Reorder Point Systems

EOQ with a reorder point The reorder point problem The service level method Fixed-order-interval model Reading: Page 563-573

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EOQ with a Reorder Point

The replenishment leadtime or simply leadtime is denoted by L (we assume L < T ) With deterministic demand , the leadtime demand = DL and R=DL is called the reorder point The deterministic reorder point policy: whenever the remaining inventory is reduced to R, we order exactly the EOQ so that there will be no stock out and inventory cost is minimized What is R if L T?
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Leadtime and Reorder Point

Q I Order in advance so that the remaining inventory can satisfy the leadtime demand

Reorder point

Place Receive order order

Time Place order Receive order

Leadtime
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What should you do if leadtime demand is not known exactly?

We now consider the problem of when to order

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The Reorder Point Problem

Inventory depletion (by demand) monitored continuously Good estimate for the total demand in a year Usually impossible to forecast future demand very accurately for a short time period How to compute the reorder point when leadtime demand is known probabilistically?
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The Reorder Point

When placing an replenishment order, the remaining stock should cover the leadtime demand Any new order can only be used for demands after L Demand in L is uncertain How to determine the remaining inventory R when an order is placed?
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Inventory on hand

order

R1 R2

L L

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The Service Level Method

Service level: Service level is a measure of the degree of stockout protection provided by a given amount of safety inventory

= Probability that all leadtime demands are

satisfied immediately, i.e.,

= Prob.( Leadtime Demand R)

(1)

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Normal Leadtime Demand

R = + z

(2)

s = z
R = mean leadtime demand + safety stock
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Safety Stock
Assuming normally distributed leadtime demand, the problem is transformed to that of determining the safety stock
Inventory on hand Q

order R

order

order

mean demand during supply leadtime safety stock

L L

Time t
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Example: Southern Metal Doors (SMD)

The weekly sales of metal doors at SMD Ltd. in Dong Guan vary, with an average of 1000/week and a standard deviation of 250/week. SMDs production follows the sales closely, so that the consumption of a main metal material follows the same distribution The replenishment leadtime of this main metal material from the supplier is 1 week SMD is currently placing an order whenever the remaining material is only enough to make 1200 doors What is the probability of no stockout in the leadtime? If SMD wants the service level to be 95%, what should the safety stock be?
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SMDs Service Level

Service Level: SL = ? (The area of the shaded part under the curve)

Mean: = 1000

R = 1200

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Computing Service Level

Average weekly demand = 1000 Standard deviation of demand = 250 R = 1200, We assume the sales (demand) is normally distributed: z = (R ) / = 0.8 Service Level SL = Probability (Leadtime Demand 1200) = 78.8%

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Computing Safety Stock and Reorder Point

What should the reorder point and safety stock for a = 95% service level be? From the normal table
z0.95 = 1.645 Safety stock: Reorder point: s = z0.95= 412 R =+s = 1412

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The Impact of Service Level

s increase 79% 200 90% 95% 98% 99% 321 412 514 582 61% 28% 25% 13%

Observations: The higher the service level is, the higher the safety stock is required; When service level is high, it takes relatively more stock to increase it.
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Fixed-Order-Interval Model
Key
Periodic review model Fixed time interval for each order

Decision
How much to order (Q)

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Computing Q

OI = Order interval (length of time between orders)

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Inventory on hand

order A

Q order

Safety stock LT OL LT+OL

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Time t

Risk of a Stockout for SMD

Suppose OI = 3 weeks, A =1300 units, Q= 3500 units mean demand per week = 1000 units, standard deviation = 250 units Risk at the end of the initial lead time z= (1300 1000)/250 =1.2 By Normal table, SL = 0.885 =88.5% Risk = 1 88.5% = 11.5% Risk at the end of the second leadtime z= (1300+3500 4 1000)/(25041/2) =1.6 By Normal table, SL = 0.945 =94.5% Risk = 194.5% = 5.5%
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Review Problems
Problem 21 at Page 588 Problem 27 at Page 589 Problem 29 at Page 589

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