CHAPTER12: INVENTORYMANAGEMENTProbabilistic Models & Safety Stock°Inventory models that apply

when product demand is unknown but can be specified usingprobability distributionTo reduce stockouts, you can
hold extra units in inventory (safety stock)ROP = d * L + ssod = daily demandoL = Order lead time, # of days it
takes to deliver an ordeross = safety stockAnnual stockout costs = (Sum of units short for each demand level *
Probability ofthat demand level * Stockout cost/unit * Number of orders per year) + amount ofunits in safety stock *
holding cost/unitChoose amount of safety stock that minimizes total costs°Service Level: The complement of the
probability of a stockoutService Level = 1 – probability of a stockoutUncertain demand raises the probability of a
stockoutProbability that a demand or a collection of demands is met°Use prescribed service levels to set safety
stock when stockout costs can’t be determinedROP = Expected demand during lead time + ZσdLToZ = # of
standard deviationsoσdLT= Standard deviation of demand during lead timeoSafety Stock = ZσdLToZ value is found
using a normal table with service level numberDemand is Variable and Lead time is constant°ROP =
(Averagedaily demand * Lead time in days) * ZσdLT°Where σ= standard deviation of demand during lead time =
σd√(lead time)°And σd= standard deviation of demand per dayLead Time is variable and Demand is constant°ROP
= (daily demand *averagelead time in days) + Z * (Daily Demand) * σLT°Where σLT= standard deviation of lead
time in daysSingle Period Model°Describes a situation in which one order is placed for a product°At the end of the
sales period, any remaining product has little or no value°Used for seasonal products (newspaper, magazines,
Christmas trees)°Cs= Cost of Shortage = sales price/unit – cost/unit°CO= Cost of overage = cost/unit – salvage
value/unit (if applicable)°Service Level (probability of not stocking out) = Cs÷ (Cs+ Co)°Find Z value using the
service level°Optimal stocking level = daily demand + Zσ°If service level is under 0.50, company should order less
than daily demandFixed-Period (P) Systems°Previous inventory models have been fixed-quantity (Q)
systemsSame fixed amount is added to inventory every time an order is placedOrders are event triggered, when
inventory decreases to ROP, new order is placed