Professional Documents
Culture Documents
• Obsolescence
Inventory
Q
Order
Size
Avg. Inv.
Time
80 Holding Cost
60
40 Order Cost
20
0
0 500 1000 1500
Order Quantity
100
Time/
0 lead-time = 1 week
weeks
lead-time = 3 weeks
DOS3701/DSC3201, Supply Chain Management 18
What if Demand is Uncertain?
Standard Deviation = 5
Standard Deviation = 10
Average = 30
0 10 20 30 40 50 60
Lead
Time
0
Time
Inventory level as a function of time in a (Q,R) policy
Continuous Review – (Q,R) Policy
• AVG = average daily demand
• STD = standard deviation of daily demand
• L = replenishment lead time in days
• h = holding cost of one unit for one day
• ⍺ = service level (e.g., 95%)
• The probability of stocking out is hence 1- ⍺ (e.g., 5%).
• Also, the Inventory Position at any time is the actual
inventory plus items already ordered, but not yet
delivered.
S
Inventory Position
Inventory Level
Lead
Time
0
Time
Periodic Review – Base-stock Policy
Market One
Supplier Warehouse
Market Two
DOS3701/DSC3201, Supply Chain Management 34
Risk Pooling Example
• Compare the two systems
• Two products
• Maintain 97% service level
• $60 fixed order cost
• $.27 weekly holding cost
• $1.05 transportation cost per unit in decentralized
system, $1.10 in centralized system
• 1 week lead-time
Market 1 B 2.5 4 22 14
Market 2 B 3 5 24 15
Cent. A 38.9 117 186 132 26%
Cent. B 3.6 6 33 20 31%
K D h Q
Retailer 250 45 1.2
Distributor 200 45 .9
Wholesaler 205 45 .8
Manufacturer 500 45 .7