Inventory Management OPMG 406

Special Inventory Models

Zakaria Yahia, PhD

Associate Professor – Industrial Engineering and Systems Management
School of Business Administration
Nile University
Single-Period Model
• Only one order is placed for a product per period
• Units have little or no value at the end of the sales period
• “A system for ordering items that have little or no value at the end of a sales
period (perishables)”

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Single-Period Model
• They are sold at their regular price only during a single time period.
• Salvage value of these products is less than their original cost, so
you lose money when they are sold for their salvage value.

Cs = Cost of Shortage (we underestimated demand) = Sales price/unit – Cost/unit

Co = Cost of Overage (we overestimated demand) = Cost/unit – Salvage value

• The service level, that is, the probability of not stocking out, is set at:

Cs
Service level =
Cs + C o

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Single-Period Example
Chris Ellis’s newsstand, just outside the Smithsonian subway station in Washington,
DC, usually sells 120 copies of the Washington Post each day. Chris believes
the sale of the Post is normally distributed, with a standard deviation of 15
papers. He pays 70 cents for each paper, which sells for $1.25. The Post gives
him a 30-cent credit for each unsold paper. He wants to determine how many
papers he should order each day and the stockout risk for that quantity.

Average demand = µ = 120 papers/day

Standard deviation = σ = 15 papers
Cs = cost of shortage = $1.25 – $.70 = $.55
Co = cost of overage = $.70 – $.30 = $.40

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Single-Period Example
Average demand = µ = 120 papers/day
Standard deviation = σ = 15 papers
Cs = cost of shortage = $1.25 – $.70 = $.55
Co = cost of overage = $.70 – $.30 = $.40
Cs
Service level =
Cs + C o
.55 Service
= level
.55 + .40 57.9%
.55
= = .579 µ = 120
.95
Optimal stocking level

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NORMAL CURVE AREAS!

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Single-Period Example

From Appendix I, for the area .579, Z ≅ .20

The optimal stocking level

= 120 copies + (.20)(σ)

= 120 + (.20)(15) = 120 + 3 = 123 papers

The stockout risk = 1 – Service level

= 1 – .579 = .422 = 42.2%

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Fixed-Period (P) Model
• Fixed-quantity ( Q ) system
• An ordering system with the same order amount each time.
Total order received
Average
Order Usage rate inventory
quantity = Q
Inventory level

on hand
(maximum
Q
inventory
level) 2

Minimum
inventory 0
Time
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Fixed-Period (P) Model
• Fixed-period ( P ) system
• A system in which inventory orders are made at regular time intervals.
• Orders placed at the end of a fixed period
• Inventory counted only at end of period
• Order brings inventory up to target level
• Only relevant costs are ordering and holding
• Lead times are known and constant
• Items are independent of one another

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Fixed-Period (P) Model
Target quantity (T) The order quantity is not
fixed.
Q4
Q2
If T is the maximum
On-hand inventory

Q1 P inventory target, and if the

Q3
inventory on hand at the time
P of periodic review is L1,

Then Q1 = T – L1.
P
T represents the average
Time demand and safety stock!
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Fixed-Period Model
• Inventory is only counted at each review period
• May be scheduled at convenient times
• Appropriate in routine situations
• May result in stockouts between periods
• May require increased safety stock
• For perfect implementation: Perpetual inventory system should be
used, a system that keeps track of each withdrawal or addition to
inventory continuously, so records are always current.

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12

Fixed-Period Model
  Special Inventory Models:
Single-Period Model
Summary: 

Discussion
Fixed-Period Model
&Questions!


Inventory Management
I. Demand is variable and lead time is constant
ROP = (Average daily demand x Lead time in days) + Z σdLT
where σdLT = σd Lead time , σd = standard deviation of demand per day

II. Lead time is variable and demand is constant

ROP = (Daily demand x Average lead time in days) +Z x (Daily demand) x σLT
where σLT = Standard deviation of lead time in days

III. Both demand and lead time are variable

ROP = (Average daily demand x Average lead time) + ZσdLT

where σd = Standard deviation of demand per day

σLT = Standard deviation of lead time in days
σdLT = (Average lead time x σd2) + (Average daily demand)2σ2LT