School of Industrial Engineering & Management (IEM) Inventory Management

International University, VNU-HCM Instructor: Dr. Nguyen Van Hop

Homework 4_ Chapter 4
Deadline: Class Day next week
Name: Phạm Thị Yến Ngọc
Student ID: IELSIU19215

I. Problem statement: Single item – Probabilistic demand

1. Continuous review: Base stock model
¿
- Method: Approximate base stock R¿ satisfying a specific service level G( R ) . Order Q=1 when
inventory position drops to r =R−1
- Assumption: Demand is probabilistic (randomly varying and unknown), inventory is refilled one unit at
a time, consider service level and backorder level.
- Given: demand distribution with mean E( X) and standard deviation σ , economic costs (holding,
setup/ordering cost, unit variable cost) and consider service level and understock/backorder cost.
- Decision variable: Base stock R¿ (always keep the inventory position at that level)
2. Continuous review: Order quantity – Reorder point (Q , s) model given service level (service
constraint)
- Assumption: Demand is probabilistic, consider service aspect (given either probabilistic of not stockout
α or proportion of demand met from stock β which are type1 and type2 service constraint), lead time can
be deterministic or probabilistic. Shortage cost is hard to compute.
- Given: Demand rate, demand distribution, lead time (constant or varying), economic data (fixed cost,
annual holding cost, unit cost), either probabilistic of not stockout α or proportion of demand met from
stock β .
- Method: Approximate reorder point s that satisfies a specific service level and order quantity Q=EOQ
(note that for type2, we can use a specific equation to solve for more accurate Q ¿. Policy: Order quantity
Q when inventory position drops to s
- Decision variable: Optimal order quantity Q ¿ and reorder point s.
3. Continuous review: Order quantity – Reorder point (Q , s) model given shortage cost (cost
minimization)
- Assumption: Demand is probabilistic, consider backorder or stockout (lost sales) case, lead time can be
deterministic or probabilistic
- Given: Demand rate, demand distribution, lead time (constant or varying), economic data (fixed cost,
annual holding cost, unit cost) , cost per stockout for the case of lost sales, unit backorder cost for
backorder case)
- Method: Approximate reorder point s and order quantity Q by iterative procedure based on cost
minimization. Order quantity Q when inventory position drops to s
- Decision variable: Optimal order quantity Q and reorder point s
¿

4. Continuous review: Order – up – to level – Reorder point( S , s) model: The same as (Q , s) but
order – up – to level S will be decision variable (instead of Q ¿
5. Periodic review: Periodic review interval – Order – up – to level ( R , S ) model
- Method: Place an order to make the inventory position up to level S every R periods. Decision is made
by cost minimization method.
- Assumption: Demand is probabilistic, consider shortage case
- Given: Demand rate, demand distribution, lead time (constant or varying), economic data (fixed cost,
holding cost, unit cost and shortage cost), reorder/review interval R
- Decision variable: Order – up – to level S

Homework

Problem 1: Monthly demand for Toy model at a Best Buy Store is normally distributed, with a
mean of 35 units and a standard deviation of 10 units. If backorder occurs, the store must pay
$65 for each toy model instead of $40. Assume that the carrying rate r = 35% per month.
Calculate the base stock level? Safety stock level?
= 35 units
 = 10 units
b= $ 25
r = 35% => h= $14
R =?
s=?
¿ b 25
G ( R )= = 0.64
h+ b 25+14
since Φ ( 0.36 )=0.64, z =0.36 and hence
R* =  + z= 35 +0.36*10= 38.6 = 39, therefore base stock level is 39
Safety stock = s = r - = 38 -35 =3 units

Problem 2: An ophthalmologist’s office operates 52 weeks per year, 6 days a week. It purchases
disposable contact lenses for $11.70 per pair and sells for $50. Demand is 90 pairs per week.
Order cost is $54 per order. Annual interest rate is 27%. Lead-time is 3 weeks. Standard
deviation of weekly demand is 15 pairs. Given that 98% service-level. Assume demand is
normally distributed.
a. Find a reorder point – Order quantity (Q, s) policy for this situation
b. Find average order frequency of the policy (a)
c. Clearly identify different types of stocks: cycle, safety and pipeline
d. Assume that lead time is probabilistic, normally distributed with mean 3 weeks and
variance 0.2 weeks, determine the reorder point – Order quantity (Q,s) policy.
(Supplement definition: Cycle stock: average inventory on hand, at any point. Safety stock:
inventory kept on hand to allow demand uncertainty. Pipeline stock: goods in transit between
levels of multi-echelon distribution system or between adjacent workstations in factory (mean
demand during lead time)
D = 90 pairs/ week= 4680 pairs/ year
c=50$
h= 11,7*0.27=3.159$/units/ year
A= $54
L= 3weeks=3/52 year
t = 15 pairs => L=t *sqrt(L) =15√ 3
S(Q,r) = 98%
a. r=?
 2∗4680∗54
Q*=
b
√ 3 .159
= 400 unit

=G( r)=0.98
b+h
since Φ ( 2.05 ) =0.98 , so z=2.05
=(4680*3)/52=270
r*=+ z= 270+2.05*15√ 3 =323.26
D 4680
b. The number of order per year is : F(Q)= = =11.7 ≈12 orders
Q 400
c. Safety stock : SS= r-= 323—270= 53 pairs
Cycle stock= Q/2= 200 pairs
Pipeline stock = 3* 90=270 pairs
d. Assume that lead time is probabilistic, normally distributed with mean 3 weeks and variance 0.2
weeks, determine the reorder point – Order quantity (Q,s) policy.
r* =E(D).E(L)+z* E ( L )∗Var ( D )+ E ( D )2∗Var ( L ) =2 . 05 √ 3∗152 +902∗0 .2 +90*3=368.2
√

Problem 3: Assume weekly demand follows normal distribution N(100,32). Given fixed cost A =
$200/order, unit cost c = $40/unit, carrying rate r = 0.1 $/$/yr, backorder cost b = 30 $/unit, lead
time L = 2 weeks.
a. Using iteratively method to find a reorder point – Order quantity (Q, s) policy for this
case?