Inventory Models

Tipos de Demanda
Demanda independente: so itens que dependem, em sua maioria, dos pedidos de clientes externos, como, por exemplo, produtos acabados em geral.

Tipos de Demanda
Demanda dependente aquela de um item cuja quantidade a ser utilizada depende da demanda de um item de demanda independente. Exemplo: O item pneus em uma montadora dependente do nmero de veculos demandados pelo pblico (5 pneus por carro)

Tipos de estoques
Matrias-primas Produtos em processo (WIP - Work In Process) Produtos acabados Em trnsito Em consignao

Importncia dos Estoques

Melhorar o servio ao cliente Economia de escala Proteo contra mudanas de preo em pocas de inflao alta Proteo contra incertezas na demanda e no tempo de entrega Proteo contra contingncias

Presses para Manter Estoque Alto

Estoque alto = maior probabilidade de atender bem os clientes Mas Estoque alto = certeza de alto custo em carregar estoques

Fontes de Elevao de Estoque

Marketing Engenharia Controle de Qualidade Manufatura Suprimentos Gerentes
7

Segmentao de Estoques
Classificao ABC um processo de categorizao de Pareto, baseado em algum critrio relevante para a priorizao dos esforos de gerenciamento. Na gesto de materiais, o critrio usualmente mais utilizado consiste no consumo mdio do item multiplicado pelo seu custo de reposio conhecido como demanda valorizada. A partir do ranking destes itens, que podem ser separados em comprados e produzidos, estratificase trs categorias atravs do corte considerando a percentagem acumulada em, por exemplo, 80%, 15% e 5%. 8

Classificao ABC

Segmentao de Estoques

Classificao XYZ Nessa classificao segmenta-se os itens baseando-se no critrio de criticidade para facilitar as rotinas de planejamento, reposio e gerenciamento.

10

Classificao XYZ
Classificao da criticidade dos itens Classe X Ordinrio: Item de baixa criticidade, cuja falta naturalmente compromete o atendimento de um usurio interno (servio ou produo) ou externos (clientes finais), mas no implica em maiores conseqncias. Classe Y Intercambivel: Apresenta razovel possibilidade de substituio com outros itens disponveis em estoque sem comprometer os processos crticos, caso seja necessrio e em detrimento dos custos envolvidos. Classe Z Vital: Item cuja falta acarreta conseqncias crticas, tais como interrupo dos processos da empresa, podendo comprometer a integridade de equipamentos e/ou segurana operacional.
11

Segmentao

Classificao 123 Essa classificao diz respeito a todo o processo de aquisio, incluindo tanto a identificao e qualificao dos fornecedores como o disparo e atendimento de requisies, em termos do grau de confiabilidade das especificaes e prazos.
12

Classificao 123
Classificao da dificuldade na obteno dos itens Classe 1 Complexa: So itens de obteno muito difcil, pois envolvem diversos fatores complicadores combinados, tais como longos set-ups e leadtimes (tempo de resposta, distncias e variabilidades) e riscos quanto a pontualidade, qualidade, fontes alternativas e sazonalidades.

Classe 2 Difcil: Envolve alguns poucos fatores complicadores relacionados acima, tornando o processo de obteno relativamente difcil. Classe 3 Fcil: Fornecimento gil, rpido e pontual e/ou o item uma commodity, com amplas alternativas a disposio no mercado fornecedor.
13

Inventory Classifications
Inventory can be classified in various ways:
By Process Raw materials Work in progress Finished goods
Used typically by accountants at manufacturing firms. Enables management to track the production process.

By Importance
(A, B, C), (X,Y,Z), (1,2,3)
Items are classified by their relative importance in terms of the firms capital needs.

By Shelf Life Perishable Nonperishable

Management of items with short shelf life and long shelf life is very different
14

Overview of Inventory Issues

Proper control of inventory is crucial to the success of an enterprise. Typical inventory problems include:
Basic inventory Quantity discount Production lot size Planned shortage Periodic review Single period

Inventory models are often used to develop an optimal inventory policy, consisting of:
An order quantity, denoted Q. A reorder point, denoted R.

15

Type of Costs in Inventory Models

Inventory analyses can be thought of as costcontrol techniques. Categories of costs in inventory models:
Holding (carrying costs) Order/ Setup costs Customer satisfaction costs Procurement/Manufacturing costs

16

Type of Costs in Inventory Models

Holding Costs (Carrying costs): These costs depend on the order size
Cost of capital Ch = H * C Storage space rental cost Costs of utilities Ch = Annual holding cost per unit Labor in inventory Insurance H = Annual holding cost rate Security C = Unit cost of an item Theft and breakage Deterioration or Obsolescence
17

Type of Costs in Inventory Models

Order/Setup Costs These costs are independent of the order size.
Order costs are incurred when purchasing a good from a supplier. They include costs such as
Telephone Order checking Labor Transportation

Setup costs are incurred when producing goods for sale to others. They can include costs of
Cleaning machines Calibrating equipment Training staff

Co = Order cost or setup cost

18

Type of Costs in Inventory Models

Customer Satisfaction Costs
Measure the degree to which a customer is satisfied. Unsatisfied customers may:
Switch to the competition (lost sales). Wait until an order is supplied.

When customers are willing to wait there are two types of costs incurred: Cb = Fixed administrative costs of an out of stock item ($/stockout unit). Cs = Annualized cost of a customer awaiting an out of stock item ($/stockout unit per year).
19

Type of Costs in Inventory Models

Procurement/Manufacturing Cost
Represents the unit purchase cost (including transportation) in case of a purchase. Unit production cost in case of in-house manufacturing. C = Unit purchase or manufacturing cost.

20

Demand in Inventory Models

Demand is a key component affecting an inventory policy. Projected demand patterns determine how an inventory problem is modeled. Typical demand patterns are:
Constant over time (deterministic inventory models) Changing but known over time (dynamic models) Variable (randomly) over time (probabilistic models)
D = Demand rate (usually per year)

21

Review Systems
Two types of review systems are used:
Continuous review systems.
The system is continuously monitored. A new order is placed when the inventory reaches a critical point.

Periodic review systems.

The inventory position is investigated on a regular basis. An order is placed only at these times.
22

Economic Order Quantity Model - Assumptions

Demand occurs at a known and reasonably constant rate. The item has a sufficiently long shelf life. The item is monitored using a continuous review system. All the cost parameters remain constant forever (over an infinite time horizon). A complete order is received in one batch.
23

The EOQ Model

Inventory profile
The constant environment described by the EOQ assumptions leads to the following observation:

Optimal EOQ policy consists of same-size orders. This observation results in the following inventory profile:
Q Q Q

24

Cost Equation for the EOQ Model

Total Annual ordering Costs Total Annual Total Annual Total Annual + + = Holding Costs procurement Costs Inventory Costs

TC(Q) = (Q/2)Ch + (D/Q)Co + DC The optimal order Size

Q Q Q

Q* =

2D C o

Ch
25

TV(Q) = Total annual variable costs and Q*

TV(Q)
Add the two curves to one another Constructing the total annual variable cost curve
Total annual holding and ordering costs

* * o * *

Q*
The optimal order size

Q
26

Sensitivity Analysis in EOQ models

Deviations from the optimal The curve is reasonably flat order around size Q*. cause only small increase in the total cost.

Q*

27

Number of Orders per Year

To find the number of orders per year:

N = D/Q
Example: The demand for a product is 1000 units per year. The order size is 250 units under an EOQ policy.
How many orders are placed per year? N = 1000/250 = 4 orders.

28

Cycle Time
The cycle time, T, represents the time that elapses between the placement of orders. T = Q/D
Example: The demand for a product is 1000 units per year. The order size is 250 units under an EOQ policy.
How often orders need to be placed (what is the cycle time)? T = 250/1000 = years. {Note: the four orders are equally spaced}.
29

Lead Time and the Reorder Point

In reality lead time always exists, and must be accounted for when deciding when to place an order. The reorder point, R, is the inventory position when an order is placed. R is calculated by R = L D
L and D must be expressed in the same time unit.
30

Lead Time and the Reorder Point

Graphical demonstration: Short Lead Time

R=Reorder Point

Place the order now

L
31

R = Inventory at hand at the beginning of lead time

Lead Time and the Reorder Point

Graphical demonstration: Long Lead Time
Inventory at hand Outstanding order R = inventory at hand at the beginning of lead time + one outstanding order = demand during lead time = LD

Place the order now

32

Safety stock
Safety stocks act as buffers to handle:
Higher than average lead time demand. Longer than expected lead time.

With the inclusion of Safety Stock (SS), R is calculated by:

R = LD + SS
The size of the safety stock is based on having a desired service level.
33

Safety stock
Planned situation

Reorder Point

Actual situation

Place the order now

L
34

R = LD

Safety stock
New Reorder Point
Actual situation

LD SS=Safety stock

Place the order now

L
The safety stock prevents excessive shortages. 35

R = LD + SS

Inventory Costs
Including safety stock
Total Annual = Total Annual + Total Annual + Total Annual Inventory Costs Holding Costs ordering Costs procurement Costs

TC(Q) = (Q/2)Ch + (D/Q)Co + DC + ChSS

Safety stock holding cost

36

ALLEN APPLIANCE COMPANY (AAC)

AAC wholesales small appliances.
AAC currently orders 600 units of the Citron brand juicer each time inventory drops to 205 units. Management wishes to determine an optimal ordering policy for the Citron brand juicer
37

ALLEN APPLIANCE COMPANY (AAC)

Data
Co = $12 ($8 for placing an order)+(20 min. to check).($12 per hr) Ch = C = $1.40 [HC = (14%)($10)] $10.

H =

14% (10% ann. interest rate)+(4% miscellaneous)

D = demand information of the last 10 weeks was collected:

Sales of Juicers over the last 10 weeks Week 1 2 3 4 Sales 105 115 125 120 Week 6 7 8 9 Sales 120 135 115 110

5 125 10 130
38

ALLEN APPLIANCE COMPANY (AAC)

Data
The constant demand rate seems to be a good assumption. Annual demand = (120/week).(52weeks) = 6240 juicers.

39

AAC Solution:
EOQ and Total Variable Cost
Current ordering policy calls for Q = 600 juicers. TV(600)=(600/2)($1.40)+(6240/600)($12) = $544.8

The EOQ policy calls for orders of size

Q* =

2(6240)(12) = 327.065 1.40

327

Savings of 16%

TV(327) = (327 / 2)($1.40) + (6240 / 327) ( $12) = $457.89

40

AAC Solution:
Reorder Point and Total Cost
Under the current ordering policy AAC holds 13 units safety stock (how come? ):
AAC is open 5 day a week.
The average daily demand = (120/week)/5 = 24 juicers/day. Lead time is 8 days. Lead time demand is (8)(24) = 192 juicers. Reorder point without Safety stock = LD = 192. Current policy: R = 205. Safety stock = 205 192 = 13.

For safety stock of 13 juicers the total cost is

TC(327) = 457.89 + 6240($10) + (13)($1.40) = $62,876.09

TV(327) + Procurement cost + Safety stock holding cost
41

AAC Solution:
Sensitivity of the EOQ Results
Changing the order size
Suppose juicers must be ordered in increments of 100 (order 300 or 400) AAC will order Q = 300 juicers in each order. There will be a total variable cost increase of $1.71. This is less than 0.5% increase in variable costs.

Changes in input parameters

Suppose there is a 20% increase in demand. D=7500 juicers. The new optimal order quantity is Q* = 359. Only 0.4% The new variable total cost = TV(359) = $502 increase If AAC still orders Q = 327, its total variable costs becomes
TV(327) = (327/2)($1.40) + (7500/327)($12) = $504.13

42

AAC Solution:
Cycle Time For an order size of 327 juicers we have:
T = (327/ 6240) = 0.0524 year.

= 0.0524(52)(5) = 14 days.
5 working days per week

This is useful information because:

Shelf life may be a problem. Coordinating orders with other items might be desirable.
43

AAC Excel Spreadsheet

44

Service Levels and Safety Stocks

45

Determining Safety Stock Levels

Businesses incorporate safety stock requirements when determining reorder points.

A possible approach to determining safety stock levels is by specifying desired service level .
46

Two Types of Service Level

Service levels can be viewed in two ways. Comum
The cycle service level The probability of not incurring a stockout during an inventory cycle. Applied when the likelihood of a stockout, and not its magnitude, is important for the firm. The unit service level (fill rate) The percentage of demands that are filled without incurring any delay. Applied when the percentage of unsatisfied demand should be under control.

47

Two Types of Service Level

Juicer Demand and Units on Backorder
Cycle Number
1 2 3 4 5 Cycle service level = 4/5 = 80%

Demand
585 610 628 572 605

# Units on backorder
0 0 15 0 0 Unit Service level = 1- 15/3000 = 99,5%

48

The Cycle Service Level Approach

In many cases short run demand is variable even though long run demand is assumed constant. Therefore, stockout events during lead time may occur unexpectedly in each cycle. Stockouts occur only if demand during lead time is greater than the reorder point.
49

The Cycle Service Level Approach

To determine the reorder point we need to know:
The lead time demand distribution.
The required service level.

In many cases lead time demand is approximately normally distributed. For the normal distribution case the reorder point is calculated by:
mL = demanda mdia no lead time e sL= desvio padro da demanda no lead time

R = mL + zasL

(1 a) = Service level (Normal

DistributionTable)
50

The Cycle Service Level Approach

Service level = P(DL<R) = 1 a

m=192

P(DL>R) = a

P(DL> R) = P(Z > (R mL)/sL) = a. Since P(Z > Za) = a, we have Za = (R mL)/sL, which gives

R = mL + zasL

51

AAC Cycle Service Level Approach

Assume that lead time demand is normally distributed. Estimation of normal distribution parameters:
Estimation of the mean weekly demand = 10 weeks average demand = 120 juicers/week.
Estimation of the variance of the weekly demand = Sample variance = 83.33 juicers2.
52

AAC Cycle Service Level Approach

To find mLand sL the parameters m (per week) and s (per week) must be adjusted since the lead time is longer than one week.
Lead time is 8 days =(8/5) weeks = 1.6 weeks.

Estimates for the lead time mean demand and variance of demand mL (1.6)(120) = 192; s2L (1.6)(83.33) = 133.33
53

AAC Service Level for a given Reorder Point

Let us use the current reorder point of 205 juicers.
205 = 192 + z (11.55)

z = 1.13

133.33

From the normal distribution table we have that a

reorder point of 205 juicers results in an 87% cycle service level.

54

AAC
Reorder Point for a given Service Level Management wants to improve the cycle service level to 99%. The z value corresponding to 1% right hand tail is 2.33. R = 192 + 2.33(11.55) = 219 juicers.
55

AAC
Acceptable Number of Stockouts per Year AAC is willing to run out of stock an average of at most one cycle/year with an order quantity of 327 juicers. What is the equivalent service level for this strategy?

56

AAC
Acceptable Number of Stockouts per Year

There will be an average of 6240/327 = 19.08 cycles (lead times) per year. The likelihood of stockouts = 1/19 = 0.0524. This translates into a service level of 94.76%
57

The Unit Service Level Approach

When lead time demand follows a normal distribution service level can be calculated as follows:
Determine the value of z that satisfy the equation L(z) = Q* / sL
L(z) = partial expected value for the standard normal between some z and infinity

Solve for R using the equation R = mL + zsL

58

AAC Cycle Service Level (Excel spreadsheet)

59

EOQ Models with Quantity Discounts

Quantity Discounts are Common Practice in Business
By offering discounts buyers are encouraged to increase their order sizes, thus reducing the sellers holding costs. Quantity discounts reflect the savings inherent in large orders.

60

EOQ Models with Quantity Discounts

Quantity Discount Schedule
This is a list of per unit discounts and their corresponding purchase volumes. Normally, the price per unit declines as the order quantity increases. The order quantity at which the unit price changes is called a break point. There are two main discount plans:
All unit schedules - the price paid for all the units purchased is based on the total purchase (mais comum). Incremental schedules - The price discount is based only on the additional units ordered beyond each break point.
61

All Units Discount Schedule

To determine optimal order quantity, the total purchase cost must be included TC(Q) = (Q/2)Ch + (D/Q)Co + DCi + ChSS Ci represents the unit cost at the ith pricing level.

62

AAC - All Units Quantity Discounts

AAC is offering all units quantity discounts to its customers. Data

Quantity Discount Schedule

1-299 $10,00 300-599 $9,75 600-999 $9,40 1000-4999 $9,50 5000 $9,00
63

Should AAC increase its regular order of 327 juicers, to take advantage of the discount?

64

AAC All units discount procedure

Step 1: Find the optimal order Qi* for each discount level i. Use the formula:

Q * ( 2DCo ) / Ch

Ch=Ci.0,14

Step 2: For each discount level i modify Q i* as follows

If Qi* is lower than the smallest quantity that qualifies for the i th discount, increase Qi* to that level. If Qi* is greater than the largest quantity that qualifies for the ith discount, eliminate this level from further consideration.

Step 3: Substitute the modified Q*i value in the total cost formula TC(Q*i ).

Step 4: Select the Q i * that minimizes TC(Q i*)

65

AAC All units discount procedure

Step 1: Find the optimal order quantity Qi* for each
discount level i based on the EOQ formula

Lowest cost order size per discount level Discount Qualifying Price level order per unit Q* 0 1-299 10,00 327 1 300-599 9,75 331 2 600-999 9,50 336 3 1000-4999 9,40 337 4 5000 9,00 34566

TC(Q) = (Q/2)Ch + (D/Q)Co + DCi + ChSS

67

AAC All Units Discount Procedure

Step 2 : Modify Q i *
$10/unit
Q1
*

$9.75/unit
299 327 331 336

Q3

$9.50
599 600 999

Q2 * Modified Q* and total Cost Qualified Price Modified Urder per Unit Q* Q* 1-299 10,00 327 **** 300-599 9,75 331 331 600-999 9,50 336 600 1000-4999 9,40 337 1000 5000 9,00 345 5000

Total Cost **** 61.292,13 59.803,80 59.388,88 59.324,98

68

AAC All Units Discount Procedure

Step 2 : Modify Q i *
$10/unit
1
* * Q3 Q2Q3Q * 3 Q1

Q3

Q3* Q3* * Q3

Modified Q* and total Cost

Q* 300 331 336 337 345 Modified Q* **** 331 600 1000 5000 Total Cost **** 61,292.13 59,803.80 59,388.88 59,324.98

336 299 327 331

Q3*

$9.50

600 999

Qualified Order

Price per Unit 1-299 10.00 300-599 9.75 600-999 9.50 1000-4999 9.40 5000 9.00

69

AAC All Units Discount Procedure

Step 3: Substitute Q I * in the total cost function
Modified Q* and total Cost Price Modified per Unit Q* Q* 10,00 327 327 9,75 331 331 9,50 336 600 9,40 337 1000 9,00 345 5000

Qualified Urder 1-299 300-599 600-999 1000-4999 5000

Total Cost 62876,09 61.292,13 59.803,80 59.388,88 59.324,98

Step 4

AAC should order 5000 juicers

70

AAC All Units Discount Excel Worksheet

Calculation of Optimal Inventory Policy Under All-Units Quantity Discounts OPTIMAL OUTPUTS
Order quantity, Q* = Cycle Time (in years), T = # of Cycles Per Year, N = Reorder Point, R = Total Annual Cost, TC(Q*) =

INPUTS
Annual Demand, D = Per Unit Cost, C = Annual Holding Cost Rate, H = Annual Holding Cost Per Unit, Ch = Order Cost, Co = Lead Time (in years), L = Safety Stock, SS =

Values 6240,00 10,00 0,14 1,40 12,00 0,03077 13,00

Values 5000 0,801282051 1,248 205,0000 59341,36

DISCOUNTS Level 0 1 2 3 4 5 6 7 8 Breakpoint 1 300 600 1000 5000 Discount Price 10,00 9,75 9,50 9,40 9,00 Q* 327 331 336 337 345 TC(Q*) 62876,09 61309,88 59821,09 59405,99 59341,36 Modified Q* 327 331 600 1000 5000

71

Production Lot Size Model Assumptions

Demand rate is constant . Production rate is larger than demand rate. The production lot is not received instantaneously (at an infinite rate), because production rate is finite. There is only one product to be scheduled. The rest of the EOQ assumptions stay in place.
72

Production Lot Size Model

Inventory profile
The optimal production lot size policy orders the same amount each time. This observation results in the inventory profile below:

73

Production Lot Size Model

Understanding the inventory profile
The production increases the inventory at a rate of P. Demand accumulation during production run = DT1 Maximum inventory Maximum inventory = (P D)T1 = (P D)(Q/P) = Q(1 D/P) Production Lot Size = Q = PT1

The inventory increases at a net rate of P - D Demand accumulation during production run The demand decreases the inventory at a rate of D.

T1 Production time

74

Production Lot Size Model Total Variable Cost

The parameters of the total variable costs function are similar to those used in the EOQ model. Instead of ordering cost, we have here a fixed setup cost per production run (Co). In addition, we need to incorporate the annual production rate (P) in the model.
75

Production Lot Size Model Total Variable Cost

TV(Q) = (Q/2)(1 - D/P)Ch + (D/Q)Co
P is the annual production rate

The average inventory

The Optimal Order Size 2DCo * Q = C (1-D/P) h

76

Production Lot Size Model Useful relationships

Cycle time T = Q / D.

Length of a production run T1 = Q / P.

Time when machines are not busy producing the product T2 = T - T1 = Q(1/D - 1/P). Average inventory = (Q/2)(1-D/P).
77

FARAH COSMETICS COMPANY

Farah needs to determine optimal production lot size for its most popular shade of lipstick. Data
The factory operates 7 days a week, 24 hours a day. Production rate is 1000 tubes per hour. It takes 30 minutes to prepare the machinery for production. It costs $150 to setup the line. Demand is 980 dozen tubes per week. Unit production cost is $.50 Annual holding cost rate is 40%.
78

FARAH COSMETICS COMPANY Solution Dozens

Input for the total variable cost function
D = 613,200/year [(980 dozen/week(12)/ 7](365)

Ch = 0.4(0.5) = $0.20 per tube per year. Co = $150 P = (1000)(24)(365) = 8,760,000 per year.

79

FARAH COSMETICS COMPANY Solution

Current Policy
Currently, Farah produces in lots of 84,000 tubes. T = (84,000 tubes per run)/(613,200 tubes per year)= 0.137 years (about 50 days).

T1 = (84,000 tubes per lot)/(8,760,000 tubes per year)= 0.0096 years (about 3.5 days).
T2 = 0.137 - 0.0096 = 0.1274 years (about 46.5 days).

TV(Q = 84,000) = (84,000/2) {1-(613,200/8,760,000)}(0.2) + 613,200/84,000)(150) = $8907.

80

FARAH COSMETICS COMPANY Solution

The Optimal Policy
The optimal order size Using the input data we find
2(613,200)(150)
(0.2)(1-613,200/8760,000)

Q* =

= 31,499

TV(Q* = 31,499) = (31,499/2) [1-(613,200/8,760,000)](0.2)

+ (613,200/31,499)(150) = $5,850. Current cost = $8,907: savings = $3,057 or 34%
81

FARAH COSMETICS COMPANY Production Lot Size Template (Excel)

82

Planned Shortage Model

When an item is out of stock, customers may:
Go somewhere else (lost sales). Place their order and wait (backordering).

In this model we consider the backordering case. All the other EOQ assumptions are in place.

83

Planned Shortage Model Total Variable Cost Equation

The parameters of the total variable costs function are similar to those used in the EOQ model. In addition, we need to incorporate the shortage costs in the model.
Backorder cost per unit per year (loss of goodwill cost) - Cs.
Reflects future reduction in profitability. Can be estimated from market surveys and focus groups.

Backorder administrative cost per unit - Cb.

Reflects additional work needed to take care of the backorder.

84

Planned Shortage Model the Total Variable Cost Equation

Variveis de controle: Q = Quantidade pedida, S = Quantidade em backorder quando chega o pedido

Annual holding cost = Ch[T1/T](Average inventory) = Ch[T1/T] (Q-S)/2 Annual shortage cost = Cb(number of backorders per year) + Cs(T2/T)(Average number of backorders).

Q-S

T1 To calculate the annual holding cost and shortage cost we need to find
S

T2

The proportion of time inventory is carried, (T1/T) The proportion of time demand is backordered, (T2/T).

85

Finding T1/ T and T2/ T

Average inventory = (Q - S) / 2
Q-S Proportion of time inventory exists = T1/T = (Q - S) / Q T1 S T S T2 T1 Proportion of time shortage exists = T2/T =S/Q
86

Q
Q T

Average shortage = S / 2

Planned Shortage Model The Total Variable Cost Equation

Annual holding cost:
Ch[T1/T](Q-S)/2 = Ch[(Q-S) /Q](Q-S)/2 = Ch(Q-S)2/2Q Cb(Units in short per year) + Cs[T2/T](Average number of backorders) = Cb(S)(D/Q) + CsS2/2Q

Annual shortage cost:

87

Planned Shortage Model The Total Variable Cost Equation

The total annual variable cost equation

TV(Q,S) =
Holding costs

(Q -S)2 D (C + SC ) + S2 Ch + CS o b 2Q Q 2Q
Ordering costs Time independent Time dependent backorder costs backorder costs

The optimal solution to this problem is obtained under the following conditions
Cs > 0 ; Cb < \/ 2CoCh / D
88

Planned Shortage Model The Optimal Inventory Policy

The Optimal Order Size
2DCo Ch + Cs (DCb)2 x Cs Ch ChCs The Optimal Backorder level * C - DC Q h b * S= C +C h s Reorder Point R = L D - S*
89

Q* =

SCANLON PLUMBING CORPORATION

Scanlon distributes a portable sauna from Sweden. Data
A sauna costs Scanlon $2400.

Annual holding cost per unit $525.

Fixed ordering cost $1250 (fairly high, due to costly transportation).

Lead time is 4 weeks.

Demand is 15 saunas per week on the average.
90

SCANLON PLUMBING CORPORATION

Backorder costs
Scanlon estimates a $20 goodwill cost for each week a customer who orders a sauna has to wait for delivery.

Administrative backorder cost is $10.

Management wishes to know:

The optimal order quantity.
The optimal number of backorders.
91

SCANLON PLUMBING
Solution

Input for the total variable cost function

D = 780 saunas [(15)(52)]

Co = $1,250
Ch = $525 Cs = $1,040 Cb = $10
92

SCANLON PLUMBING
Solution

The optimal policy

Q*

2(780)(1250) 525+1040 (780)(10)2 x (525)(1040) 1040 525

74

S* =

(74)(525) _ (780)(10) 525 + 1040

20

R = (4 / 52)(780) - 20 = 40
93

SCANLON PLUMBING
Spreadsheet Solution

Calculation of Optimal Inventory Policy for a Planned Shortage Model

INPUTS Values OPTIMAL OUTPUTS Values ASSIGNED OUTPUTS Values

Annual Demand, D = 780,00 Per Unit Cost, C = 2400,00 Annual Holding Cost Rate, H = 0,22 Annual Holding Cost Per Unit, Ch 525,00 = Order Cost, Co = 1250,00 Annual Backorder Cost, Cs = 1040,00 Fixed Admin. Backorder Cost, Cb10,00 = Lead Time (in years), L = 0,07692

Order Quantity, Q* = 74,01 Backorder Level, S* = 19,84 Cycle Time (in years), T = 0,0949 # of Cycles Per Year, N = 10,5388 Reorder Point, R = 40,1531 Total Annual Variable Cost, TV(Q*) 28438,24 = Total Annual Cost, TC(Q*) = 1900438,24 % of Customers Backordered = 26,81

Q= 74,00 S= 20,00 T= 0,0949 N= 10,5405 R= 39,9976 TV(Q) = 28438,51 TC(Q) = 1900438,51 % Back. = 27,03
94

Review Systems Continuous Review

(R, Q) Policies
The EOQ, production lot size, and planned shortage models assume that
inventory levels are continuously monitored Items are sold one at a time.

95

Review Systems Continuous

Review
(R, Q) Policies
The above models call for order point (R)

order quantity (Q) inventory policies.

Such policies can be implemented by
A point-of-sale computerized system. The two-bin system.

96

Continuous Review Systems

(R, M) policies
When items are not necessarily sold one at a

time, the reorder point might be missed, and

out of stock situations might occur more frequently. The order to level (R, M) policy may be implemented in this situation.
97

Continuous Review Systems

(R,M) policies
The R, M policy replenishes inventory up to a pre-

determined level M.
Order Q = Q* + (R I) = (M SS) + (R I)

each time the inventory falls to the reorder point

R or below. (Order size may vary from one cycle
98

to another).

Exemplo da Citron e AAC

AAC usa poltica (R,M) com R=219 e M = 354 (= Q + SS = 327 + 27)
Cliente pede 60 juicers quando I = 224 (> R) O novo pedido ser feito quando estoque = 224 60 = 164

Novo pedido dever ser =Q = Q* + (R I) = (M SS)+(R I) = 382 = 354 27 + 219 164 382 327 = 55 = nvel de estoque abaixo de R = 219 quando foi colocado o novo pedido.
99

Periodic Review Systems

It may be difficult or impossible to adopt a continuous review system, because of:
The high price of a computerized system. Lack of space to adopt the two-bin system. Operations inefficiency when ordering different items from the same vendor separately.

The periodic review system may be found more suitable for these situations.
100

Periodic Review Systems

Under this system the inventory position for each item is observed periodically. Orders for different items can be better coordinated periodically.

101

Periodic Review Systems

(T,M) Policies In a replenishment cycle policy (T, M), the
inventory position is reviewed every T time units. An order is placed to bring the inventory level back up to a maximum inventory level M. M is determined by
Forecasting the number of units demanded during the review period T. Adding the desired safety stock to the forecasted demand.
102

Periodic Review Systems

Calculation of the replenishment level and order size
T =Review period L = Lead time SS= Safety stock Q = Inventory position D = Annual demand I = Inventory position

M = TD + SS Q = M + LD I

103

AAC operates a (T, M) policy

Every three weeks AAC receives deliveries of different products from Citron. Lead time is eight days for ordering Citrons juicers. AAC is now reviewing its juicer inventory and finds 210 in stock. How many juicers should AAC order for a safety stock of 30 juicers?
104

AAC operates a (T, M) policy Solution

Data
Review period T = 3 weeks = 3/52 = .05769 years, Lead time = L = 8 days = 8/260 = .03077 years, AAC operates Demand D = 6240 juicers per year, 260 days a year. Safety stock SS = 30 juicers, (5)(52) = 260. Inventory position I = 210 juicers

105

AAC operates a (T, M) policy Solution

Review period demand = TD = ( 3/52)(6240) = 360 juicers, M = TD + SS = 360 + 30 = 390 juicers,
Q = M + LD I = 390 + .03077(6240) - 210 = 372 juicers.
106

AAC operates a (T, M) policy Solution

Replenishment level
Order Order M = maximum inventory

Inventory position Inventory position

SS
Review point

SS
Review point

SS

Notice: I + Q is designed to satisfy the demand within an interval of T + L. To obtain the replenishment level add SS to I + Q.
107

Single Period Inventory Model Assumptions

Demand is stochastic At the end of each with a known distribution. period, unsold inventory Shelf life of the item is is disposed of for some limited. salvage. Inventory is saleable only The salvage value is less than the cost per item. within a single time period. Unsatisfied demand may result in shortage costs. Inventory is delivered only once during a time period.
108

The Expected Profit Function

To find an optimal order quantity we need to balance the expected cost of over-ordering and under ordering.
Expected Profit =S(Profit for Demand=X) Prob(Demand=X)

The expected profit is a function of the order size, the random demand, and the various costs.

109

The Expected Profit Function

Developing an expression for EP(Q)
Notation
p = per unit selling price of the good. c = per unit cost of the good. s = per unit salvage value of unsold good. K = fixed purchasing costs Q = order quantity. EP(Q) = Expected Profit if Q units are ordered.

Scenarios
Demand X is less than the order quantity (X < Q). Demand X is greater than or equal to the order quantity (X Q).
110

The Expected Profit Function

Scenario 1: Demand X is less than the units stocked, Q.
Profit = pX + s(Q - X) - cQ - K

Scenario 2: Demand X is greater than or equal to the units stocked.

Profit = pQ - g(X - Q) - cQ - K
EP(Q) =
X Q

[pX+s(Q - X) - cQ - K]P(X) +X Q

[pQ - g(X - Q) - cQ - K]P(X)

111

The Optimal Solution

To maximize the expected profit order Q* For the discrete demand case take the smallest value of Q* that satisfies the condition P(D Q*) (p - c + g)/(p - s + g)
Nvel de servio timo

For the continuous demand case find the Q* that solves F(Q*) = (p - c + g) /(p - s + g)
Nvel de servio timo
112

THE SENTINEL NEWSPAPER

Management at Sentinel wishes to know how many newspapers to put in a new vending machine. Demand distribution is Data discrete uniform between

30 and 49 newspapers. Unit selling price is $0.30 Unit production cost is $0.38. Advertising revenue is $0.18 per newspaper. Unsold newspaper can be recycled and net $0.01. Unsatisfied demand costs $0.10 per newspaper. Filling a vending machine costs $1.20.
113

SENTINEL - Solution
Input to the optimal order quantity formula
p = 0.30 c = 0.20 [0.38-0.18] p+ g - c s = 0.01 The probability of the optimal service level = p+ g - s g = 0.10 0.30 + 0.10 - 0.20 = 0.513 K = 1.20 = 0.30 + 0.10 - 0.01
114

SENTINEL Solution
Finding the optimal order quantity Q*
1.0

P(D 39) = 0.50 P(D 40) = 0.55

0.513

0.55
0.50

Q* = 40

30

39 40

49

115

SENTINEL Spreadsheet Solution

116

WENDELLS BAKERY
Management in Wendells wishes to determine the number of donuts to prepare for sale, on weekday evenings Demand is normally distributed with a mean of 120, and a Data standard deviation of 20 donuts.

Unit cost is $0.15. Unit selling price is $0.35. Unsold donuts are donated to charity for a tax credit of $0.05 per donut. Customer goodwill cost is $0.25. Operating costs are $15 per evening.
117

WENDELLS BAKERY - Solution

Input to the optimal order quantity formula
p = $0.35 c = $0.15 s = $0.05 g = $0.25 K = $15.00

p+ g - c The optimal service level = p+ g - s

0.35+ 0.25 - 0.15 = 0.8182 = 0.35+0.25 - 0.05

118

WENDELLS BAKERY - Solution Finding the optimal order quantity

From the relationship F(Q*) = 0.8182 we find the corresponding z value. From the standard normal table we have z = 0.3186. The optimal order quantity is calculated by Q* = m + zs
.8182 m=120 Q*

For Wendells Q* = 120 + (0.3186)(20) @ 138

119

WENDELLS BAKERY - Solution Calculating the expected profit

For the normal distribution
Ver slide 112

L [(Q* - m ) /s] is obtained from the partial expected value table. EP(Q*) = (p - s) m - (c - s)Q* - (p + g - s) (s)L[(Q* - m ) /s] - K

For Wendells
EP(138) = (0.35 - 0.05)(120) - (0.15 - 0.05)(138) - (0.35 + 0.25- 0.05)x(20)L[(138 - 120) / 20] - 15 = $6.10 L(0.9) = 0.1004
Apndice B
120

WENDELLS BAKERY Spreadsheet Solution

121

WENDELLS
The commission strategy
When commission replaces fixed wages
Compare the maximum expected profit of two strategies:
$0.13 commission paid per donut sold,

$15 fixed wage per evening (calculated before).

Calculate first the optimal quantity for the alternative policy. Check the expected difference in pay for the operator.
122

WENDELLS
The commission strategy - Solution
The unit selling price changes to
c = 0.35 - 0.13 = $0.22

The optimal order:

F(Q*) = (0.22 + 0.25 - 0.15) / (0.22 + 0.25 - 0.05)= 0.7616.

Z = .71
.7616 m=120 Q*
123 Q* = m + zs = 120 + (0.71)(20) 134 donuts.

WENDELLS
The commission strategy - Solution
Will the bakerys expected profit increase?
EP(134) = (0.22 - 0.05)(20) - (0.15 - 0.05)(134) (0.22 + 0.25 - 0.05)x(20)L[(134 - 120) / 20] = $5.80 < 6.10

The bakery should not proceed with the alternative plan.

124

WENDELLS
The commission strategy - Solution
Comments
The operator expected compensation will increase, but not as much as the bakerys expected loss. An increase in the mean sales is probable when the commission compensation plan is implemented. This may change the analysis results.
125

Dimensionamento de Lotes (Lot Sizing)

126

Introduo
O problema de dimensionamento de lotes consiste em planejar a quantidade de itens a ser produzida em vrias (ou nica) mquinas, em cada perodo ao longo de um horizonte de tempo finito, de modo a atender uma certa demanda, podendo estar sujeito a algumas restries.

127

Mtodos Bsicos de Dimensionamento de Lotes

Lot for Lot (L4L);
Silver-Meal Heuristic Procedure(SM ); Economic Order Quantity (EOQ); Periodic Order Quantity (POQ); Least Unit Cost (LUC); Least Total Cost (LTC); Fixed Period Requirements (FPR); Part Period Balancing (PPB); Wagner-Whitin Algorithm(WW).
128

Lot for Lot

Esta heurstica consiste no mtodo mais bsico possvel, onde a quantidade produzida visa atender somente o perodo em que o item ser utilizado. Sendo assim, o estoque ser sempre nulo e sero feitas preparaes de mquina em todos os perodos com demanda positiva.
129

Silver-Meal Heuristic Procedure(SM )

Pode ser usado para achar um cronograma de produo perto do timo. A heurstica do SM baseado no fato de que a meta minimizar o custo mdio do perodo.

130

Economic Order Quantity (EOQ )

Consiste no principio de que sempre que seja necessrio fazer uma encomenda, encomendar uma quantidade igual EOQ. Assume-se que a demanda constante, os itens so independentes, e nenhuma incerteza est envolvida no processo decisrio.
131

Periodic Order Quantity (POQ)

Uma maneira de reduzir os altos custos de manter inventrio associado com tamanhos de lotes fixos usar a frmula da EOQ para encontrar um perodo econmico de encomenda. Faz-se isso dividindo o EOQ pela taxa mdia de demanda.
132

Least Unit Cost (LUC)

Este mtodo tem como objetivo encontrar o tamanho da encomenda que se traduz no menor custo unitrio do produto. O mtodo segue os seguintes passos: 1. Calcular os lanamentos previstos acumulados at que o valor acumulado seja superior quantidade de desconto. 2. Calcular se vantajoso aceitar o desconto com base no menor custo unitrio.
133

Least Total Cost (LTC)

O tamanho da ordem cobrir os prximos T perodos, onde T o perodo onde o custo de transporte e o custo de preparao so muito prximos.

134

Fixed Period Requirements (FPR)

Ordena-se uma quantidade suficiente para suprir a demanda de um nmero fixo de perodos consecutivos.

135

Part Period Balancing (PPB)

Usa todas as informaes providas pelo cronograma de pedidos, tentando igualar os custos totais de ordens feitas e do transporte de estoque.

136

Wagner-Whitin Algorithm (WW)

Procedimento de programao dinmica para obter o cronograma timo de dimensionamento de lotes no horizonte de planejamento.

137

Exemplo
Certa firma que fabrica um determinado produto deseja fazer um planejamento da produo para um horizonte de quatro semanas. Sabe-se que a demanda para estas quatro semanas ser de 104, 174, 46 e 112 unidades. Suponha que a firma faa no mximo uma preparao de mquina a cada semana e que no haja restrio de capacidade de produo.
138

WinQSB

139

WinQSB

140

Solve and Analyze

141

Wagner-Whitin (timo!)

142

Silver-Meal

143

EOQ

144

POQ

145

LUC

146

LTC

147

FPR

148

PPB

149

LOT for LOT

150

Comparao entre Mtodos

Mtodo
Wagner-Whitin

Custo
$ 1368,00

% acima do timo
timo

Silver-Meal
EOQ POQ LUC

$ 1368,00
$ 1521,00 $ 1458,00 $ 1458,00

11 7 7

LTC
FPR PPB Lot for Lot

$ 1458,00
$ 1472,00 $ 1438,00 $ 1472,00

7
8 5 8
151