) = Qs Qp ; D Q
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Volume Percentage
Benefits of ABC Analysis
Helps in maintaining better control of costly
inventory (A-class item).
Class- A items could be better controlled through
centralized buying, switching suppliers and contract
negotiation.
Sufficient stock of C-class items maintained with
least attention.
Better use of working capital based on weightage of
items.
VED Analysis
(Vital, Essential and Desirable)