Recap

• OM, Product-Service Spectrum, Functions of OM, Alignment, QCDF

• KCC- Process flow analysis: PFD, B/N, CT, TPT, Gantt Chart, Capacity,
Utilization
• Shouldice- PFA in a service context, revisit B/N, Little’s law
• Manzana- Impact of uncertainty, Risk, pooling, work content vs TAT
• Lego- Batching, impact of setup time and batch size on capacity
• Queueing- Why wait?, Variability, Configuration, M/M/1, G/G/S
• Donner- Setup time, Volume-Variety plot, Product-Process matrix
Recap- Inventory management
• Inventory, its importance and types
• Cyclic inventory, pipeline inventory and safety stock
• Ordering and Carrying costs
• Standard EOQ model
• Modifications in EOQ model [based on relaxed assumptions]
• Service level, safety stock and ROP when demand follows normal
distribution
Inventory policies
Two friends
• Qasim and Pratham are two friends who use their smartphones
extensively. It looks like that their phones are extended parts of their
bodies
• Qasim believes Li-ion battery has limited number of charge and
discharge cycles and he needs to be careful about that. So, he puts his
phone’s battery on charge when it reaches 20% and let it charge till
90% (He believes beyond 90% charge is bad for battery life)

• Pratham on the other hand charges his phone once in 8 hrs and let it
charge completely
Our day to day policies- Type I
• When do you refuel your bike/car?
• When do we refill LPG cylinder?
• When do we charge batteries of various electronic devices?

• Reserve capacity Reorder point (ROP)

• This is the way Qasim is behaving; his ROP is 20% and Q is 70% (90%-20%)

The system which follows this policy is called continuous review or Q

system. Because one needs to keep track of inventory level continuously
Our day to day policies- Type II
• When do we buy milk/newspaper? [consider a modified version]
• When do we buy other grocery items?

>> This is the way Pratham is behaving. He is following a periodic review

(8 hours). His order upto level, S is 100%
>> His order quantity QR = S – IR
>> IR = Inventory position at review(battery level when charger was just
connected)
The system which follows this policy is called periodic review or P system
Two questions

Continuous review Periodic review

When to order? When at ROP Every period
How much to order
Q* S – IR
Physical inventory vs Inventory position
• Should ROP algorithm track physical inventory?
• If yes, what will happen?
• If no, what can we do?

• What is inventory position?

• Inventory position = Physical inventory + Ordered but not delivered inventory
Continuous review system (Q)
• Steps for following this system-
• Computation
1. Calculate Q* [by EOQ or some function of that]
2. Find out safety stock based on service level
3. Calculate demand during lead time [mean and std. dev]
4. Find out ROP
Implementation
5. Keep track of inventory position continuously
6. When inventory position reaches ROP, order Q*
Periodic review system (P)

• Ordering every T unit of time

• Lead time is L units of time
• Need to have safety for T+L units of time
• Order upto level, S = Mean demand during (T+L) + Safety stock (T+L)

• S = µ(T+L) + Za * σ(T+L)
Periodic review system (P)
• Steps for following this system-
• Computation
1. Calculate T (review period) [EOQ(time between order), some other
constraint]
2. Calculate S, order upto level

Implementation
3. Monitor inventory position (IR) every T unit of time
4. Order QR = S – IR every period
Policy comparison

Continuous review Periodic review

Ease of implementation Difficult [some novel ways] Easier
Response to demand change Not responsive Comparatively better
Same supplier compatibility
[for multiple item] Difficult/ Impractical Natural
Safety stock and related cost
Lower Higher
Inventory classification
• How you buy and stock grocery vs gold [volume and value]

• A-class- high total value- tighter control

• B-class- medium total value-moderate control
• C-class- low total value- negligible or no control
Some other classifications
• XYZ (Only unit value no volume)

• FSN [Fast, Slow and Non moving]

• VED [Vital, Essential and Desirable] – Vital may not be expensive

• SDE [Scarce, Difficult, Easy to procure]
• Source of supply [Imported, national level, state level, local]
Arijit Pro-night planning
• As part of IIM N cultural night, you are organizing a pro-night event.
Following are the points you have realized after a conversation with Arijit’s
manager-
• Event should be open to general public of Nagpur for commercial viability
• You sell ticket to spectators at a flat price of INR 2000/each
• Arijit charges INR 1400 per spectator
• You need to spend additional INR 100 every spectator for seating arrangements etc.
• You need to pay Arijit before you actually sell your tickets and there are no
modifications allowed in the order once the payment is made

How much tickets/seat should you order for?

Products to be considered…
• Consider these products
• Newspaper
• Milk [excluding UHT or powdered milk]
• Vegetables
• Smartphone models
• Sports/Events tickets
• Advertising space during an event
• Christmas tree
• Fire crackers, deepawali lamps
• Ganesha, Durga idols

• What if we apply P or Q system to sell these?

Single period problem
• We have discussed tradeoff between ordering cost and carrying cost

• What if the product perishes after one period?

• Tradeoff between overstocking and understocking costs
• Cost of understocking- revenue lost
• Cost of overstocking- carrying cost, unit cost of the product or unit cost minus
salvage cost
Arijit Pro-night planning
• What is the cost of understocking?

• What is the cost of overstocking?

Arijit Pro-night planning
•  What is the expected cost of understocking?
• P(d>Q) * Cu

• What is the expected cost of overstocking?

• P(d<Q)* Co

Both costs should balance at equilibrium(optimum)

Arijit Pro-night planning
• You found from previous similar events happened in Nagpur that the
demand distribution can be represented by following table-
Demand (in tickets or seats) Probability Cumulative probability
0 0.01 0.01
1000 0.09 0.10
2000 0.20 0.30
3000 0.40 0.70
4000 0.20 0.90
5000 0.10 1.00

How many tickets should you order for?

Arijit Pro-night planning
• What if demand follows normal distribution- N(μ,σ)
• Find z-value from CR, CR = G(z)

• Order quantity = μ + z *σ