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Managing Facilitating Goods: Replenishment Order Replenishment Order Replenishment Order Customer Order
Managing Facilitating Goods: Replenishment Order Replenishment Order Replenishment Order Customer Order
|
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2
K Q
H
H B
* *
=
+
|
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|
.
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Values for Q* and K* as A
Function of Backorder Cost
B Q* K* Inventory Levels
B
0< < B
B 0
2DS
H
2DS
H
H B
B
+
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|
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undefined
Q
H
H B
*
+
(
Q*
0
0
0
0
Demand During Lead Time
Example
+
+ + =
u=3
o =15 .
u=3 u=3
u=3
o =15 . o =15 .
o
L
= 3
d
L
=12 ROP
s s
Four Days Lead Time
Demand During Lead time
o =15 .
Safety Stock (SS)
Demand During Lead Time (LT) has
Normal Distribution with
-
-
SS with r% service level
Reorder Point
Mean d LT
L
( ) ( ) =
Std Dev LT
L
. .( ) o o =
SS z LT
r
= o
ROP SS d
L
= +
Continuous Review System (Q,r)
Average lead time usage, d
L
Reorder point, ROP
Safety stock, SS
Inventory on hand
EOQ
EOQ
d
1
d
2
d
3
Amount used during first lead time
First lead
time, LT
1
Order 1 placed
LT
2 LT
3
Order 2 placed Order 3 placed
Shipment 1 received
Shipment 2 received Shipment 3 received
Time
Periodic Review System
(order-up-to)
RP RP RP
Review period
First order quantity, Q1
d
1
Q
2
Q
3
d
2
d
3
Target inventory level, TIL
Amount used during
first lead time
Safety stock, SS
First lead time, LT
1
LT
2
LT
3
Order 1 placed Order 2 placed Order 3 placed
Shipment 1 received Shipment 2 received Shipment 3 received
Time
Inventory on Hand
Inventory Control Systems
Continuous Review System
Periodic Review System
EOQ
DS
H
ROP SS LT
SS z LT
r
=
= +
=
2
o
RP EOQ
TIL SS RP LT
SS z RP LT
r
=
= + +
= +
/
( )
o
ABC Classification of Inventory
Items
0
10
20
30
40
50
60
70
80
90
100
0
1
0
2
0
3
0
4
0
5
0
6
0
7
0
8
0
9
0
1
0
0
Percentage of inventory items (SKUs)
P
e
r
c
e
n
t
a
g
e
o
f
d
o
l
l
a
r
v
o
l
u
m
e
A B
C
Inventory Items Listed in
Descending Order of Dollar Volume
Monthly Percent of
Unit cost Sales Dollar Dollar Percent of
Inventory Item ($) (units) Volume ($) Volume SKUs Class
Computers 3000 50 150,000 74 20 A
Entertainment center 2500 30 75,000
Television sets 400 60 24,000
Refrigerators 1000 15 15,000 16 30 B
Monitors 200 50 10,000
Stereos 150 60 9,000
Cameras 200 40 8,000
Software 50 100 5,000 10 50 C
Computer disks 5 1000 5,000
CDs 20 200 4,000
Totals 305,000 100 100
Single Period Inventory Model
Newsvendor Problem Example
D = newspapers demanded
p(D) = probability of demand
Q = newspapers stocked
P = selling price of newspaper, $10
C = cost of newspaper, $4
S = salvage value of newspaper, $2
C
u
= unit contribution: P-C = $6
C
o
= unit loss: C-S = $2
Single Period Inventory Model
Expected Value Analysis
Stock Q
p(D) D 6 7 8 9 10
.028 2 4 2 0 -2 -4
.055 3 12 10 8 6 4
.083 4 20 18 16 14 12
.111 5 28 26 24 22 20
.139 6 36 34 32 30 28
.167 7 36 42 40 38 36
.139 8 36 42 48 46 44
.111 9 36 42 48 54 52
.083 10 36 42 48 54 60
.055 11 36 42 48 54 60
.028 12 36 42 48 54 60
Expected Profit $31.54 $34.43 $35.77 $35.99 $35.33
Single Period Inventory Model
Incremental Analysis
E (revenue on last sale) E (loss on last sale)
P ( revenue) (unit revenue) P (loss) (unit loss)
P D Q C P D Q C
u o
( ) ( ) > > <
>
>
| | 1 < > < P D Q C P D Q C
u o
( ) ( )
P D Q
C
C C
u
u o
( ) < s
+
(Critical Fractile)
where:
C
u
= unit contribution from newspaper sale ( opportunity cost of underestimating demand)
C
o
= unit loss from not selling newspaper (cost of overestimating demand)
D = demand
Q = newspaper stocked
Critical fractile for the
newsvendor problem
0 2 4 6 8 10 12 14
Newspaper demand, Q
P
r
o
b
a
b
i
l
i
t
y
P(D<Q)
(C
o
applies)
P(D>Q)
(C
u
applies)
0.722
Retail Discounting Model
S = current selling price
D = discount price
P = profit margin on cost (% markup as decimal)
Y = average number of years to sell entire stock of dogs at
current price (total years to clear stock divided by 2)
N = inventory turns (number of times stock turns in one year)
Loss per item = Gain from revenue
S D = D(PNY)
) 1 ( PNY
S
D
+
=
Topics for Discussion
Discuss the functions of inventory for different
organizations in the supply chain.
How would one find values for inventory costs?
How can information technology create a competitive
advantage through inventory management?
How valid are the assumptions for the EOQ model?
How is a service level determined for inventory
items?
What inventory model would apply to service capacity
such as seats on an aircraft?
Interactive Exercise
The class engages in an estimation of the
cost of a 12-ounce serving of Coke in
various situations (e.g., supermarket,
convenience store, fast-food restaurant,
sit-down restaurant, and ballpark).
What explains the differences?