Inventory Management

Review Period

Sanjay Choudhari

Indian Institute of Management

Indore
 Inventory Control Systems

⚫ Two important questions:

◆ How much?
◆ When?
 Review Period

Continuous Review / Q Periodic Review / P

System system
Q is fixed T is fixed

1. Q*= EOQ : 1. T : Time interval

Economic Order
Quantity
2. OUL = TI : Target
2. R : Reorder point
inventory level
 Continuous Review Period
Demand is either Deterministic or Stochastic
Lead Time is either Deterministic or Stochastic

❖ Constant demand rate, constant lead time

❖ Variable demand rate, constant lead time
❖ Constant demand rate, variable lead time
❖ Variable demand rate, variable lead time
 Continuous Review Period
d= σd= LT= σLT =
 Continuous Review Period
d= σd= LT= σLT =
 Demand During Lead Time
σd = 2 σd = 2 σd = 2

+ + =
5 5 5
Demand for day 1 Demand for day 2 Demand for day 3

σdLT = 3.46

15
Demand for 3-days lead
time
 Demand During Lead Time
σd = 2 σd = 2 σd = 2

+ + =
5 5 5
Demand for day 1 Demand for day 2 Demand for day 3
Demand for 3-days lead
time

15

σdLT = 3.46
 Demand During Lead Time

Cycle-service level = 95%

Probability of stockout
(1.0 – 0.95 = 0.05)

Average
demand
during
lead time

zσdLT

R
Demand During Lead Time

Cycle-service level = 95%

Probability of stockout
(1.0 – 0.95 = 0.05)
Average
demand
during
lead time
zσdLT
R
 Continuous Review Period
d= σd= LT= σLT =
 Continuous Review Period
d= σd= LT= σLT =
 Continuous Review Systems

Order
Order Order
received
received received
Order
On-hand inventory

received

Q Q Q

R
Order Order Order
placed placed placed

0
LT1 LT2 LT3 Time
T1 T2 T3

Q System When Demand and Lead time is Uncertain

 Continuous Review Period
Reorder point (R) = Expected demand + Safety stock
during lead time
= d  LT + Z* dLT
Where

 dLT = LT  d + d  LT
2 2 2
SAP

 dLT = Standard deviation of demand during lead time

d = Mean demand

LT = Lead time

d = Std. deviation of the demand

 LT = Std. deviation of the lead time

Z = Standard normal deviate associated with the cycle service level

 Continuous Review Period

Cycle-service level = 95%

Probability of stockout
(1.0 – 0.95 = 0.05)

Average
demand
during lead
time

zσdLT

pp. 460 Ch 12
 Total Annual Inventory Cost

Continuous Review : Q System

𝐷 𝑄
𝑇𝐴𝐶 = 𝐶𝑂 + 𝐶𝐻 + 𝑆𝑆 ∗ (𝐶𝐻 ) + 𝐷 ∗ 𝐶𝑖
𝑄 2
 Review Period

Continuous Review / Q Periodic Review / P

System system
Q is fixed T is fixed

1. Q*= EOQ : 1. T : Time interval

Economic Order
Quantity
2. OUL = TI : Target
2. R : Reorder point
inventory level
 Periodic Review
Variable Demand (d),
Constant Lead Time (LT)

OUL

Q1 Imax
Q2
Q3
Q1
Q2 Q3
SS
Imin
LT LT LT Time
T T
Order Order Order Order Order Order
Placed Received Placed Received Placed Received
 Periodic Review
Order upto level (OUL) = Expected demand + Safety stock
during protection interval
= d  (T + LT ) + Z*  dLT
Where

 dLT = (T + LT )  
d
2
+ d 
2
LT
2

 dLT = Standard deviation of demand during lead time

d = Mean demand
T = Review period
LT = Lead time

d = Std. deviation of the demand

 LT = Std. deviation of the lead time

Z = Standard normal deviate associated with the cycle service level

 Total Annual Inventory Cost

Periodic Review : P System

𝐷 𝑑𝑇
𝑇𝐴𝐶 = 𝐶𝑂 + 𝐶𝐻 + 𝑆𝑆 ∗ 𝐶𝐻 + 𝐷 ∗ 𝐶𝑖
𝑑𝑇 2

No of orders is fixed due to

constant Review Period T
 Comparative Advantages

Continuous Review : Q System

◆ Lower safety stocks
◆ Fixed lot sizes can result in quantity discounts
◆ Review frequency may be individualized

Periodic Review : P System

◆ Convenient, Less time consuming
◆ Allow for combining orders to the same
supplier
◆ Inventory recordkeeping cost can be reduced