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Lect 12 - Continuous & Periodic Review Systems
Lect 12 - Continuous & Periodic Review Systems
IP
On-hand inventory
IP
Order
received
Order
received
Order
received
Order
received
Q
OH
OH
IP
Q
OH
R
Order
placed
Order
placed
L
TBO
Order
placed
L
TBO
Time
TBO
12 1
12 2
On-hand inventory
IP
IP
Order
received
Order
received
Order
received
Order
received
Q
Q
OH
L
TBO1
Order
placed
Order
placed
Order
placed
L
TBO2
Time
TBO3
12 3
z L
z=
12 4
Probability of stockout
(1.0 0.85 = 0.15)
Average
Average
demand
demand
(D)
during
during
lead
lead time
time
R
z L
12 5
Reorder point
= z L
= 2.33(22) = 51.3
= 51 boxes
= DL + SS
= 250 + 51
= 301 boxes
12 6
In Class Example
Suppose that the demand for an item
during the lead time period is normally
distributed with and an average of 85 and a
standard deviation of 40.
Find the safety stock and reorder point for
a service level of 95%
How much reduction is safety stock will
result if the desired service level is reduced
to 85%
12 7
Development of Demand
Distributions for the Lead Time
t = 15
+
75
Demand for week 1
t = 15
t = 15
+
75
Demand for week 2
75
Demand for week 3
t = 26
225
Demand for 3-week lead time
12 8
Where
d = average demand per week (or day or months)
L = constant lead time in weeks (or days or months)
12 9
d2L = d
L = t
L =5
= 7.1
Class Example:
The following info is available for the purchase of
kitty litter:
Ld2 + d2LT2
12 14
Solved Problem
Grey Wolf Lodge is a popular 500-room hotel in the North
Woods. Managers need to keep close tabs on all room service
items, including a special pine-scented bar soap. The daily
demand for the soap is 275 bars, with a standard deviation of
30 bars. Ordering cost is $10 and the inventory holding cost is
$0.30/bar/year. The lead time from the supplier is 5 days, with a
standard deviation of 1 day. The lodge is open 365 days a year.
a. What is the economic order quantity for the bar of soap?
b. What should the reorder point be for the bar of soap if
management wants to have a 99 percent cycle-service level?
c. What is the total annual cost for the bar of soap, assuming a
Q system will be used?
Solved Problem
SOLUTION
a. We have D = (275)(365) = 100,375 bars of soap; S = $10; and
H = $0.30. The EOQ for the bar of soap is
EOQ =
2DS
=
H
=
2(100,375)($10)
$0.30
6,691,666.7 = 2,586.83 or 2,587 bars
Solved Problem
b. We have d = 275 bars/day, d = 30 bars, L = 5 days,
and LT = 1 day.
dLT =
Ld2 +(5)(30)
d2LT2 2 =+ (275)2(1)2 = 283.06 bars
Solved Problem
c. The total annual cost for the Q system is
Q
D
C = 2 (H) + Q (S) + (H)(Safety stock)
2,587
100,375
C=
2 ($0.30) + 2,587 ($10) + ($0.30)(660) = $974.05
Independent demand
On-hand inventory
IP
Q1
IP
Order
received
OH
Order
received
Q2
IP
Q3
Order
received
OH
IP1
IP3
Order
placed
Order
placed
IP2
L
P
Protection interval
L
P
Time
IP = OH + SR BO
= 0 + 0 5 = 5 sets
T IP = 400 (5) = 405 sets
L = t
L =5
= 7.1
Calculating P and T
Calculating P and T
SOLUTION
We first define D and then P. Here, P is the time between
reviews, expressed in weeks because the data are expressed
as demand per week:
D = (18 units/week)(52 weeks/year) = 936 units
EOQ
75
(52) = 4.2 or 4 weeks
P=
(52) =
D
936
With d = 18 units per week, an alternative approach is to
calculate P by dividing the EOQ by d to get 75/18 = 4.2 or 4
weeks. Either way, we would review the bird feeder inventory
every 4 weeks.
Calculating P and T
We now find the standard deviation of demand over the
protection interval (P + L) = 6:
P L d P L 5 6 12.25units
Before calculating T, we also need a z value. For a 90 percent
cycle-service level z = 1.28. The safety stock becomes
Safety stock = zP + L = 1.28(12.25) = 15.68 or 16 units
We now solve for T:
T = Average demand during the protection interval + Safety stock
= d(P + L) + safety stock
= (18 units/week)(6 weeks) + 16 units = 124 units
C=
In Class Example
Discount Appliance Store has the following information:
520
Comparative Advantages
Primary advantages of P systems
Convenient
Orders
Only
can be combined
Lower
safety stocks
Example
So if the demand for newspapers on
Mondays is normally distributed with a
mean of 90 and standard deviation of 10,
and the newsboy wants to be 80% certain
that he/she will not run out of papers, then
the number of papers he/she should order
will be equal to:
Q = D + z
Q = 90 + .84 * 10 = 98.4 = 99 papers
Example continued
If we assume that the newspaper boy pays
20 cents per paper and he sells it for 50
cents. How many newspapers should he
order if the demand is normally distributed
with a mean of 90 and standard deviation of
10?
Cost of underestimating (Lost sales)= .5 - .2 = .3
Cost of overestimation (stock piling) = .2
Probability of stock outs <= .3/(.2+.3) <= .6 <= 60%
Z = .253
Q = 90 + .253 * 10 = 92.53 = 93 newspapers
In Class Example
Assume you are helping a Christmas tree
retailer determine how many trees to order
for this years season. Assuming that you
know from past experience that the average
demand for Christmas trees in his area is
500 but that the demand over the past 25
years has varied depending on the
economy and the offers on plastic trees.
The standard deviation of the demand is
100 trees. If this person can buy each tree
at an average cost of $5 and sell them at
$50, then how many trees would you
recommend he orders?
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall.